UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWASHINGTON,
      DC 20549FORM
      10-Q(Mark
      One)





x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the quarterly period ended September 30,
      2008o
              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  0-50970PSB
      Holdings, Inc.(Exact
      name of registrant as specified in its
charter)





United
      States
              
              42-1597948(State
      or other jurisdiction of incorporation or organization)
              
              (IRS
      Employer Identification No.)





40
      Main Street, Putnam, Connecticut 06260(Address
      of principal executive offices)(Zip
      Code)(860)
      928-6501(Issuer’s
      telephone number)N/A(Former
      name, former address and former fiscal year, if changed since last
      report)




Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.




x
YES   o NO




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer     o
            Accelerated
      filer
                            oNon-accelerated
      filer       o
            Smaller
      reporting company    x(Do
      not check if a smaller reporting company)





Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).o
      YES   x
  NO




As
of September 30, 2008, there were 6,530,509 shares of the registrant’s common
stock outstanding.













PSB
      Holdings, Inc.Table
      of Contents





Page
      No.Part
      I.
            FINANCIAL
      INFORMATIONItem
      1.
            Financial
      StatementsCondensed
      Consolidated Balance Sheets at September 30, 2008 (Unaudited) and June 30,
      2008 (Unaudited)
            
            1Condensed
      Consolidated Statements of (Loss) Income for the Quarters Ended September
      30, 2008 and 2007 (Unaudited)
            
            2Condensed
      Consolidated Statements of Changes in Stockholders’ Equity for the
      Quarters Ended September 30, 2008 and 2007 (Unaudited)
            
            3Condensed
      Consolidated Statements of Cash Flows for the Quarters Ended September 30,
      2008 and 2007 (Unaudited)
            
            4Notes
      to Consolidated Financial Statements (Unaudited)
            
            5Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            17Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            28Item
      4.
            Controls
      and Procedures
            
            28Item
      4T.
            Controls
      and Procedures
            
            28Part
      II.
            OTHER
      INFORMATIONItem
      1.
            Legal
      Proceedings
            
            29Item
      1A.
            Risk
      Factors
            
            29Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            29Item
      3.
            Defaults
      Upon Senior Securities
            
            30Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            30Item
      5.
            Other
      Information
            
            30Item
      6.
            Exhibits
            
            30SIGNATURES
            
            31








Part
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements







PSB
      Holdings, Inc.Condensed
      Consolidated Balance Sheets(Unaudited)September
      30,
                                                                                    2008
                                                                                  
                                                                                  
                                                                                  June
      30,
                                                                                    2008(in
      thousands, except share data)ASSETSCash
      and due from depository institutions
                                                                                  
                                                                                  $
                                                                                  4,323
                                                                                  
                                                                                  
                                                                                  $
                                                                                  7,026Federal
      funds sold
                                                                                  
                                                                                  
                                                                                  1,170
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,120Investment
      securities available-for-sale, at fair value and FHLB
Stock
                                                                                  
                                                                                  
                                                                                  202,488
                                                                                  
                                                                                  
                                                                                  
                                                                                  220,026Loans
      receivable, net of allowance for loan losses of $1,996 as of September 30,
      2008 and $1,758 as of June 30, 2008
                                                                                  
                                                                                  
                                                                                  248,311
                                                                                  
                                                                                  
                                                                                  
                                                                                  242,728Loans
      held-for-sale
                                                                                  
                                                                                  
                                                                                  491
                                                                                  
                                                                                  
                                                                                  
                                                                                  675Premises
      and equipment, net
                                                                                  
                                                                                  
                                                                                  3,747
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,854Intangible
      assets
                                                                                  
                                                                                  
                                                                                  7,717
                                                                                  
                                                                                  
                                                                                  
                                                                                  7,769Other
      assets
                                                                                  
                                                                                  
                                                                                  14,472
                                                                                  
                                                                                  
                                                                                  
                                                                                  11,301TOTAL
      ASSETS
                                                                                  
                                                                                  $
                                                                                  482,719
                                                                                  
                                                                                  
                                                                                  $
                                                                                  494,499LIABILITIES AND STOCKHOLDERS’
      EQUITYLiabilitiesDeposits
                                                                                  
                                                                                  $
                                                                                  281,956
                                                                                  
                                                                                  
                                                                                  $
                                                                                  283,724Borrowed
      funds
                                                                                  
                                                                                  
                                                                                  156,708
                                                                                  
                                                                                  
                                                                                  
                                                                                  156,621Mortgagors’
      escrow accounts
                                                                                  
                                                                                  
                                                                                  742
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,423Other
      liabilities
                                                                                  
                                                                                  
                                                                                  2,805
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,294Total
      Liabilities
                                                                                  
                                                                                  
                                                                                  442,211
                                                                                  
                                                                                  
                                                                                  
                                                                                  445,062Commitments
      and contingenciesStockholders’
      EquityPreferred
      stock, $.10 par value, 1,000,000 shares authorized, no shares issued and
      outstanding
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  —Common
      stock, ($.10 par value, 12,000,000 shares authorized, 6,943,125 shares
      issued, 6,530,509 shares outstanding at September 30, 2008 and at June 30,
      2008)
                                                                                  
                                                                                  
                                                                                  694
                                                                                  
                                                                                  
                                                                                  
                                                                                  694Additional
      paid-in capital
                                                                                  
                                                                                  
                                                                                  30,750
                                                                                  
                                                                                  
                                                                                  
                                                                                  30,795Unearned
      ESOP shares
                                                                                  
                                                                                  
                                                                                  (2,089
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (2,089
                                                                                  )Unearned
      stock awards
                                                                                  
                                                                                  
                                                                                  (605
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (605
                                                                                  )Retained
      earnings
                                                                                  
                                                                                  
                                                                                  24,389
                                                                                  
                                                                                  
                                                                                  
                                                                                  28,663Treasury
      stock, at cost (412,616 shares at September 30, 2008 and at June 30,
      2008)
                                                                                  
                                                                                  
                                                                                  (4,205
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (4,205
                                                                                  )Accumulated
      other comprehensive loss
                                                                                  
                                                                                  
                                                                                  (8,426
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (3,816
                                                                                  )Total
      stockholders’ equity
                                                                                  
                                                                                  
                                                                                  40,508
                                                                                  
                                                                                  
                                                                                  
                                                                                  49,437TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                                                  
                                                                                  $
                                                                                  482,719
                                                                                  
                                                                                  
                                                                                  $
                                                                                  494,499




See notes
to condensed consolidated financial statements.




1





PSB
      Holdings, Inc.Condensed
      Consolidated Statements of (Loss) Income(Unaudited)





Three
      Months EndedSeptember
      30,2008
                                                  
                                                  
                                                  2007(in
      thousands, except share data)Interest
      and dividend income:Interest
      on loans
                                                  
                                                  $
                                                  3,683
                                                  
                                                  
                                                  $
                                                  3,838Interest
      and dividends on investments
                                                  
                                                  
                                                  2,803
                                                  
                                                  
                                                  
                                                  2,917Total
      interest and dividend income
                                                  
                                                  
                                                  6,486
                                                  
                                                  
                                                  
                                                  6,755Interest
      expense:Deposits
      and escrow
                                                  
                                                  
                                                  1,763
                                                  
                                                  
                                                  
                                                  2,145Borrowed
      funds
                                                  
                                                  
                                                  1,571
                                                  
                                                  
                                                  
                                                  1,860Total
      interest expense
                                                  
                                                  
                                                  3,334
                                                  
                                                  
                                                  
                                                  4,005Net
      interest and dividend income
                                                  
                                                  
                                                  3,152
                                                  
                                                  
                                                  
                                                  2,750Provision
      for loan losses
                                                  
                                                  
                                                  274
                                                  
                                                  
                                                  
                                                  12Net
      interest and dividend income after provision for loan
    losses
                                                  
                                                  
                                                  2,878
                                                  
                                                  
                                                  
                                                  2,738Noninterest
      (charge) income:Fees
      for services
                                                  
                                                  
                                                  660
                                                  
                                                  
                                                  
                                                  613Mortgage
      banking activities
                                                  
                                                  
                                                  28
                                                  
                                                  
                                                  
                                                  19Net
      commissions from brokerage service
                                                  
                                                  
                                                  46
                                                  
                                                  
                                                  
                                                  26Loss
      on writedowns of securities
                                                  
                                                  
                                                  (5,480
                                                  )
                                                  
                                                  
                                                  —Other
      income
                                                  
                                                  
                                                  107
                                                  
                                                  
                                                  
                                                  101Total
      noninterest (charge) income
                                                  
                                                  
                                                  (4,639
                                                  )
                                                  
                                                  
                                                  759Noninterest
      expense:Compensation
      and benefits
                                                  
                                                  
                                                  1,465
                                                  
                                                  
                                                  
                                                  1,504Occupancy
      and equipment
                                                  
                                                  
                                                  294
                                                  
                                                  
                                                  
                                                  324Data
      processing
                                                  
                                                  
                                                  196
                                                  
                                                  
                                                  
                                                  231Advertising
      and marketing
                                                  
                                                  
                                                  105
                                                  
                                                  
                                                  
                                                  108Other
      noninterest expense
                                                  
                                                  
                                                  504
                                                  
                                                  
                                                  
                                                  619Total
      noninterest expense
                                                  
                                                  
                                                  2,564
                                                  
                                                  
                                                  
                                                  2,786(Loss)
      income before income tax (benefit) expense
                                                  
                                                  
                                                  (4,325
                                                  )
                                                  
                                                  
                                                  711Income
      tax (benefit) expense
                                                  
                                                  
                                                  (315
                                                  )
                                                  
                                                  
                                                  172NET
      (LOSS) INCOME
                                                  
                                                  $
                                                  (4,010
                                                  )
                                                  
                                                  $
                                                  539(Loss)
      earnings per common shareBasic
                                                  
                                                  $
                                                  (0.64
                                                  )
                                                  
                                                  $
                                                  0.08Diluted
                                                  
                                                  $
                                                  (0.64
                                                  )
                                                  
                                                  $
                                                  0.08




See notes
to condensed consolidated financial statements.


2




PSB
      Holdings, Inc.Condensed
      Consolidated Statements of Changes in Stockholders’ Equity
      (unaudited)For
      the Three Months Ended September 30, 2008 and
  2007


Common
                                      Stock
                                    
                                    
                                    Additional
                                      Paid-in
                                      Capital
                                    
                                    
                                    Unallocated
                                      Common
                                      Shares
      held
                                      by
      ESOP
                                    
                                    
                                    Unearned
                                      Stock
                                      Awards
                                    
                                    
                                    Treasury
                                      Stock
                                    
                                    
                                    Retained
                                      Earnings
                                    
                                    
                                    Accumulated
      Other
                                      Comprehensive
                                      Income
      (Loss)
                                    
                                    
                                    Total
                                      Stockholders’
                                      Equity(in
      thousands)Balances
      at June 30, 2007
                                    
                                    $
                                    694
                                    
                                    
                                    $
                                    30,465
                                    
                                    
                                    $
                                    (2,222
                                    )
                                    
                                    $
                                    (978
                                    )
                                    
                                    $
                                    (1,767
                                    )
                                    
                                    $
                                    26,441
                                    
                                    
                                    $
                                    (1,382
                                    )
                                    
                                    $
                                    51,251Dividends
      declared
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (193
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (193
                                    )Treasury
      stock acquired
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,121
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,121
                                    )Comprehensive
      income:Net
      income
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    539
                                    
                                    
                                    
                                    —Net
      change in unrealized holding losses on available-for-sale securities, net
      of tax effect
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    449Comprehensive
      income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    988Balances
      at September 30, 2007
                                    
                                    $
                                    694
                                    
                                    
                                    $
                                    30,465
                                    
                                    
                                    $
                                    (2,222
                                    )
                                    
                                    $
                                    (978
                                    )
                                    
                                    $
                                    (2,888
                                    )
                                    
                                    $
                                    26,787
                                    
                                    
                                    $
                                    (933
                                    )
                                    
                                    $
                                    50,925Balances
      at June 30, 2008
                                    
                                    $
                                    694
                                    
                                    
                                    $
                                    30,795
                                    
                                    
                                    $
                                    (2,089
                                    )
                                    
                                    $
                                    (605
                                    )
                                    
                                    $
                                    (4,205
                                    )
                                    
                                    $
                                    28,663
                                    
                                    
                                    $
                                    (3,816
                                    )
                                    
                                    $
                                    49,437Dividends
      declared
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (264
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (264
                                    )Stock
      based compensation
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (45
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (45
                                    )Comprehensive
      loss:Net
      loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (4,010
                                    )Net
      change in unrealized holding losses on available-for-sale securities, net
      of tax effect
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (4,610
                                    )Comprehensive
      loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (8,620
                                    )Balances
      at September 30, 2008
                                    
                                    $
                                    694
                                    
                                    
                                    $
                                    30,750
                                    
                                    
                                    $
                                    (2,089
                                    )
                                    
                                    $
                                    (605
                                    )
                                    
                                    $
                                    (4,205
                                    )
                                    
                                    $
                                    24,389
                                    
                                    
                                    $
                                    (8,426
                                    )
                                    
                                    $
                                    40,508




See notes
to condensed consolidated financial statements.


3




PSB
      Holdings, Inc.Condensed
      Consolidated Statements of Cash Flows(Unaudited)





For
      the Three MonthsEnded
      September 30,2008
                                  
                                  2007(in
      thousands)Cash
      flows from operating activitiesNet
      (Loss) income
                                  
                                  $
                                  (4,010
                                  )
                                  $
                                  539Adjustments
      to reconcile net (loss)income to cash provided by operating
      activities:Provision
      for loan losses
                                  
                                  
                                  274
                                  
                                  
                                  12Stock-based
      compensation
                                  
                                  
                                  4
                                  
                                  
                                  137Amortization
      of core deposit intangible
                                  
                                  
                                  52
                                  
                                  
                                  59Depreciation
                                  
                                  
                                  119
                                  
                                  
                                  139Net
      amortization of available-for-sale securities
                                  
                                  
                                  56
                                  
                                  
                                  (43
                                  )Writedowns
      of securities
                                  
                                  
                                  5,480
                                  
                                  
                                  —Amortization
      of premium on purchased loans
                                  
                                  
                                  —
                                  
                                  
                                  5Originations
      of loans for resale
                                  
                                  
                                  (2,058
                                  )
                                  
                                  (2,379
                                  )Proceeds
      from sale of loans
                                  
                                  
                                  2,264
                                  
                                  
                                  3,475Gain
      on sale of loans
                                  
                                  
                                  (22
                                  )
                                  
                                  (19
                                  )Increase
      in cash surrender value of Bank owned life insurance
                                  
                                  
                                  (66
                                  )
                                  
                                  (66
                                  )Net
      change in:Deferred
      loan costs
                                  
                                  
                                  (28
                                  )
                                  
                                  (58
                                  )Other
      assets
                                  
                                  
                                  (730
                                  )
                                  
                                  75Other
      liabilities
                                  
                                  
                                  (541
                                  )
                                  
                                  (277
                                  )Net
      cash provided by operating activities
                                  
                                  
                                  794
                                  
                                  
                                  1,599Cash
      flows from investing activitiesProceeds
      from maturities of available-for-sale securities
                                  
                                  
                                  7,132
                                  
                                  
                                  11,507Purchase
      of available-for-sale securities and Federal Home Loan Bank
      stock
                                  
                                  
                                  (2,115
                                  )
                                  
                                  (10,646
                                  )Loan
      originations net of principal payments
                                  
                                  
                                  (5,829
                                  )
                                  
                                  (5,172
                                  )Purchase
      of premises and equipment
                                  
                                  
                                  (12
                                  )
                                  
                                  (68
                                  )Net
      cash (used) by investing activities
                                  
                                  
                                  (824
                                  )
                                  
                                  (4,379
                                  )Cash
      flows from financing activitiesNet
      decrease in savings, demand deposits and NOW accounts
                                  
                                  
                                  (3,038
                                  )
                                  
                                  (8,919
                                  )Net
      increase in time deposit accounts
                                  
                                  
                                  1,270
                                  
                                  
                                  620Proceeds
      from long term borrowings
                                  
                                  
                                  8,000
                                  
                                  
                                  31,000Repayments
      of long term borrowings
                                  
                                  
                                  (5,031
                                  )
                                  
                                  (13,074
                                  )Net
      change in short term borrowings
                                  
                                  
                                  (2,882
                                  )
                                  
                                  (10,080
                                  )Net
      decrease in mortgagors’ escrow account
                                  
                                  
                                  (681
                                  )
                                  
                                  (592
                                  )Acquisition
      of treasury shares
                                  
                                  
                                  —
                                  
                                  
                                  (1,121
                                  )Dividends
      paid
                                  
                                  
                                  (261
                                  )
                                  
                                  (170
                                  )Net
      cash (used) by financing activities
                                  
                                  
                                  (2,623
                                  )
                                  
                                  (2,336
                                  )(Decrease)
      in cash and cash equivalents
                                  
                                  
                                  (2,653
                                  )
                                  
                                  (5,116
                                  )Cash
      and cash equivalents at beginning of year
                                  
                                  
                                  8,146
                                  
                                  
                                  13,198Cash
      and cash equivalents at end of period
                                  
                                  $
                                  5,493
                                  
                                  $
                                  8,082Supplemental
      disclosuresCash
      paid during the period for:Interest
                                  
                                  $
                                  3,337
                                  
                                  $
                                  4,017Income
      taxes
                                  
                                  $
                                  1
                                  
                                  $
                                  160




See notes
to condensed consolidated financial statements.




4




PSB
      Holdings, Inc.Notes
      to Condensed Consolidated Financial Statements(Unaudited)




NOTE
1 – Organization




PSB
Holdings, Inc. (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
(formerly known as Putnam Savings Bank until its name change effective November
2, 2007) (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 issued 6,943,125 shares of common stock, 3,729,846
shares (53.7%) of which were issued to Putnam Bancorp, MHC and 3,089,691 shares
(44.5%) of which were sold to eligible depositors of the Bank and others at
$10.00 per share. In addition, the Company issued 123,588 shares (1.8%) to a
charitable foundation established by the Bank.




NOTE
2 – Basis of Presentation




The
accompanying unaudited condensed consolidated interim financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements and the instructions
to Form 10-Q, and accordingly do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments necessary, consisting of only normal
recurring accruals and the elimination of all significant intercompany accounts,
to present fairly the financial position, results of operations and cash flows
of the Company for the periods presented. In preparing the interim 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 balance
sheet and revenues and expenses for the period. Material estimates that are
particularly susceptible to significant changes 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
foreclosed real estate, future additions to the allowance may be necessary based
on changes in economic conditions, particularly in Connecticut. Actual results
could differ significantly from those estimates. The interim results of
operations are not necessarily indicative of the operating results to be
expected for future periods, including the year ending June 30, 2009. These
financial statements should be read in conjunction with the 2008 consolidated
financial statements and notes thereto included in the Company’s Form 10-KSB
filed with the Securities and Exchange Commission (SEC) on September 23,
2008.




NOTE
3 – Recent Accounting Pronouncements




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.




5




In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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
operations. See Note 11 for further information.




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 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’s
adoption of EITF Issue 06-4 did not have a material impact on the Company’s
financial position or results of operations.




During
the first quarter of 2007, FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 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 as of July 1, 2008,
and is currently evaluating the impact of the adoption on its financial position
and results of operation. The Company did not elect fair value treatment for any
financial assets or liabilities upon adoption.




In
December 2007, the FASB issued SFAS No. 141 (Revised 2008), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) will significantly change the
accounting for business combinations. Under SFAS 141(R), an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited exceptions. It
also amends the accounting treatment for certain specific items including
acquisition costs and non controlling minority interests and includes a
substantial number of new disclosure requirements. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after January 1, 2009. The Company does not expect the adoption of this
statement to have a material impact on its financial condition and results of
operations.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133” (SFAS 161). SFAS
161 changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
The guidance in SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. This statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The Company
does not expect the adoption of this statement to have a material impact on its
financial condition and results of operations.




6




NOTE
4 – Earnings Per Share




As
presented, basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. For purposes of computing
diluted EPS, the treasury stock method is used.




The
following information was used in the computation of EPS on both a basic and
diluted basis for the quarters ended September 30, 2008 and September 30,
2007:




Three
      Months Ended
                                                                      
                                                                      
                                                                      Three
      Months EndedSeptember
      30, 2008
                                                                      
                                                                      
                                                                      September
      30, 2007Basic
      EPS computation:Net
      (loss)income
                                                                      
                                                                      $
                                                                      (4,010,000
                                                                      )
                                                                      
                                                                      $
                                                                      539,000Weighted
      average shares outstanding
                                                                      
                                                                      
                                                                      6,263,728
                                                                      
                                                                      
                                                                      
                                                                      6,615,070Basic
      EPS
                                                                      
                                                                      $
                                                                      (0.64
                                                                      )
                                                                      
                                                                      $
                                                                      0.08Diluted
      EPS computation:Net
      (loss)income
                                                                      
                                                                      $
                                                                      (4,010,000
                                                                      )
                                                                      
                                                                      $
                                                                      539,000Weighted
      average shares outstanding
                                                                      
                                                                      
                                                                      6,263,728
                                                                      
                                                                      
                                                                      
                                                                      6,615,070Dilutive
      potential shares
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      92,1686,263,728
                                                                      
                                                                      
                                                                      
                                                                      6,707,238Diluted
      EPS
                                                                      
                                                                      $
                                                                      (0.64
                                                                      )
                                                                      
                                                                      $
                                                                      0.08




7




NOTE
5 – Investment Securities




The
carrying value and estimated market values of investment securities are as
follows:




September
      30, 2008Amortized
                                
                                
                                Gross
      Unrealized
                                
                                
                                FairCost
      Basis
                                
                                
                                Gains
                                
                                
                                (Losses)
                                
                                
                                Value(in
      thousands)Debt
      securities:U.S.
      government and agency obligations:From
      one through five years
                                
                                $
                                2,970
                                
                                
                                $
                                39
                                
                                
                                $
                                —
                                
                                
                                $
                                3,009From
      five through ten years
                                
                                
                                3,245
                                
                                
                                
                                12
                                
                                
                                
                                (34
                                )
                                
                                
                                3,223After
      ten years
                                
                                
                                14,989
                                
                                
                                
                                88
                                
                                
                                
                                (40
                                )
                                
                                
                                15,03721,204
                                
                                
                                
                                139
                                
                                
                                
                                (74
                                )
                                
                                
                                21,269State
      agency and municipal obligations:After
      ten years
                                
                                
                                4,448
                                
                                
                                
                                43
                                
                                
                                
                                (13
                                )
                                
                                
                                4,4784,448
                                
                                
                                
                                43
                                
                                
                                
                                (13
                                )
                                
                                
                                4,478Corporate
      bonds and other obligations:Due
      within one year
                                
                                
                                1,001
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                1,001From
      one through five years
                                
                                
                                7,161
                                
                                
                                
                                —
                                
                                
                                
                                (1,031
                                )
                                
                                
                                6,130After
      ten years
                                
                                
                                7,095
                                
                                
                                
                                18
                                
                                
                                
                                (1,369
                                )
                                
                                
                                5,74415,257
                                
                                
                                
                                18
                                
                                
                                
                                (2,400
                                )
                                
                                
                                12,875Mortgage-backed
      securities
                                
                                
                                150,971
                                
                                
                                
                                546
                                
                                
                                
                                (11,028
                                )
                                
                                
                                140,489Total
      debt securities
                                
                                
                                191,880
                                
                                
                                
                                746
                                
                                
                                
                                (13,515
                                )
                                
                                
                                179,111Equity
      securities:Preferred
      stock
                                
                                
                                15,320
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                15,320FHLB
      restricted stock
                                
                                
                                8,057
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                8,057Total
      equity securities
                                
                                
                                23,377
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                23,377Total
      available-for-sale securities and FHLB Stock
                                
                                $
                                215,257
                                
                                
                                $
                                746
                                
                                
                                $
                                (13,515
                                )
                                
                                $
                                202,488




8




NOTE
5 – Investment Securities –
(Continued)




June
      30, 2008Amortized
                                        
                                        
                                        Gross
      Unrealized
                                        
                                        
                                        FairCost
      Basis
                                        
                                        
                                        Gains
                                        
                                        
                                        (Losses)
                                        
                                        
                                        Value(in
      thousands)Debt
      securities:U.S.
      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 and FHLB Stock
                                        
                                        $
                                        225,810
                                        
                                        
                                        $
                                        926
                                        
                                        
                                        $
                                        (6,710
                                        )
                                        
                                        $
                                        220,026




There
were no gross gains or losses realized on sales of available-for-sale securities
for the quarters ended September 30, 2008 and September 30, 2007, respectively.
There was an other-than-temporary impairment charge on available-for-sale
securities of $5.5 million in the current quarter. See Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations-Overview.




9




NOTE
6 – Loans




The
following table sets forth the composition of our loan portfolio at September
30, 2008 and June 30, 2008:




September
      30,
                                      2008
                                    
                                    
                                    June
      30,
                                      2008Amount
                                    
                                    
                                    Percent
                                    
                                    
                                    Amount
                                    
                                    
                                    Percent(Dollars
      in thousands)Mortgage
      Loans:Residential
      (1)
                                    
                                    $
                                    188,198
                                    
                                    
                                    
                                    73.39
                                    %
                                    
                                    $
                                    181,978
                                    
                                    
                                    
                                    72.59
                                    %Commercial
      real estate
                                    
                                    
                                    57,018
                                    
                                    
                                    
                                    22.24
                                    
                                    
                                    
                                    55,406
                                    
                                    
                                    
                                    22.10Residential
      construction
                                    
                                    
                                    1,877
                                    
                                    
                                    
                                    0.73
                                    
                                    
                                    
                                    3,223
                                    
                                    
                                    
                                    1.29Commercial
                                    
                                    
                                    8,049
                                    
                                    
                                    
                                    3.14
                                    
                                    
                                    
                                    8,687
                                    
                                    
                                    
                                    3.46Consumer
      and other
                                    
                                    
                                    1,289
                                    
                                    
                                    
                                    0.50
                                    
                                    
                                    
                                    1,394
                                    
                                    
                                    
                                    0.56Total
      loans
                                    
                                    
                                    256,431
                                    
                                    
                                    
                                    100.00
                                    %
                                    
                                    
                                    250,688
                                    
                                    
                                    
                                    100.00
                                    %Unadvanced
      construction loans
                                    
                                    
                                    (6,472
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (6,522
                                    )249,959
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    244,166Net
      deferred loan costs
                                    
                                    
                                    348
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    320Allowance
      for loan losses
                                    
                                    
                                    (1,996
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1,758
                                    )Loans,
      net
                                    
                                    $
                                    248,311
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    242,728




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




10




NOTE
7 – Non-performing Assets




The table
below sets forth the amounts and categories of non-performing assets at the
dates indicated.


At
      September 30,
                            2008
                          
                          
                          At
      June 30,
                            2008(Dollars
      in thousands)Non-accrual
      loans:Residential
      mortgage loans (1)
                          
                          $
                          —
                          
                          
                          $
                          —Commercial
      real estate
                          
                          
                          3,649
                          
                          
                          
                          982Residential
      construction
                          
                          
                          —
                          
                          
                          
                          —Commercial
                          
                          
                          48
                          
                          
                          
                          —Consumer
      and other
                          
                          
                          —
                          
                          
                          
                          —Total
      non-accrual loans
                          
                          
                          3,697
                          
                          
                          
                          982Accruing
      loans past due 90 days or more:Residential
      mortgage loans (1)
                          
                          
                          —
                          
                          
                          
                          —Commercial
      real estate
                          
                          
                          2,823
                          
                          
                          
                          2,859Residential
      construction
                          
                          
                          —
                          
                          
                          
                          —Commercial
                          
                          
                          195
                          
                          
                          
                          195Consumer
      and other
                          
                          
                          —
                          
                          
                          
                          —Total
                          
                          
                          3,018
                          
                          
                          
                          3,054Total
      non-performing loans
                          
                          
                          6,715
                          
                          
                          
                          4,036Real
      estate owned
                          
                          
                          —
                          
                          
                          
                          —Other
      non-performing assets
                          
                          
                          520
                          
                          
                          
                          —Total
      non-performing assets
                          
                          $
                          7,235
                          
                          
                          $
                          4,036Total
      non-performing loans to total loans
                          
                          
                          2.69
                          %
                          
                          
                          1.65
                          %Total
      non-performing assets to total assets
                          
                          
                          1.50
                          
                          
                          
                          0.82


(1)
              Residential
      mortgage loans include one- to four-family mortgage loans, home equity
      loans, and home equity lines of credit.(2)
              Loans
      past-due 90 days or more and accruing consist of matured loans pending
      renewal with current interest
payments.




11




NOTE
8 – Allowance for Loan Losses




The
following summarizes the changes in the allowance for loan losses for the
quarter ended September 30, 2008, as compared to the year-ago
period:




Three
      Months Ended
                                                              September
      30,2008
                                                            
                                                            
                                                            2007(in
      thousands)Balance,
      beginning of period
                                                            
                                                            $
                                                            1,758
                                                            
                                                            
                                                            $
                                                            1,780Provision
      for loan losses
                                                            
                                                            
                                                            274
                                                            
                                                            
                                                            
                                                            12Charge
      offs
                                                            
                                                            
                                                            (50
                                                            )
                                                            
                                                            
                                                            (15
                                                            )Recoveries
                                                            
                                                            
                                                            14
                                                            
                                                            
                                                            
                                                            3Balance,
      end of period
                                                            
                                                            $
                                                            1,996
                                                            
                                                            
                                                            $
                                                            1,780




At
September 30, 2008, the Company had loans with balances of $3.7 million
(representing 16 loans) on nonaccrual status. At September 30, 2007, the Company
had loans with balances of $982,000 (representing 8 loans) on nonaccrual status
and $470,000 (representing 2 loans) past due over 90 days and still accruing.
The Company had two impaired loan relationships with a balance of $2.4 million
as of September 30, 2008 and there were no impaired loans as of September 30,
2007.




NOTE
9 – Goodwill and Other Intangibles




Intangible
assets include goodwill and a core deposit intangible associated with the Bank’s
purchase of three branches from another financial institution in October 2005.
The goodwill and core deposit intangible are evaluated for impairment on an
annual basis and the core deposit intangible is amortized on an accelerated
basis over a ten-year period. The carrying amount of goodwill and core deposit
intangible as of September 30, 2008 was $6.9 million and $805,000, respectively.
The amortization expense related to the core deposit intangible for the quarters
ended September 30, 2008 and 2007 was $52,000 and $59,000,
respectively.




September
      30,
                                2008
                              
                              
                              June
      30,
                                2008(in
      thousands)Balances
      not subject to amortization:Goodwill
                              
                              $
                              6,912
                              
                              
                              $
                              6,912Balances
      subject to amortization:Core
      Deposit Intangible
                              
                              $
                              805
                              
                              
                              $
                              857Total
      intangible assets
                              
                              $
                              7,717
                              
                              
                              $
                              7,769




12




The
following table shows the estimated future amortization expense for amortizing
intangible assets for the periods indicated:




(in
      thousands)For
      the nine months ended June 30, 2009
                      
                      $
                      154For
      the twelve months ended June 30, 2010
                      
                      
                      178For
      the twelve months ended June 30, 2011
                      
                      
                      149For
      the twelve months ended June 30, 2012
                      
                      
                      121Thereafter
                      
                      
                      203Total
                      
                      $
                      805




NOTE
10 – Comprehensive (Loss) Income




Statement
of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”
establishes standards for disclosure of comprehensive income, which includes net
income and any changes in equity from non-owner sources that are not recorded in
the income statement (such as changes in the net unrealized gains (losses) on
securities). The Company’s one source of other comprehensive income is the net
unrealized gain (loss) on securities.




Three
      Months Ended
                                                      September
      30,2008
                                                    
                                                    
                                                    2007(in
      thousands)Net
      (Loss) Income
                                                    
                                                    $
                                                    (4,010
                                                    )
                                                    
                                                    $
                                                    539Other
      comprehensive (loss) income:Net
      unrealized holding (losses) gains on available-for-sale
      securities
                                                    
                                                    
                                                    (12,465
                                                    )
                                                    
                                                    
                                                    845Reclassification
      adjustment for loss recognized in net loss
                                                    
                                                    
                                                    5,480
                                                    
                                                    
                                                    
                                                    —Other
      comprehensive (loss) gains before tax (benefit) expense
                                                    
                                                    
                                                    (6,985
                                                    )
                                                    
                                                    
                                                    845Income
      tax (benefit) expense related to items of other comprehensive (loss)
      income
                                                    
                                                    
                                                    2,375
                                                    
                                                    
                                                    
                                                    (396
                                                    )Other
      comprehensive (loss) income net of tax
                                                    
                                                    
                                                    (4,610
                                                    )
                                                    
                                                    
                                                    449Total
      comprehensive (loss) income
                                                    
                                                    $
                                                    (8,620
                                                    )
                                                    
                                                    $
                                                    988




13




NOTE
11 – FAIR VALUES OF ASSETS AND LIABILITIES




Effective
July 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157 (“SFAS 157”), Fair Value Measurements, which provides a framework for
measuring fair value under generally accepted accounting
principles.




The
Company also adopted SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB Statement No. 115.
SFAS 159 allows an entity the irrevocable option to elect fair value for the
initial and subsequent measurement for certain financial assets and liabilities
on a contract-by-contract basis. The Company did not elect fair value treatment
for any financial assets or liabilities upon adoption.




In
accordance with SFAS 157, the Company groups its financial assets and financial
liabilities measured at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value.




Level 1 –
Valuations for assets and liabilities traded in active exchange markets, such as
the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S.
Government and agency mortgage-backed securities that are traded by dealers or
brokers in active markets. Valuations are obtained from readily available
pricing sources for market transactions involving identical assets or
liabilities.




Level 2 –
Valuations for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third party pricing services for identical
or comparable assets or liabilities.




Level 3 –
Valuations for assets and liabilities that are derived from other methodologies,
including option pricing models, discounted cash flow models and similar
techniques, and not based on market exchange, dealer, or broker traded
transactions. Level 3 valuations incorporate certain assumptions and projections
in determining the fair value assigned to such assets and
liabilities.




A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.




A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation methodologies were
applied to all of the Company’s financial assets and financial liabilities
carried at fair value for September 30, 2008.




The
Company’s cash instruments are generally classified within level 1 or level 2 of
the fair value hierarchy because they are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency.




The
Company’s investment and mortgage-backed securities available for sale are
generally classified within level 2 of the fair value hierarchy. For these
securities, we obtain fair value measurements from independent pricing services.
The fair value measurements consider observable data that may include dealer
quotes, market spreads, cash flows, the U. S. treasury yield curve, trading
levels, market consensus prepayment speeds, credit information and the
instrument’s terms and conditions.




Level 3
is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence. In the absence of such evidence, management’s best estimate is
used. Subsequent to inception, management only changes level 3 inputs and
assumptions when corroborated by evidence such as transactions in similar
instruments, completed or pending third-party transactions in the underlying
investment or comparable entities, subsequent rounds of financing,
recapitalization and other transactions across the capital structure, offerings
in the equity or debt markets, and changes in financial ratios or cash
flows.




The
Company’s impaired loans are reported at the fair value of the underlying
collateral if repayment is expected solely from the collateral. Collateral
values are estimated using level 2 inputs based upon appraisals of similar
properties obtained from a third party.




14




The
following summarizes assets measured at fair value for the period ending
September 30, 2008 (in thousands):




ASSETS
MEASURED AT FAIR VALUE ON A RECURRING BASIS




Fair
      Value Measurements at Reporting Date Using:September
      30, 2008
                        
                        
                        Quoted
      Prices in
                          Active
      Markets for
                          Identical
      Assets
                          Level
      1
                        
                        
                        Significant
      Other
                          Observable
      Inputs
                          
                          Level
      2
                        
                        
                        Significant
                          Unobservable
      Inputs
                          
                          Level
      3Securities
      available for sale
                        
                        $
                        194,431
                        
                        
                        $
                        520
                        
                        
                        $
                        178,911
                        
                        
                        $
                        15,000Impaired
      Loans
                        
                        
                        2,426
                        
                        
                        
                        —
                        
                        
                        
                        2,426
                        
                        
                        
                        0Total
                        
                        $
                        196,857
                        
                        
                        $
                        520
                        
                        
                        $
                        181,337
                        
                        
                        $
                        15,000







Fair
      Value Measurements
                                          Using
      Significant Unobservable Inputs
                                          (Level
      3)Available-for-sale
                                          Securities
                                        
                                        
                                        TotalBeginning
      balance, July 1, 2008
                                        
                                        $
                                        19,000
                                        
                                        
                                        $
                                        19,000Total
      gains or losses (realized/unrealized)Included
      in earnings (or changes in net assets)
                                        
                                        
                                        (3,680
                                        )
                                        
                                        
                                        (3,680
                                        )Included
      in other comprehensive incomeAmortization
      of securities, netTransfers
      in and/or out of Level 3
                                        
                                        
                                        (320
                                        )
                                        
                                        
                                        (320
                                        )Ending
      balance, September 30, 2008
                                        
                                        $
                                        15,000
                                        
                                        
                                        $
                                        15,000The
      amount of total gains or losses for the period included inearnings
      (or changes in net assets) attributable to the changein
      unrealized gains or losses relating to assets still held at thereporting
      date
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —




15




NOTE
12 – 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.




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.




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 granted to date 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) “Accounting for Stock Options and Other Stock
Based Compensation”, 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 expense related to unearned restricted shares is 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. The Company recorded share-based compensation
expense in connection with the stock option and restricted stock awards for the
three months ended September 30, 2008 and September 30, 2007 of $49,000 and
$137,000, respectively. During the current quarter, a reduction of $45,000 was
recorded in stock award expense due to forfeitures.




The
weighted-average fair value of stock options granted on November 7, 2005, June
7, 2006 and May 25, 2007 using the Black-Scholes option pricing method was $2.00
per share, $1.97 per share and $1.84 per share, respectively. 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




16




NOTE
13 – Dividends




On
September 3, 2008, the Board of Directors of the Company declared a cash
dividend of $0.10 a share for stockholders of record as of October 3, 2008 and
payable on October 17, 2008. Putnam Bancorp, MHC, the mutual holding company,
waived the receipt of the dividend declared by the Company.




NOTE
14 – Commitments to Extend Credit




The
Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. These commitments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the Statement of Financial Condition.




The
contractual amounts of outstanding commitments were as follows:


September
      30,
                                                      2008
                                                    
                                                    
                                                    June
      30,
                                                      2008(in
      thousands)Commitments
      to extend credit:Loan
      commitments
                                                    
                                                    $
                                                    9,495
                                                    
                                                    
                                                    $
                                                    9,732Unadvanced
      construction loans
                                                    
                                                    
                                                    6,472
                                                    
                                                    
                                                    
                                                    6,522Unadvanced
      lines of credit
                                                    
                                                    
                                                    18,964
                                                    
                                                    
                                                    
                                                    18,522Standby
      letters of credit
                                                    
                                                    
                                                    2,056
                                                    
                                                    
                                                    
                                                    2,050Outstanding
      commitments
                                                    
                                                    $
                                                    36,987
                                                    
                                                    
                                                    $
                                                    36,826






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




The
following analysis discusses changes in the financial condition and results of
operations at and for the quarters ended September 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 I, Item 1 of this quarterly
report. These financial statements should be read in conjunction with the 2008
Consolidated Financial Statements and notes thereto included in the Company’s
Form 10-KSB filed with the SEC on September 23, 2008.




The
year-end condensed balance sheet data were derived from audited financial
statements, but do not include all disclosures required by GAAP.




17




Forward-Looking
Statements




This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995,
and is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identified by use of the words “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “project,” or similar expressions. The Company’s ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and its subsidiary include, but are not limited to, changes in:
interest rates, general economic conditions, legislation and regulations,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company’s market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company’s financial results, is included in the Company’s filings with the
Securities and Exchange Commission.




Except as
required by applicable law and regulation, the Company does not undertake – and
specifically disclaims any obligation – to publicly release the results of any
revisions that may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.




18




Overview




The
Company’s results of operation 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.




During
the quarter ended September 30, 2008, the U.S. Treasury announced a plan to
place the Federal National Mortgage Association (“Fannie Mae”) and the Federal
Home Loan Mortgage Corporation (“Freddie Mac”) under conservatorship under the
authority of the Federal Housing Finance Agency. The actions of the U.S.
Government adversely impacted the value of the preferred stock of Fannie Mae and
Freddie Mac. The Bank owns $4.0 million of Freddie Mac auction pass-through
certificates (APT) issued by trusts sponsored by Merrill Lynch. The results of
this action, along with general concern in the market about the future value of
Freddie Mac preferred stock, have caused the values for the APT certificates to
decrease materially. The Company has recorded a non-cash other-than-temporary
impairment (“OTTI”) charge of $3.7 million in the current quarter. On October
29, 2008, the U.S. Treasury clarified that ordinary loss treatment applies to
these Freddie Mac APT certificates. As an ordinary loss, the Company will be
able to record a tax benefit related to this impairment charge for book purposes
but under generally accepted accounting principles banks may not record the
effect of this tax change in their balance sheets and income statements for
financial and regulatory purposes until the period in which the law was enacted,
i.e., the fourth quarter of 2008. On September 15, 2008, Lehman Brothers
Holdings Inc. (“LBHI”) filed a petition in the United States Bankruptcy Court
for the Southern District of New York seeking relief under chapter 11 of the
United States Bankruptcy Code. This action has adversely impacted the value of
Lehman Brothers corporate debt. The Bank owns $2.0 million of this corporate
debt. The Company has recorded an OTTI charge of $1.8 million in the current
quarter. At this time it is unclear when and if the values of both these
investments will recover in the future. Both of these investments were rated
investment grade by Moody’s and Standard & Poor’s at the time of
purchase.




The net
interest margin increased from 2.38% for the quarter ended September 30, 2007 to
2.69% for the quarter ended September 30, 2008. This resulted in a $400,000
increase over the periods. In addition, noninterest expense decreased $222,000
or 8.0% during the quarter ended September 30, 2008 compared to the quarter
ended September 30, 2007. The provision for loan losses increased $262,000
during the quarter ended September 30, 2008 as compared to the quarter ended
September 30, 2007.




Critical
Accounting Policies




Critical
accounting policies are those that involve significant judgments and assumptions
by management 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, goodwill and the impairment of
securities.




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. For
the general allocations, 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, historicalloan charge offs, 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.
Actual loan losses may be significantly more than the allowances we have
established which could have a material negative effect on our financial
results.




19




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 implied fair
value.




Other-Than-Temporary Impairment of
Securities.Management periodically reviews all investment securities
with significant declines in fair value for potential other-than-temporary
impairment pursuant to the guidance provided by SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities”.In November 2006, the
Financial Accounting Standards Board issued Staff Position (“FSP”) FAS 115-1 and
FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments”. The FSP addressed the determination as to when an
investment is considered impaired, whether the impairment is
other-than-temporary, and the measurement of an impairment loss. It also
included accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. The guidance in this FSP amended SFAS No. 115“Accounting for Certain
Investments in Debt and Equity Securities, No. 124”, “Accounting for Certain
Investments Held by Not-for-Profit Organizations”, and APB Opinion 18, “The
Equity Method of Accounting for Investments in Common Stock”.Management evaluates the
Company’s investment portfolio on an ongoing basis and determined that $6
million of investments were other-than-temporarily impaired as of September 30,
2008 and was written-down by $5.5 million as of September 30, 2008, resulting in
a charge to income of the same amount. There were no other-than-temporarily
impaired investments as of September 30, 2007.




Management
has discussed the development and selection of these critical accounting
policies with the Audit Committee of the Board of Directors.




Comparison
of Financial Condition at September 30, 2008 and June 30, 2008




Assets




Total
assets decreased to $482.7 million at September 30, 2008 from $494.5 million
Investments in securities decreased $17.5 million during the quarter ended
September 30, 2008, and represented $202.5 million or 42.0% of total assets at
September 30, 2008. Net loans have continued to grow to $248.3 million at
September 30, 2008 from $242.7 million at June 30, 2008 and now represent 51.4%
of total assets. Cash flows from the investment portfolio have been used to fund
this loan growth.




Allowance
for Loan Losses




The table
below indicates the relationships between the allowance for loan losses, total
loans outstanding and nonperforming loans at September 30, 2008 and June 30,
2008.




September
      30,
                                                                            2008
                                                                          
                                                                          
                                                                          June
      30,
                                                                            2008(Dollars
      in thousands)Allowance
      for loan losses
                                                                          
                                                                          $
                                                                          1,996
                                                                          
                                                                          
                                                                          $
                                                                          1,758Gross
      loans outstanding
                                                                          
                                                                          
                                                                          249,959
                                                                          
                                                                          
                                                                          
                                                                          244,166Nonperforming
      loans
                                                                          
                                                                          
                                                                          6,715
                                                                          
                                                                          
                                                                          
                                                                          4,036Allowance/gross
      loans outstanding
                                                                          
                                                                          
                                                                          0.80
                                                                          %
                                                                          
                                                                          
                                                                          0.72
                                                                          %Allowance/nonperforming
      loans
                                                                          
                                                                          
                                                                          29.7
                                                                          %
                                                                          
                                                                          
                                                                          43.6
                                                                          %




20




Past
Due and Nonperforming Loans




The
following table sets forth information regarding past due and non-performing
loans:




September
      30,
                                    2008
                                  
                                  
                                  June
      30,
                                    2008(in
      thousands)Past
      due 30 days through 89 days and accruing
                                  
                                  $
                                  3,150
                                  
                                  
                                  $
                                  4,230Past
      due 90 days or more and accruing (1)
                                  
                                  $
                                  3,018
                                  
                                  
                                  $
                                  3,054Past
      due 90 days or more and nonaccruing
                                  
                                  $
                                  3,697
                                  
                                  
                                  $
                                  982




(1)
              Loans
      past-due 90 days or more and accruing consist of matured loans pending
      renewal with current interest
      payments.




Liabilities




Total
liabilities decreased to $442.2 million at September 30, 2008 from $445.1
million at June 30, 2008. Total deposits decreased to $282.0 million at
September 30, 2008 from $283.7 million at June 30, 2008, a decrease of $1.7
million or 0.6%. Total borrowing funds remained relatively unchanged from $156.6
million at June 30, 2008 to $156.7 million at September 30, 2008.




Stockholders’
Equity




Total
stockholders’ equity decreased to $40.5 million at September 30, 2008 from $49.4
million at June 30, 2008. This was primarily due to a net loss of $4.0 million
and other comprehensive loss of $4.6 million.




Comparison
of Operating Results for the Quarters Ended September 30, 2008 and
2007




Net
(Loss) Income




The net
loss amounted to $4.0 million for the quarter ended September 30, 2008 compared
to net income of $539,000 for the quarter ended September 30, 2007. The decrease
in net income reflected an other-than-temporary impairment charge on investments
of $5.5 million in the current quarter. This was partially offset by an increase
in net interest income of $402,000 and a decrease in noninterest expense of
$222,000. The provision for loan losses increased by $262,000.




21




Interest
and Dividend Income




Interest
and dividend income amounted to $6.5 million for the quarter ended September 30,
2008 as compared to $6.8 million for the quarter ended September 30, 2007, a
decrease of $269,000 or 4.0%. The decrease in yield on loans had the greatest
impact on interest income when comparing the quarters. The yield on loans
decreased 50 basis points. This was partially offset by an increase in average
loan balances of $9.7 million when comparing the quarters ended September 30,
2008 and 2007. Average investment securities decreased $4.8 million and the
yield decreased nine basis points. Included in the decrease in investment
security yields for the quarter ended September 30, 2008 was the accrued
interest and dividend income reversed on the Freddie Mac Auction Rate Preferred
and Lehman Brothers investments that were written down during the quarter. The
yield on average other earning assets decreased by 282 basis points when
comparing the quarters ended September 30, 2008 and 2007, resulting in a
decrease in interest income, which was partially offset by an increase in
average balances of other earning assets of $936,000. The decrease in yield is
due to reductions in short-term rates implemented by the Federal Open Market
Committee since September 30, 2007.




Interest
Expense




Interest
expense amounted to $3.3 million for the quarter ended September 30, 2008 as
compared to $4.0 million for the quarter ended September 30, 2007, a decrease of
$671,000 or 16.8%. The decrease in rates on interest-bearing liabilities had the
greatest impact on interest expense. The average rates paid on interest-bearing
liabilities decreased by 77 basis points during the same periods. The average
balance of interest-bearing deposits grew by $995,000, and the average rate paid
decreased by 63 basis points when comparing the quarters ended September 30,
2008 and 2007. The average balance of borrowed money increased by $9.9 million,
and the average rate paid decreased by 103 basis points when comparing the
quarters ended September 30, 2008 and 2007. Average brokered deposits decreased
$7.9 million for the quarter ended September 30, 2008 as compared to the average
quarter ended September 30, 2007. This decrease in average brokered deposits was
funded with Federal Home Loan Bank of Boston (FHLBB) advances, which were
significantly lower in cost than the brokered deposits.




Net
Interest and Dividend Income




Net
interest and dividend income amounted to $3.2 million for the quarter ended
September 30, 2008 as compared to $2.8 for the quarter ended September 30, 2007,
an increase of $402,000 or 14.6%. Net interest spread increased 46 basis points
to 2.26% as compared to 1.80% when comparing the quarters ended September 30,
2008 and 2007. Net interest margin increased 31 basis points to 2.69% as
compared to 2.38% when comparing the quarters ended September 30, 2008 and
2007.




Due to
the large portion of fixed rate loans and securities in the Company’s asset
portfolio, interest rate risk is a concern and the Company continues to monitor
and adjust the asset and liability mix as much as possible to take advantage of
the benefits and reduce the risks or potential negative effects of a rising rate
environment. Management attempts to mitigate the interest rate risk through
balance sheet composition. One strategy has been to extend out FHLBB advance
maturities and take advantage of relatively low cost funding.




Provision
for Loan Losses




The
provision for loan losses amounted to $274,000 for the quarter ended September
30, 2008 and $12,000 for the quarter ended September 30, 2007. This increase is
primarily due to an increase in non-performing loans. The allowance for loan
losses is based on management’s estimate of the probable losses inherent in the
portfolio, considering the impact of certain factors. Among the factors
management may consider are prior loss experience, current economic conditions
and their effects on borrowers, the character and size of the portfolio, trends
in nonperforming loans and delinquency rates and the performance of individual
loans in relation to contractual terms. The provision for loan losses reflects
adjustments to the allowance based on management’s review of the portfolio in
light of those conditions. The ratio of the allowance to gross loans outstanding
was 0.80% as of September 30, 2008 compared to 0.72% as of June 30, 2008. Net
charge-offs were $36,000 for the quarter ended September 30, 2008.




22




Noninterest
(Charge) Income




Noninterest
charge amounted to $4.6 million for the quarter ended September 30, 2008 as
compared to noninterest income of $759,000 for the quarter ended September 30,
2007, a decrease of $5.4 million or 711.2%. This decrease was primarily due to
other-than-temporarily impaired investment write-downs of $5.5 million during
the current quarter. The write-downs included $3.7 million in Freddie Mac
pass-through auction-rate securities issued by trusts consisting solely of
Freddie Mac preferred stock and $1.8 million in Lehman Brothers corporate debt.
Excluding these write-downs, noninterest income would have increased by $82,000
or 10.8%.




Noninterest
Expense




Noninterest
expense amounted to $2.6 million for the quarter ended September 30, 2008 as
compared to $2.8 million for the quarter ended September 30, 2007, a decrease of
$222,000 or 8.0%. Compensation and benefits expense decreased $39,000 or 2.6%
when comparing quarters ended September 30, 2008 and 2007. This decrease was
primarily due to a reduction in employee stock award expense due to forfeitures.
This decrease was partially offset by an increase in salary expense. Occupancy
expense decreased $30,000 or 9.3% when comparing the quarters ended September
30, 2008 and 2007 due primarily to lower depreciation expense. Other noninterest
expense decreased $153,000 or 16.0% when comparing the quarters ended September
30, 2008 and 2007 primarily due to decreases in data processing, Director stock
awards, postage expense and item processing expense. This was partially offset
by increases in FDIC assessments and audit expenses.




Provision
for Income Taxes




The
income tax benefit amounted to $315,000 for the quarter ended September 30, 2008
as compared to $172,000 in income tax expense for the quarter ended September
30, 2007, a decrease of $487,000 or 283.1%. This increased benefit was due to
the “other-than-temporary impairment” charge of $1.8 million against the Lehman
Brothers securities owned by the Bank. The $3.7 million “other-than-temporary
impairment” charge against the Freddie Mac pass-through auction rate securities
is currently treated as a capital loss. Capital loss treatment would not result
in a tax benefit for book purposes because the Company has no capital gains to
offset the capital losses incurred.On October 29, 2008, the
U.S. Treasury clarified that ordinary loss treatment applies to these Freddie
Mac APT certificates. As an ordinary loss, the Company will be able to record a
tax benefit related to this impairment charge for book purposes but under
generally accepted accounting principles companies may not record the effect of
this tax change in their balance sheets and income statements for financial and
regulatory purposes until the period in which the law was enacted, i.e., the
fourth quarter of 2008.




23




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. Yields and costs for the quarters are annualized.




For
      the three months ended September 30,2008
                                                                            
                                                                            
                                                                            2007(Dollars
      in thousands)Interest-earning
      assets:
                                                                            
                                                                            Average
                                                                              Balance
                                                                            
                                                                            
                                                                            Interest/
                                                                              Dividends
                                                                            
                                                                            
                                                                            Yield/
                                                                              Cost
                                                                            
                                                                            Average
                                                                              Balance
                                                                            
                                                                            
                                                                            Interest/
                                                                              Dividends
                                                                            
                                                                            
                                                                            Yield/
                                                                              CostInvestment
      securities
                                                                            
                                                                            $
                                                                            215,247
                                                                            
                                                                            
                                                                            $
                                                                            2,791
                                                                            
                                                                            
                                                                            
                                                                            5.14
                                                                            %
                                                                            
                                                                            $
                                                                            220,087
                                                                            
                                                                            
                                                                            $
                                                                            2,899
                                                                            
                                                                            
                                                                            
                                                                            5.23
                                                                            %Loans
                                                                            
                                                                            
                                                                            247,242
                                                                            
                                                                            
                                                                            
                                                                            3,683
                                                                            
                                                                            
                                                                            
                                                                            5.91
                                                                            %
                                                                            
                                                                            
                                                                            237,549
                                                                            
                                                                            
                                                                            
                                                                            3,838
                                                                            
                                                                            
                                                                            
                                                                            6.41
                                                                            %Other
      earning assets
                                                                            
                                                                            
                                                                            2,429
                                                                            
                                                                            
                                                                            
                                                                            12
                                                                            
                                                                            
                                                                            
                                                                            1.96
                                                                            %
                                                                            
                                                                            
                                                                            1,493
                                                                            
                                                                            
                                                                            
                                                                            18
                                                                            
                                                                            
                                                                            
                                                                            4.78
                                                                            %Total
      interest-earnings assets
                                                                            
                                                                            
                                                                            464,918
                                                                            
                                                                            
                                                                            
                                                                            6,486
                                                                            
                                                                            
                                                                            
                                                                            5.53
                                                                            %
                                                                            
                                                                            
                                                                            459,129
                                                                            
                                                                            
                                                                            
                                                                            6,755
                                                                            
                                                                            
                                                                            
                                                                            5.84
                                                                            %Non-interest-earning
      assets
                                                                            
                                                                            
                                                                            27,818
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            30,027Total
      assets
                                                                            
                                                                            $
                                                                            492,736
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            $
                                                                            489,156Interest-bearing
      liabilities:NOW
      accounts
                                                                            
                                                                            $
                                                                            37,448
                                                                            
                                                                            
                                                                            
                                                                            225
                                                                            
                                                                            
                                                                            
                                                                            2.38
                                                                            %
                                                                            
                                                                            $
                                                                            26,709
                                                                            
                                                                            
                                                                            
                                                                            169
                                                                            
                                                                            
                                                                            
                                                                            2.51
                                                                            %Savings
      accounts
                                                                            
                                                                            
                                                                            45,306
                                                                            
                                                                            
                                                                            
                                                                            68
                                                                            
                                                                            
                                                                            
                                                                            0.60
                                                                            %
                                                                            
                                                                            
                                                                            48,867
                                                                            
                                                                            
                                                                            
                                                                            92
                                                                            
                                                                            
                                                                            
                                                                            0.75
                                                                            %Money
      market accounts
                                                                            
                                                                            
                                                                            12,429
                                                                            
                                                                            
                                                                            
                                                                            53
                                                                            
                                                                            
                                                                            
                                                                            1.69
                                                                            %
                                                                            
                                                                            
                                                                            17,133
                                                                            
                                                                            
                                                                            
                                                                            85
                                                                            
                                                                            
                                                                            
                                                                            1.97
                                                                            %Time
      deposits
                                                                            
                                                                            
                                                                            151,041
                                                                            
                                                                            
                                                                            
                                                                            1,417
                                                                            
                                                                            
                                                                            
                                                                            3.72
                                                                            %
                                                                            
                                                                            
                                                                            152,520
                                                                            
                                                                            
                                                                            
                                                                            1,800
                                                                            
                                                                            
                                                                            
                                                                            4.68
                                                                            %Borrowed
      money
                                                                            
                                                                            
                                                                            158,371
                                                                            
                                                                            
                                                                            
                                                                            1,571
                                                                            
                                                                            
                                                                            
                                                                            3.94
                                                                            %
                                                                            
                                                                            
                                                                            148,511
                                                                            
                                                                            
                                                                            
                                                                            1,859
                                                                            
                                                                            
                                                                            
                                                                            4.97
                                                                            %Total
      interest-bearing liabilities
                                                                            
                                                                            
                                                                            404,595
                                                                            
                                                                            
                                                                            
                                                                            3,334
                                                                            
                                                                            
                                                                            
                                                                            3.27
                                                                            %
                                                                            
                                                                            
                                                                            393,740
                                                                            
                                                                            
                                                                            
                                                                            4,005
                                                                            
                                                                            
                                                                            
                                                                            4.04
                                                                            %Non-interest-bearing
      demand deposits
                                                                            
                                                                            
                                                                            36,157
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            40,350Other
      non-interest-bearing liabilities
                                                                            
                                                                            
                                                                            3,849
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            3,707Capital
      accounts
                                                                            
                                                                            
                                                                            48,135
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            51,359Total
      liabilities and capital accounts
                                                                            
                                                                            $
                                                                            492,736
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            $
                                                                            489,156Net
      interest income
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            $
                                                                            3,152
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            $
                                                                            2,750Interest
      rate spread
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            2.26
                                                                            %
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            1.80
                                                                            %Net
      interest-earning assets
                                                                            
                                                                            $
                                                                            60,323
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            $
                                                                            65,389Net
      interest margin
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            2.69
                                                                            %
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            2.38
                                                                            %Average
      earning assets toaverage
      interest-bearing liabilities
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            114.91
                                                                            %
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            116.61
                                                                            %




24




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 three months ended September 30, 2008compared
      to the three months ended September 30, 2007Increase(Decrease)
      Due toRate
                                                                                                  
                                                                                                  
                                                                                                  Volume
                                                                                                  
                                                                                                  
                                                                                                  NetINTEREST
      INCOMEInvestment
      securities
                                                                                                  
                                                                                                  $
                                                                                                  (45
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  (63
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  (108
                                                                                                  )Loans
                                                                                                  
                                                                                                  
                                                                                                  (918
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  763
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (155
                                                                                                  )Other
      interest-earning assets
                                                                                                  
                                                                                                  
                                                                                                  (46
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  40
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (6
                                                                                                  )TOTAL
      INTEREST INCOME
                                                                                                  
                                                                                                  
                                                                                                  (1,009
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  740
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (269
                                                                                                  )INTEREST
      EXPENSE:NOW
      accounts
                                                                                                  
                                                                                                  
                                                                                                  (54
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  110
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  56Savings
      accounts
                                                                                                  
                                                                                                  
                                                                                                  (18
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (6
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (24
                                                                                                  )Money
      Market accounts
                                                                                                  
                                                                                                  
                                                                                                  (11
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (21
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (32
                                                                                                  )Time
      deposits
                                                                                                  
                                                                                                  
                                                                                                  (366
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (17
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (383
                                                                                                  )Other
      borrowed money
                                                                                                  
                                                                                                  
                                                                                                  (960
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  672
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (288
                                                                                                  )TOTAL
      INTEREST EXPENSE
                                                                                                  
                                                                                                  
                                                                                                  (1,409
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  738
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (671
                                                                                                  )CHANGE
      IN NET INTEREST INCOME
                                                                                                  
                                                                                                  $
                                                                                                  400
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  2
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  402




Market
Risk, Liquidity and Capital Resources




Market
Risk




The
majority of our assets and liabilities are monetary in nature. Consequently, our
most significant form of market risk is interest rate risk (“IRR”). Our assets,
consisting primarily of mortgage loans, have longer maturities than our
liabilities, consisting primarily of deposits and other borrowings. As a result,
a principal part of our business strategy is to manage IRR and reduce the
exposure of our net interest income (“NII”) to changes in market interest rates.
Accordingly, our Board of Directors has established an Asset/Liability
Management Committee which is responsible for evaluating the IRR inherent in our
assets and liabilities, for determining the level of risk that is appropriate
given our business strategy, operating environment, capital, liquidity and
performance objectives, and for managing this risk consistent with the
guidelines approved by the Board of Directors. With the assistance of an IRR
management consultant, the committee monitors the level of IRR on a regular
basis and generally meets at least on a quarterly basis to review our
asset/liability policies and IRR position.




We
have sought to manage our IRR in order to minimize the exposure of our earnings
and capital to changes in interest rates. As part of our ongoing asset/liability
management, we currently use the following strategies to manage our IRR: (i)
using alternative funding sources, such as advances from the Federal Home Loan
Bank of Boston, to “match fund” certain investments and/or loans; (ii) continued
emphasis on increasing core deposits; (iii) offering adjustable rate and
shorter-term home equity loans, commercial real estate loans, construction loans
and commercial and industrial loans; (iv) offering a variety of consumer loans,
which typically have shorter-terms; (v) investing in mortgage-backed securities
with variable rates or fixed rates with shorter durations. Shortening the
average maturity of our interest-earning assets by increasing our investments in
shorter-term loans and securities, as well as loans and securities with variable
rates of interest, helps to better match the maturities and interest rates of
our assets and liabilities, thereby reducing the exposure of our NII to changes
in market interest rates.




25




Net
interest income at-risk measures the risk of a decline in earnings due to
potential short-term and long term changes in interest rates. The table below
represents an analysis of our IRR as measured by the estimated changes in NII,
resulting from an instantaneous and sustained parallel shift in the yield curve
(+200 and -200 basis points) at March 31, 2008 and June 30, 2008.




Net
      Interest Income At-RiskEstimated
      Increase (Decrease)
                    
                    Estimated
      Increase (Decrease)Change
      in Interest Rates
                    
                    in
      NII
                    
                    in
      NII(Basis
      Points)
                    
                    June
      30, 2008
                    
                    March
      31, 2008-
      100
                    
                    1.17%
                    
                    1.95%Stable+
      200
                    
                    -7.48%
                    
                    -11.88%




The
preceding income simulation analysis does not represent a forecast of NII and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions, which are
subject to change, including: the nature and timing of interest rate levels
including the yield curve shape, prepayments on loans and securities, deposit
decay rates, pricing decisions on loans and deposits, reinvestment/replacement
of asset and liability cash flows, and others. Also, as market conditions vary
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate changes on caps and floors embedded in adjustable rate
loans, early withdrawal of deposits, changes in product preferences, and other
internal/external variables. We do not believe that there has been a material
change in our NII position between June 30, 2008 and September 30,
2008.




Net
Portfolio Value Simulation Analysis.The Office of Thrift Supervision
requires the computation of amounts by which the net present value of an
institution’s cash flow from assets, liabilities and off-balance sheet items
(the institution’s net portfolio value or “NPV”) would change in the event of a
range of assumed changes in market interest rates. The Office of Thrift
Supervision provides all institutions that file a Consolidated Maturity/Rate
Schedule as a part of their quarterly Thrift Financial Report an interest rate
sensitivity report of net portfolio value. The Office of Thrift Supervision
simulation model uses a discounted cash flow analysis and an option-based
pricing approach to measuring the interest rate sensitivity of net portfolio
value. Historically, the Office of Thrift Supervision model estimated the
economic value of each type of asset, liability and off-balance sheet contract
under the assumption that the United States Treasury yield curve increases or
decreases instantaneously by 100 to 300 basis point increments. However, given
the current low level of market interest rates, we did not prepare a net
portfolio value calculation for an interest rate decrease of greater than 100
basis points. A basis point equals one-hundredth of one percent, and 200 basis
points equals two percent, an increase in interest rates from 3% to 5% would
mean, for example, a 200 basis point increase in the “Change in Interest Rates”
column below. The Office of Thrift Supervision provides us the results of the
interest rate sensitivity model, which is based on information we provide to the
Office of Thrift Supervision to estimate the sensitivity of our net portfolio
value.




The
tables below set forth, at June 30, 2008 indicated the estimated changes in our
net portfolio value that would result from the designated instantaneous changes
in the United States Treasury yield curve. Computations of prospective effects
of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, loan prepayments and deposit
decay, and should not be relied upon as indicative of actual results. This data
is for Putnam Bank only and does not include any yield curve changes in the
assets of PSB Holdings, Inc. We do not believe that there has been a material
change in our NPV position between June 30, 2008 and September 30,
2008.




26




NPV
      as a Percentage of PresentValue
      of Assets (3)Change
      in
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Estimated
      Increase (Decrease) in
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      IncreaseInterest
      Rates
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Estimated
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      NPV
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (Decrease)(basis
      points) (1)
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      NPV
      (2)
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Amount
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Percent
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      NPV
      Ratio (4)
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (basis
      points)+300
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      21,499
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (26,537
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      -55%
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4.63%
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -496+200
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      31,495
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (16,541
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      -34%
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      6.60%
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -299+100
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      40,751
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      (7,285
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      -15%
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      8.32%
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -1270
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      48,036
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      —
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      0%
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      9.59%
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      0-100
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      52,443
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      4,407
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      9%
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      10.28%
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      69




(1)
                    Assumes
      an instantaneous uniform change in interest rates at all
      maturities.(2)
                    NPV
      is the discounted present value of expected cash flows from assets,
      liabilities and off-balance sheet contracts.(3)
                    Present
      value of assets represents the discounted present value of incoming cash
      flows on interest-earning assets.(4)
                    NPV
      ratio represents NPV divided by the present value of
    assets.




Liquidity




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 September 30, 2008 of $150.2 million with unused
borrowing capacity of $41.6 million. The Bank had no brokered certificates of
deposits as of September 30, 2008. The Bank has a limit of wholesale borrowings
to total assets ratio of 40.0%. As of September 30, 2008, the ratio of wholesale
borrowings to total assets was 31.2%.




The
Bank’s primary investing activities are the origination of loans and the
purchase of investment securities. During the quarters ended September 30, 2008
and 2007, the Bank originated loans for the portfolio net of principal payments
of $5.8 million and $5.2 million, respectively. Purchases of securities totaled
$2.1 million and $10.6 million, for the quarters ended September 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.




Certificates
of deposits totaled $151.2 million at September 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.




The Bank
was well capitalized at September 30, 2008 and exceeded each of the applicable
regulatory capital requirements at such date. For purposes of the regulatory
capital calculations for the quarter ended September 30, 2008, but not for
balance sheet and income statement purposes, banks may elect to adjust the tax
effect of losses on Fannie Mae and Freddie Mac preferred stock as if the tax
change was enacted in the third quarter of 2008. The table below presents the
capital required and maintained at September 30, 2008 including the
above-mentioned tax effect.




27




Required
                                    
                                    
                                    ActualRatio
      of Tier 1 Capital to total assets
                                    
                                    4%
                                    
                                    
                                    7.84%Ratio
      of Total Risk Based Capital to risk-weighted assets
                                    
                                    8%
                                    
                                    
                                    15.37%Ratio
      of Tier 1 Risk Based Capital to risk-weighted assets
                                    
                                    4%
                                    
                                    
                                    14.61%




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
quarter ended September 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.




Item
3. Quantitative and Qualitative Disclosures About Market Risk




Not
applicable to smaller reporting companies




Item
4. Controls and Procedures




Not
applicable




Item
4T. Controls and Procedures




Under the
supervision and with the participation of the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, the Company evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15(d)-15(e) under the Exchange
Act) 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, the Company’s
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 Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and in timely altering them to material information relating to the Company (or
its consolidated subsidiaries) required to be filed in its periodic SEC
filings.




There has
been no change in the Company’s internal control over financial reporting in
connection with the quarterly evaluation that occurred during the Company’s last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.




28




Part
II. – OTHER INFORMATION




Item
      1.
            Legal
      Proceedings – Not applicableItem
      1A.
            Risk
      Factors




The risks
set forth below, in addition to the other risks described in this quarterly
report, represent material changes from those risk factors previously disclosed
the Company’s previous filings with the Securities and Exchange Commission, and
may adversely affect our business, financial condition and operating results. In
addition to the risks set forth below and the other risks described in this
quarterly report, there may also be additional risks and uncertainties that are
not currently known to us or that we currently deem to be immaterial that could
materially and adversely affect our business, financial condition or operating
results. As a result, past financial performance may not be a reliable indicator
of future performance, and historical trends should not be used to anticipate
results or trends in future periods. Further, to the extent that any of the
information contained in this Quarterly Report on Form 10-Q constitutes
forward-looking statements, the risk factors set forth below also are cautionary
statements identifying important factors that could cause our actual results to
differ materially from those expressed in any forward-looking statements made by
or on behalf of us.




Our
Expenses Will Increase as a Result of Increases in FDIC Insurance
Premiums




The
Federal Deposit Insurance Corporation (“FDIC”) imposes an assessment against
institutions for deposit insurance. This assessment is based on the risk
category of the institution and ranges from five to 43 basis points of the
institution’s deposits. Federal law requires that the designated reserve ratio
for the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of
estimated insured deposits. If this reserve ratio drops below 1.15% or the FDIC
expects it to do so within six months, the FDIC must, within 90 days, establish
and implement a plan to restore the designated reserve ratio to 1.15% of
estimated insured deposits within five years (absent extraordinary
circumstances).




Recent
bank failures coupled with deteriorating economic conditions have significantly
reduced the deposit insurance fund’s reserve ratio. As of June 30, 2008, the
designated reserve ratio was 1.01% of estimated insured deposits at March 31,
2008. As a result of this reduced reserve ratio, on October 16, 2008, the FDIC
published a proposed rule that would restore the reserve ratios to its required
level. The proposed rule would raise the current deposit insurance assessment
rates uniformly for all institutions by seven basis points (to a range from 12
to 50 basis points) for the first quarter of 2009. The proposed rule would also
alter the way the FDIC calculates federal deposit insurance assessment rates
beginning in the second quarter of 2009 and thereafter.




Under the
proposed rule, the FDIC would first establish an institution’s initial base
assessment rate. This initial base assessment rate would range, depending on the
risk category of the institution, from 10 to 45 basis points. The FDIC would
then adjust the initial base assessment (higher or lower) to obtain the total
base assessment rate. The adjustments to the initial base assessment rate would
be based upon an institution’s levels of unsecured debt, secured liabilities,
and brokered deposits. The total base assessment rate would range from eight to
77.5 basis points of the institution’s deposits. There can be no assurance that
the proposed rule will be implemented by the FDIC or implemented in its proposed
form.




In
addition, the Emergency Economic Stabilization Act of 2008 (EESA) temporarily
increased the limit on FDIC insurance coverage for deposits to $250,000 through
December 31, 2009, and the FDIC took action to provide coverage for newly issued
senior unsecured debt and non-interest bearing transaction accounts in excess of
the $250,000 limit, for which institutions will be assessed additional
premiums.




These
actions will significantly increase the Company’s non-interest expense in 2009
and in future years as long as the increased premiums are in place.





Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceedsa)
      Not applicableb)
      Not applicable





29




Item
      3.
            Defaults
      Upon Senior Securities – Not applicableItem
      4.
            Submission
      of Matters to a Vote of Security
Holders





The
Company convened its 2008 Annual Meeting of Stockholders on November 7, 2008. At
the meeting, the stockholders of the Company considered and voted on the
following proposals:




Ballot
No. 1. The election of Mary E. Patenaude, Robert J. Halloran, Jr., and Jitendra
K. Sinha, each to serve as a director for a term of three years and until his or
her successor has been elected and qualified.





For
                
                
                WithheldMary
      E. Patenaude
                
                
                5,782,723
                
                
                
                23,281Robert
      J. Halloran, Jr.
                
                
                5,722,090
                
                
                
                83,914Jitendra
      K. Sinha
                
                
                5,782,723
                
                
                
                23,281





The term
in office of directors Thomas A. Borner, Richard A. Loomis, Paul M. Kelly,
Charles H. Puffer, Charles W. Bentley, Jr. and John P. Miller continued after
the 2008 Annual Meeting.




Ballot
No. 2. The ratification of the appointment of Shatswell, MacLeod & Company,
P.C. as the independent registered public accounting firm of the Company for the
fiscal year ending June 30, 2009.




The
results of Ballot No.2 were as follows:





For
              
              
              Against
              
              
              AbstainNumber
      of votes
              
              
              5,773,249
              
              
              
              16,586
              
              
              
              16,169Percentage
      of shares voting in person or by proxy
              
              
              99.7
              %
              
              
              0.3
              %





Item
      5.
            Other
      Information





a.
                    Not
      applicable.b.
                    There
      were no material changes to the procedures by which security holders may
      recommend nominees to the Company’s Board of Directors during the period
      covered by this Form
10-Q.





Item
      6.
            Exhibits





Exhibits31.1
                  
                  Chief
      Executive Officer Certification pursuant to 17 CFR 240.13a-14 as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
                  
                  Chief
      Financial Officer Certification pursuant to 17 CFR 240.13a-14 as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
                  
                  Chief
      Executive Officer Certification pursuant to 18 U.S.C. Section
      1350.32.2
                  
                  Chief
      Financial Officer Certification pursuant to 18 U.S.C. Section
      1350.




30




SIGNATURES




In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





PSB
      HOLDINGS, INC.(Registrant)Date
                  November
      13, 2008
                  
                  /s/
      Thomas A. BornerThomas
      A. BornerChief
      Executive OfficerDate
                  November
      13, 2008
                  
                  
                  /s/
      Robert J. Halloran, Jr.Robert
      J. Halloran, Jr.President,
      Chief Financial Officer and
Treasurer




31