**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-QSB**

 

**(Mark One)**

 

**ý****             ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended December31, 2005**

 

**o****             ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For thetransition period from              to             **

 

**Commission file number 0-50970**

 

**PSB 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)                                           |
|                                                                                |       |                               |
| **(860)  928-6501**                                                                 |
| (Issuer’s telephone  number)                                                   |
|                                                                                |       |                               |
| **N/A**                                                                             |
| (Former name, former  address and former fiscal year, if changed since last report) |

 

Indicateby 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 suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

Yes  ý  No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 

Yes  o  No  ý

 

Indicateby check mark whether the Registrant is a shell company as defined in Rule12b-2 of the Exchange Act  o YES   ýNO

 

As of December 31, 2005, there were 6,932,753 sharesof the registrant’s common stock outstanding.

 

Transitional Small Business Disclosure Format    Yes o  No ý

 

 

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PSB Holdings, Inc.

 

Table of Contents

 
| **Part  I.** | **FINANCIAL  INFORMATION**                                                                                                 |   |
|--------------|----------------------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                                       |   |
| Item 1.      | Financial  Statements                                                                                                      |   |
|         |                                                                                                                       |   |
|         | Consolidated  Statements of Financial Condition at December 31, 2005 (Unaudited) and June  30, 2005 (Unaudited)            | 1      |
|         |                                                                                                                       |   |
|         | Consolidated Statements of  Income for the Three Months Ended and Six Months Ended December 31, 2005 and  2004 (Unaudited) | 2      |
|         |                                                                                                                       |   |
|         | Consolidated  Statements of Cash Flows for the Six Months Ended December 31, 2005 and 2004  (Unaudited)                    | 3      |
|         |                                                                                                                       |   |
|         | Notes to Financial Statements (Unaudited)                                                                                  | 4      |
|         |                                                                                                                       |   |
| Item  2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                | 11     |
|         |                                                                                                                       |   |
| Item  3.     | Controls  and Procedures                                                                                                   | 22     |
|         |                                                                                                                       |   |
| **Part II.** | **OTHER  INFORMATION**                                                                                                     | 22     |
|         |                                                                                                                       |   |
| Item  1.     | Legal  Proceedings                                                                                                         | 22     |
|         |                                                                                                                       |   |
| Item  2.     | Unregistered  Sales of Equity Securities and Use of Proceeds                                                               | 22     |
|         |                                                                                                                       |   |
| Item  3.     | Defaults  Upon Senior Securities                                                                                           | 22     |
|         |                                                                                                                       |   |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                                                       | 22     |
|         |                                                                                                                       |   |
| Item  5.     | Other  Information                                                                                                         | 23     |
|         |                                                                                                                       |   |
| Item 6.      | Exhibits                                                                                                                   | 23     |
|         |                                                                                                                       |   |
| SIGNATURES   | 24                                                                                                                         |

 

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**PartI.  FINANCIAL INFORMATION**

 

Item1.  Financial Statements

 

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PSB Holdings, Inc.

 

Consolidated Statementsof Financial Condition

(Unaudited)

 
| ** **                                                                                                                                                               | ** ** | **December 31,**                                    | ** **  | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|-------------|-------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2005**                                                 | ** **  | **2005**          | ** ** |
| ** **                                                                                                                                                               | ** ** | **(in thousands except share data)** | ** **  |
| **ASSETS**                                                                                                                                                               |       |                                                     |        |              |       |
| Cash and due  from depository institutions                                                                                                                               |       | $                                                        | 12,863      |              | $          | 7,705 |   |
| Available-for-sale  securities                                                                                                                                           |       | 191,074                                                  |        | 153,405           |       |
|                                                                                                                                                                     |       |                                                     |        |              |       |
| Loans  receivable, gross                                                                                                                                                 |       | 180,026                                                  |        | 166,365           |       |
| Allowance for  loan losses                                                                                                                                               |       | (1,471                                                   | )           | (1,359            | )          |
| Loans  receivable, net                                                                                                                                                   |       | 178,555                                                  |        | 165,006           |       |
|                                                                                                                                                                     |       |                                                     |        |              |       |
| Premises and  equipment, net                                                                                                                                             |       | 4,649                                                    |        | 4,514             |       |
| Accrued income  receivable                                                                                                                                               |       | 1,913                                                    |        | 1,571             |       |
| Bank owned life  insurance                                                                                                                                               |       | 2,314                                                    |        | 2,270             |       |
| Core deposit  intangible                                                                                                                                                 |       | 1,494                                                    |        | —            |       |
| Goodwill                                                                                                                                                                 |       | 6,909                                                    |        | —            |       |
| Deposit for  branch acquisitions                                                                                                                                         |       | —                                                   |        | 1,888             |       |
| Other assets                                                                                                                                                             |       | 2,062                                                    |        | 1,276             |       |
| **TOTAL  ASSETS**                                                                                                                                                        | ** ** | **$**                                                    | **401,833** | ** **        | **$**      | **337,635** | ** ** |
| ** **                                                                                                                                                               | ** ** | ** **                                               | ** **  | ** **        | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                           |       |                                                     |        |              |       |
| Liabilities                                                                                                                                                              |       |                                                     |        |              |       |
| Deposits                                                                                                                                                                 |       | $                                                        | 280,237     |              | $          | 218,123 |   |
| Borrowed funds                                                                                                                                                           |       | 65,486                                                   |        | 63,734            |       |
| Mortgagors’  escrow accounts                                                                                                                                        |       | 989                                                      |        | 1,029             |       |
| Other  liabilities                                                                                                                                                       |       | 2,543                                                    |        | 1,729             |       |
| Total  Liabilities                                                                                                                                                       |       | 349,255                                                  |        | 284,615           |       |
|                                                                                                                                                                     |       |                                                     |        |              |       |
| Stockholders’  Equity                                                                                                                                               |       |                                                     |        |              |       |
| Preferred 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,  6,932,753 shares outstanding at December 31, 2005 and 6,943,125 at June 30,  2005 |       | 694                                                      |        | 694               |       |
| Additional  paid-in capital                                                                                                                                              |       | 31,816                                                   |        | 30,446            |       |
| Unearned ESOP  shares                                                                                                                                                    |       | (2,472                                                   | )           | (2,472            | )          |
| Unearned stock  awards                                                                                                                                                   |       | (1,370                                                   | )           | —            |       |
| Retained  earnings                                                                                                                                                       |       | 24,609                                                   |        | 23,808            |       |
| Treasury stock,  at cost (10,372 shares at December 31, 2005 and no shares at June 30, 2005)                                                                             |       | (110                                                     | )           | —            |       |
| Accumulated  other comprehensive income (loss)                                                                                                                           |       | (589                                                     | )           | 544               |       |
| Total  Stockholders’ Equity                                                                                                                                         |       | 52,578                                                   |        | 53,020            |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                     | ** ** | **$**                                                    | **401,833** | ** **        | **$**      | **337,635** | ** ** |

 

See notes to consolidatedfinancial statements.

 

1

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PSB Holdings, Inc.

 

Consolidated Statementsof Income

(Unaudited)

 
| ** **                                           | ** ** | **Three Months Ended  December 31,**      | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                                 | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(in thousands except share data)** | ** ** |
| Interest income:                                     |       |                                                     |       |                                              |       |   |   |   |   |
| Interest on  loans                                   |       | $                                                        | 2,652      |                                              | $          | 2,142 |   | $ | 5,214 |   | $ | 4,166 |   |
| Interest and  dividends on investments and deposits  |       | 2,001                                                    |       | 1,485                                             |       | 3,605 |   | 2,861 |   |
| Total interest  income                               |       | 4,653                                                    |       | 3,627                                             |       | 8,819 |   | 7,027 |   |
|                                                 |       |                                                     |       |                                              |       |   |   |   |   |
| Interest  expense:                                   |       |                                                     |       |                                              |       |   |   |   |   |
| Deposits and  escrow                                 |       | 1,408                                                    |       | 931                                               |       | 2,535 |   | 1,815 |   |
| Borrowed money                                       |       | 550                                                      |       | 426                                               |       | 1,145 |   | 848 |   |
| Total interest  expense                              |       | 1,958                                                    |       | 1,357                                             |       | 3,680 |   | 2,663 |   |
| Net interest  income                                 |       | 2,695                                                    |       | 2,270                                             |       | 5,139 |   | 4,364 |   |
|                                                 |       |                                                     |       |                                              |       |   |   |   |   |
| Provision for  loan losses                           |       | 15                                                       |       | 25                                                |       | 35 |   | 48 |   |
| Net interest  income after provision for loan losses |       | 2,680                                                    |       | 2,245                                             |       | 5,104 |   | 4,316 |   |
|                                                 |       |                                                     |       |                                              |       |   |   |   |   |
| Noninterest  income:                                 |       |                                                     |       |                                              |       |   |   |   |   |
| Fees for  services                                   |       | 430                                                      |       | 204                                               |       | 711 |   | 409 |   |
| Net gain on sale  of loans                           |       | 22                                                       |       | 20                                                |       | 52 |   | 42 |   |
| Net commissions  from brokerage service              |       | 42                                                       |       | (6                                                | )          | 71 |   | (7 | ) |
| Other income                                         |       | 67                                                       |       | 48                                                |       | 113 |   | 98 |   |
| Net investment  security gains                       |       | —                                                   |       | 19                                                |       | 120 |   | 19 |   |
| Total  noninterest income                            |       | 561                                                      |       | 285                                               |       | 1,067 |   | 561 |   |
|                                                 |       |                                                     |       |                                              |       |   |   |   |   |
| Noninterest  expense:                                |       |                                                     |       |                                              |       |   |   |   |   |
| Compensation and  benefits                           |       | 1,340                                                    |       | 1,012                                             |       | 2,515 |   | 2,017 |   |
| Occupancy and equipment                              |       | 356                                                      |       | 208                                               |       | 598 |   | 398 |   |
| Data processing                                      |       | 204                                                      |       | 137                                               |       | 358 |   | 272 |   |
| Advertising and  marketing                           |       | 68                                                       |       | 63                                                |       | 125 |   | 121 |   |
| Other  noninterest expense                           |       | 552                                                      |       | 1,626                                             |       | 1,009 |   | 1,990 |   |
| Total  noninterest expense                           |       | 2,520                                                    |       | 3,046                                             |       | 4,605 |   | 4,798 |   |
| Income (loss)  before income tax expense             |       | 721                                                      |       | (516                                              | )          | 1,566 |   | 79 |   |
|                                                 |       |                                                     |       |                                              |       |   |   |   |   |
| Income tax  expense (benefit)                        |       | 178                                                      |       | (237                                              | )          | 411 |   | (67 | ) |
| **NET  INCOME (LOSS)**                               | ** ** | **$**                                                    | **543**    | ** **                                        | **$**      | **(279** | **)** | **$** | **1,155** | ** ** | **$** | **146** | ** ** |
|                                                 |       |                                                     |       |                                              |       |   |   |   |   |
| Earnings per  common share                           |       |                                                     |       |                                              |       |   |   |   |   |
| Basic                                                |       | $                                                        | 0.08       |                                              | N/A        |   | $ | 0.17 |   | N/A |   |
| Dilutive                                             |       | $                                                        | 0.08       |                                              | N/A        |   | $ | 0.16 |   | N/A |   |

 

See notes to consolidatedfinancial statements.

 

2

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PSB Holdings, Inc.

 

Consolidated Statementsof Cash Flows

(Unaudited)

 
| ** **                                                                     | ** ** | **For the Six Months  Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                                            | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                                             | ** ** |
| **Cash  flows from operating activities**                                      |       |                                                                |       |   |   |
| Net income                                                                     |       | $                                                                   | 1,155      |   | $ | 146 |   |
| Adjustments to  reconcile net income to cash provided by operating activities: |       |                                                                |       |   |   |
| Provision for  loan losses                                                     |       | 35                                                                  |       | 48 |   |
| Stock-based  compensation expense                                              |       | 60                                                                  |       | — |   |
| Amortization of  core deposit intangible                                       |       | 59                                                                  |       | — |   |
| Depreciation                                                                   |       | 280                                                                 |       | 173 |   |
| Net amortization  on available-for-sale securities                             |       | 155                                                                 |       | 228 |   |
| Amortization of  premium on purchased loans                                    |       | 26                                                                  |       | — |   |
| Contribution of  common stock to charitable foundation                         |       | —                                                              |       | 1,236 |   |
| ESOP expense  including tax effect of release                                  |       | 63                                                                  |       | 36 |   |
| Net realized  investment security gains                                        |       | (120                                                                | )          | (19 | ) |
| Originations of  loans for resale                                              |       | (7,104                                                              | )          | (4,644 | ) |
| Proceeds from  sale of loans                                                   |       | 6,316                                                               |       | 5,833 |   |
| Gain on sale of  loans                                                         |       | (52                                                                 | )          | (41 | ) |
| Accrued earnings  on bank owned life insurance                                 |       | (44                                                                 | )          | (51 | ) |
| Net change in:                                                                 |       |                                                                |       |   |   |
| Accrued income  receivable                                                     |       | (342                                                                | )          | (111 | ) |
| Deferred loan  fees                                                            |       | (77                                                                 | )          | (4 | ) |
| Other assets                                                                   |       | (63                                                                 | )          | (348 | ) |
| Other  liabilities                                                             |       | 691                                                                 |       | 116 |   |
| **Net  cash provided by operating activities**                                 |       | 1,038                                                               |       | 2,598 |   |
| **Cash  flows from investing activities**                                      |       |                                                                |       |   |   |
| Proceeds from  sales of available-for-sale securities                          |       | 10,377                                                              |       | 23,113 |   |
| Proceeds from  maturities of available-for-sale securities                     |       | 23,120                                                              |       | 16,286 |   |
| Purchase of  available-for-sale securities                                     |       | (73,057                                                             | )          | (73,229 | ) |
| Loan  originations net of principal payments                                   |       | (12,460                                                             | )          | (12,468 | ) |
| Deposit for  branch acquisition                                                |       | 1,888                                                               |       | — |   |
| Net cash paid  for acquisition                                                 |       | 51,730                                                              |       | — |   |
| Purchase of  premises and equipment                                            |       | (265                                                                | )          | (407 | ) |
| **Net  cash provided(used) by investing activities**                           |       | 1,333                                                               |       | (46,705 | ) |
| **Cash  flows from financing activities**                                      |       |                                                                |       |   |   |
| Change in  savings and demand deposit accounts                                 |       | (6,617                                                              | )          | (4,213 | ) |
| Change in time  deposit accounts                                               |       | 8,156                                                               |       | 19,729 |   |
| Proceeds from  long term borrowings                                            |       | 8,000                                                               |       | 10,500 |   |
| Repayments of  long term borrowings                                            |       | (5,304                                                              | )          | (12,246 | ) |
| Net change in  short term borrowings                                           |       | (944                                                                | )          | 2,746 |   |
| Change in  mortgagors’ escrow account                                     |       | (40                                                                 | )          | 5 |   |
| Proceeds from  common stock offering                                           |       | —                                                              |       | 30,897 |   |
| Cost of common  stock issuance                                                 |       | —                                                              |       | (1,095 | ) |
| Acquisition of  common stock by ESOP                                           |       | —                                                              |       | (2,571 | ) |
| Acquisition of  treasury shares                                                |       | (110                                                                | )          | — |   |
| Dividends  paid/declared                                                       |       | (354                                                                | )          | (161 | ) |
| **Net  cash provided by financing activities**                                 |       | 2,787                                                               |       | 43,591 |   |
| Increase(decrease)  in cash and cash equivalents                               |       | 5,158                                                               |       | (516 | ) |
| Cash and cash  equivalents at beginning of year                                |       | 7,705                                                               |       | 7,427 |   |
| **Cash  and cash equivalents at end of year**                                  |       | $                                                                   | 12,863     |   | $ | 6,911 |   |
| ***Supplemental  disclosures***                                                |       |                                                                |       |   |   |
| Cash paid during  the year for:                                                |       |                                                                |       |   |   |
| Interest                                                                       |       | $                                                                   | 3,637      |   | $ | 2,652 |   |
| Income taxes                                                                   |       | $                                                                   | 452        |   | $ | 371 |   |

 

See notes to consolidatedfinancial statements.

 

3

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PSB Holdings, Inc.

 

Notes to ConsolidatedFinancial Statements

(Unaudited)

 

**NOTE 1 – Organization**

 

PSB Holdings, Inc. (Company) is a federally chartered holding companyformed on May 27, 2003 for the purpose of acquiring all of the common stock ofPutnam Savings Bank (Bank) concurrent with the Bank’s reorganization from amutual savings institution to the mutual holding company form oforganization.  No shares were offered tothe public as part of this reorganization.

 

On October 4, 2004, the Company issued 6,943,125 shares of commonstock, 3,729,846 shares (53.7%) of which were issued to Putnam Bancorp, MHC (MHC)and 3,089,691 shares (44.5%) of which were sold to eligible depositors of theBank at $10.00 per share. In addition, the Company issued 123,588 shares (1.8%)to a charitable foundation established by Putnam Savings Bank.

 

Costs incurred in connection with the offering were recorded as areduction of the proceeds from the offering and amounted to $1.1 million.

 

**NOTE 2 – Basis of Presentation**

 

The accompanying unaudited condensed consolidated interim financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialstatements and the instructions to Form 10-QSB, and accordingly do not includeall of the information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financialstatements.  In the opinion ofmanagement, the accompanying unaudited financial statements reflect alladjustments necessary, consisting of only normal recurring accruals, to presentfairly the financial position, results of operations and cash flows of theCompany for the periods presented.  Inpreparing the interim financial statements, management is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities as of the date of the balance sheet and revenues and expenses forthe period.  Material estimates that areparticularly susceptible to significant changes in the near-term relate to thedetermination of the allowance for losses on loans and the valuation of realestate acquired in connection with foreclosure or in satisfaction ofloans.  While management uses availableinformation to recognize losses on loans and foreclosed real estate, futureadditions to the allowance may be necessary based on changes in economicconditions, particularly in Connecticut. Actual results could differ significantly from those estimates.  The interim results of operations are notnecessarily indicative of the operating results to be expected for the yearending June 30, 2006.

 

4

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**NOTE 3 – Earnings Per Share**

 

As presented, basic earnings per share is computed by dividing incomeavailable to common stockholders by the weighted average number of commonshares outstanding for the period. Diluted earnings per share reflect the potential dilution that couldoccur if securities or other contracts to issue common stock were exercised orconverted into common stock or resulted in the issuance of common stock thatthen shared in the earnings of the entity. For purposes of computing dilutedEPS, the treasury stock method is used. Because the initial public offering of the Company was completed onOctober 4, 2004, per share earnings data was not meaningful for the three andsix months ended December 31, 2004.

 

The following information was used in the computation of EPS on both abasic and diluted basis for the three and six months ended December 31, 2005:

 

| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **December 31, 2005**  | ** ** |
| Basic EPS  computation:                |       |                             |       |
| Net income                             |       | $                                | 543,000    |   |
|                                   |       |                             |       |
| Weighted average  shares outstanding   |       | 6,942,571                        |       |
|                                   |       |                             |       |
| Basic EPS                              |       | $                                | 0.08       |   |
|                                   |       |                             |       |
| Diluted EPS  computation:              |       |                             |       |
| Net income                             |       | $                                | 543,000    |   |
|                                   |       |                             |       |
| Weighted average  shares outstanding   |       | 6,942,571                        |       |
| Dilutive  potential shares outstanding |       | 129,281                          |       |
|                                   |       | 7,071,852                        |       |
|                                   |       |                             |       |
| Diluted EPS                            |       | $                                | 0.08       |   |
|                                   |       |                             |       |
| ** **                             | ** ** | **Six Months Ended**             | ** ** |
| ** **                             | ** ** | **December 31, 2005**            | ** ** |
| Basic EPS  computation:                |       |                             |       |
| Net income                             |       | $                                | 1,155,000  |   |
|                                   |       |                             |       |
| Weighted average  shares outstanding   |       | 6,942,848                        |       |
|                                   |       |                             |       |
| Basic EPS                              |       | $                                | 0.17       |   |
|                                   |       |                             |       |
| Diluted EPS  computation:              |       |                             |       |
| Net income                             |       | $                                | 1,155,000  |   |
|                                   |       |                             |       |
| Weighted average  shares outstanding   |       | 6,942,848                        |       |
| Dilutive  potential shares outstanding |       | 129,281                          |       |
|                                   |       | 7,072,129                        |       |
|                                   |       |                             |       |
| Diluted EPS                            |       | $                                | 0.16       |   |

 

**NOTE 4 – Acquisitions**

 

On October 14, 2005, the Company completed its acquisition of threebranches from People’s Bank, Bridgeport, Connecticut.  The acquisition included $60.6 million indeposits, $233,000 in loans and $150,000 in fixed assets.

 

5

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**NOTE 5 – Investment Securities**

 

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

 
| ** **                               | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **Amortized**                   | ** ** | **Gross Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                               | ** ** | **Cost Basis**             | ** ** | **Gain** | ** ** | **(Loss)** | ** ** | **Market Value** | ** ** |
| ** **                               | ** ** | **(in thousands)**         | ** ** |
| Debt securities:                         |       |                            |       |   |   |   |   |   |   |
| US government  and agency obligations:   |       |                            |       |   |   |   |   |   |   |
| Due within one  year                     |       | $                               | 3,998      |   | $ | — |   | $ | (52 | ) | $ | 3,946 |   |
| From one through  five years             |       | 33,233                          |       | — |   | (510 | ) | 32,723 |   |
| From five  through ten years             |       | 1,999                           |       | — |   | — |   | 1,999 |   |
|                                     |       | 39,230                          |       | — |   | (562 | ) | 38,668 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| State agency and  municipal obligations: |       |                            |       |   |   |   |   |   |   |
| From five  through ten years             |       | 609                             |       | 22 |   | — |   | 631 |   |
| After ten years                          |       | 8,514                           |       | 484 |   | — |   | 8,998 |   |
|                                     |       | 9,123                           |       | 506 |   | — |   | 9,629 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| Corporate bonds  and other obligations:  |       |                            |       |   |   |   |   |   |   |
| Due within one  year                     |       | 8,412                           |       | 15 |   | (34 | ) | 8,393 |   |
| From one through  five years             |       | 8,543                           |       | 12 |   | (75 | ) | 8,480 |   |
| After ten years                          |       | 8,042                           |       | 414 |   | (201 | ) | 8,255 |   |
|                                     |       | 24,997                          |       | 441 |   | (310 | ) | 25,128 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| Mortgage-backed  securities              |       | 95,202                          |       | 165 |   | (1,337 | ) | 94,030 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| Total debt  securities                   |       | 168,552                         |       | 1,112 |   | (2,209 | ) | 167,455 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| Marketable  equity securities:           |       |                            |       |   |   |   |   |   |   |
| Common stock                             |       | 128                             |       | 86 |   | (1 | ) | 213 |   |
| Preferred stock                          |       | 19,603                          |       | 47 |   | — |   | 19,650 |   |
|                                     |       | 19,731                          |       | 133 |   | (1 | ) | 19,863 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| FHLB restricted  stock                   |       | 3,756                           |       | — |   | — |   | 3,756 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| Total equity  securities                 |       | 23,487                          |       | 133 |   | (1 | ) | 23,619 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| **Total  available-for-sale securities** |       | $                               | 192,039    |   | $ | 1,245 |   | $ | (2,210 | ) | $ | 191,074 |   |

 

6

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

 

There were no gross gains or gross losses realized onavailable-for-sale securities for the three months ended December 31, 2005, ascompared to gross gains of $43,000 and gross losses of $24,000 for the threemonths ended December 31, 2004.  Grossgains of $132,000 and gross losses of $12,000 were realized onavailable-for-sale securities for the six months ended December 31, 2005, ascompared to gross gains of $43,000 and gross losses of $24,000 for the sixmonths ended December 31, 2004.

 

7

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**NOTE 6 – Allowance for Loan Losses**

 

The following summarizes the changes in the allowance for loan lossesfor the three and six months ended December 31, 2005, as compared to theyear-ago periods:

 
| ** **                                         | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                            | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(in thousands)**                             | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Balance,  beginning of period                      |       | $                                                   | 1,466      |                                              | $          | 1,325 |   | $ | 1,359 |   | $ | 1,285 |   |
| Provision for  loan losses                         |       | 15                                                  |       | 25                                                |       | 35 |   | 48 |   |
| Charge offs                                        |       | (12                                                 | )          | —                                            |       | (23 | ) | — |   |
| Recoveries                                         |       | 2                                                   |       | —                                            |       | 2 |   | 17 |   |
| Transfer from  reserve for off-balance sheet items |       | —                                              |       | —                                            |       | 98 |   | — |   |
| **Balance,  end of period**                        | ** ** | **$**                                               | **1,471**  | ** **                                        | **$**      | **1,350** | ** ** | **$** | **1,471** | ** ** | **$** | **1,350** | ** ** |

 

At December 31, 2005 and December 31, 2004, the Company had loans withbalances of $105,961 (representing 5 loans) and $704,000 (representing 9loans), respectively, on nonaccrual status. The loans were not considered impaired.

 

**NOTE 7 – Goodwill and Other Intangibles**

 

Goodwill and other intangibles include goodwill and a core depositintangible associated with the Bank’s purchase of three branches from anotherfinancial institution in October 2005. The goodwill will be evaluated for impairment on an annual basis and thecore deposit intangible will be amortized on an accelerated basis over a tenyear period.  The carrying amount ofgoodwill and core deposit intangible as of December 31, 2005 was $6.9 millionand $1.5 million, respectively.  Theamortization expense related to the core deposit intangible was $59,000 for thethree and six months ended December 31, 2005.

 
| ** **               | ** ** | **December 31, 2005** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **Gross**                       | ** ** | ** ** | ** ** | **Unamortized** | ** ** |
| ** **               | ** ** | **Carrying**                    | ** ** | **Accumulated** | ** ** | **Intangible** | ** ** |
| ** **               | ** ** | **Amount**                      | ** ** | **Depreciation** | ** ** | **Assets** | ** ** |
| Intangible  Assets:      |       |                            |       |   |   |   |   |
| Core Deposit  Intangible |       | $                               | 1,552,521  |   | $ | 58,808 |   | $ | 1,493,713 |   |
|                          |            |                                 |            |  |  |  |  |  |  |  |

 

8

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

 

| ** **                                | ** ** | **Core Deposit** | ** **    |
|-------------------------------------------|------------|-----------------------|---------------|
| ** **                                | ** ** | **Intangible**        | ** **    |
| Six months ended  June 30, 2006           |       | $                     | 141,138       |   |
| Year ended June  30, 2007                 |       | 262,282               |          |
| Year ended June  30, 2008                 |       | 234,054               |          |
| Year ended June  30, 2009                 |       | 205,827               |          |
| Year ended June  30, 2010                 |       | 177,599               |          |
| Year ended June  30, 2011                 |       | 149,371               |          |
| Year ended June  30, 2012                 |       | 121,144               |          |
| Year ended June  30, 2013                 |       | 92,916                |          |
| Year ended June  30, 2014                 |       | 64,688                |          |
| Year ended June  30, 2015                 |       | 36,461                |          |
| Year ended June  30, 2016                 |       | 8,233                 |          |
| **Total  estimated amortization expense** | ** ** | **$**                 | **1,493,713** | ** ** |

 

**NOTE 8 – Comprehensive Income**

 

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

 
| ** **                                                                          | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                                            | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                          | ** ** | **(in thousands)**                             | ** ** |
| Net Income  (Loss)                                                                  |       | $                                                   | 543        |                                              | $          | (279 | ) | $ | 1,155 |   | $ | 146 |   |
|                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Other  comprehensive income (loss):                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Net unrealized  holding gains (losses) on available-for-sale securities             |       | (588                                                | )          | (305                                              | )          | (1,737 | ) | 801 |   |
| Reclassification  adjustment for gain recognized in net income                      |       | —                                              |       | (19                                               | )          | (120 | ) | (19 | ) |
| Other  comprehensive income (loss) before tax expense                               |       | (588                                                | )          | (324                                              | )          | (1,857 | ) | 782 |   |
| Income tax  expense (benefit) related to items of other comprehensive income (loss) |       | 229                                                 |       | 126                                               |       | 723 |   | (305 | ) |
| Other  comprehensive income net of tax                                              |       | (359                                                | )          | (198                                              | )          | (1,134 | ) | 477 |   |
| **Total  comprehensive income (loss)**                                              | ** ** | **$**                                               | **184**    | ** **                                        | **$**      | **(477** | **)** | **$** | **21** | ** ** | **$** | **623** | ** ** |

 

9

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**NOTE 9 – Stock-Based Incentive Plan**

 

At the annual meeting of stockholders on October 21, 2005, stockholdersof the Company approved the PSB Holdings, Inc. 2005 Stock-Based Incentive Plan(the “Incentive Plan”).  Under theIncentive Plan, the Company may grant up to 340,213 stock options and 136,085shares of restricted stock to its employees, officers and directors for anaggregate amount of up to 476,298 shares of the Company’s common stock forissuance upon the grant or exercise of awards. Both incentive stock options and non-statutory stock options may begranted under the Incentive Plan.

 

On November 7, 2005, the Company awarded 319,800 options to purchasethe Company’s common stock and 129,281 shares of restricted stock.  Stock option awards were granted with anexercise price equal to the market price of the Company’s stock at the date ofgrant ($10.60) with a maximum term of ten years.  Both stock option and restricted stock awardsvest at 20% per year beginning on the first anniversary of the date of thegrant.

 

Stock options and restricted stock awards are considered common stockequivalents for the purpose of computing earnings per share on a diluted basis.

 

The Company has elected to comply with the Financial AccountingStandards Board’s SFAS No.123(R), “Share Based Payment”, beginning with theperiod ended December 31, 2005, prior to the mandatory compliance date for theCompany of July 1, 2006.  In accordancewith Statement No.123 (R), the Company has recorded share-based compensationexpense related to outstanding stock option and restricted stock awards basedupon the fair value at the date of grant over the vesting period of such awardson a straight-line basis.  The fair valueof each restricted stock allocation, based on the market price at the date ofgrant, is recorded to unearned stock awards. Compensation expenses related to unearned restricted shares areamortized to compensation and benefits expense over the vesting period of therestricted stock awards.   The fair value of each stock option award isestimated on the date of grant using the Black-Scholes option pricing methodwhich includes several assumptions such as volatility, expected dividends,expected term and risk-free rate for each stock option award.  The Company recorded share-based compensationexpense of $60,082 for the three and six months ended December 31, 2005 inconnection with the stock option and restricted stock awards.

 

The weighted-average fair value of stock options granted on November 7,2005 using the Black-Scholes option pricing method was $2.00 per share.  Assumptions used to determine theweighted-average fair value of stock options granted were as follows:

 
| Dividend yield:          |   | 1.89  | %      |
|--------------------------|--------|-------|--------|
| Expected  volatility:    |   | 12.65 | %      |
| Risk-free rate:          |   | 4.56  | %      |
| Expected life in  years: |   | 6.5   |   |

 

**NOTE 10 – Dividends**

 

On December 21, 2005, the Board of Directors of the Company declared acash dividend of $0.06 a share for stockholders of record as of January 4, 2006and payable on January 19, 2006.  Thedividends declared totaling $218,000 were accrued and are included in otherliabilities in the December 31, 2005 Consolidated Statements of FinancialCondition.  Putnam Bancorp, MHC, themutual holding company, waived the receipt of all but $25,000 of the dividenddeclared by the Company.

 

10

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**NOTE 11 – Commitment to Extend Credit**

 

The Company is party to financial instruments with off-balance sheetrisk in the normal course of business to meet the financing needs of itscustomers. These financial instruments include commitments to extend credit. Thesecommitments involve, to varying degrees, elements of credit and interest raterisk in excess of the amount recognized in the statement of financialcondition.

 

The contractual amounts of outstanding commitments were as follows:

 
| ** **                     | ** ** | **December 31,**   | ** ** | **June 30,** | ** ** |
|--------------------------------|------------|-------------------------|------------|-------------------|------------|
| ** **                     | ** ** | **2005**                | ** ** | **2005**          | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Commitments to  extend credit: |       |                    |       |              |       |
| Loan commitments               |       | $                       | 4,036      |              | $          | 3,476 |   |
| Unadvanced  construction loans |       | 3,869                   |       | 4,220             |       |
| Unadvanced lines  of credit    |       | 13,074                  |       | 12,301            |       |
| Standby letters  of credit     |       | 165                     |       | 144               |       |
| Outstanding  commitments       |       | $                       | 21,144     |              | $          | 20,141 |   |

 

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

 

The following analysis discusses changes in the financial condition andresults of operations at and for the three and six  months ended December 31, 2005 and 2004, andshould be read in conjunction with the Company’s Condensed ConsolidatedFinancial Statements and the notes thereto, appearing in Part I, Item 1 of thisquarterly report.  These financialstatements should be read in conjunction with the 2005 consolidated financialstatements and notes thereto included in the Company’s Form 10-KSB filed withthe SEC on September 19, 2005.

 

The year-end condensedbalance sheet data were derived from audited financial statements, but do notinclude all disclosures required by GAAP.

 

**Forward-Looking Statements**

 

This report contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by thesafe harbor provisions for forward-looking statements contained in the PrivateSecurities Litigation Reform Act of 1995, and is including this statement forpurposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions anddescribe future plans, strategies and expectations of the Company, aregenerally 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 futureplans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations ofthe 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 theU.S. Treasury and the Federal Reserve Board, the quality or composition of theloan or investment portfolios, demand for loan products, deposit flows,competition, demand for financial services in the Company’s market area andaccounting principles and guidelines. These risks and uncertainties should be considered in evaluatingforward-looking statements and undue reliance should not be placed on suchstatements.  Further informationconcerning the Company and its business, including additional factors thatcould materially affect the Company’s financial results, is included in theCompany’s filings with the Securities and Exchange Commission.

 

Except as required by applicable law and regulation, the Company doesnot undertake – and specifically disclaims any obligation – to publicly releasethe result of any revisions that may be made to any forward-looking statementsto reflect events or circumstances after the date of such statements or toreflect the occurrence of anticipated or unanticipated events.

 

11

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**Overview**

 

The Company’s results of operations depend primarily on net interestand dividend income, which is the difference between the interest and dividendincome earned on its interest-earning assets, such as loans and securities, andthe interest expense on its interest-bearing liabilities, such as deposits andborrowings. The Company also generates noninterest income, primarily from feesand service charges.  Gains on sales ofloans and securities and cash surrender value of life insurance policies areadded sources of noninterest income.  TheCompany’s noninterest expense primarily consists of employee compensation andbenefits, occupancy and equipment expense, advertising, data processing,professional fees and other operating expenses.

 

**Comparison of Financial Condition at December 31,2005 and June 30, 2005**

 

**Assets**

 

Total assets of the Company were $401.8 million at December 31, 2005,an increase of $64.2 million or 19.0%, from $337.6 million at June 30, 2005.  Investments in available-for-sale securitiesincreased $37.7 million, or 24.6%, to $191.1 million at December 31, 2005compared to $153.4 million at June 30, 2005. Total loans outstanding increased $13.7 million, or 8.2%, to $180.0million at December 31, 2005 from $166.3 million at June 30, 2005.  This increase was primarily due to anincrease of $6.6 million, or 5.0%, in residential mortgage loans.  Commercial loans increased $6.8 million, or 21.2%,from June 30, 2005 to December 31, 2005, which reflected the continued strongperformance by the Company’s Business Banking Group.

 

**Allowance for Loan Losses**

 

The Company determines the adequacy of the allowance for loan losses ona quarterly basis. We consider a variety of factors in establishing thisestimate including, but not limited to, current economic conditions,delinquency statistics, geographic and industry concentrations, the adequacy ofthe underlying collateral, the financial strength of the borrower, results ofinternal and external loan reviews and other relevant factors.  This evaluation is inherently subjective asit requires material estimates by management that may be susceptible tosignificant change.  The table belowindicates the relationships between the allowance for loan losses, total loansoutstanding and nonperforming loans at December 31, 2005 and June 30, 2005.

 

**Past due and Nonperforming loans**

 

The following table sets forth information regarding past due andnon-accrual loans:

 

| ** **                         | ** ** | **December 31,**                | ** ** | **June 30,** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                         | ** ** | **2005**                             | ** ** | **2005**          | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Allowance for  loan losses         |       | $                                    | 1,471      |              | $          | 1,359 |   |
| Gross loans  outstanding           |       | 180,026                              |       | 166,365           |       |
| Nonperforming  loans               |       | 106                                  |       | 86                |       |
|                               |       |                                 |       |              |       |
| Allowance/gross  loans outstanding |       | 0.82                                 | %          | 0.82              | %          |
| Allowance/nonperforming  loans     |       | 1388                                 | %          | 1580              | %          |
|                                    |            |                                      |            |                   |            |  |  |

 

**Liabilities**

 

Total liabilities increased $64.6 million, or 22.7%, to $349.2 millionat December 31, 2005 from $284.6 million at June 30, 2005, primarily due to anincrease in deposits of $62.1 million, or 28.5%, and an increase in otherborrowed funds of $1.8 million, or 2.7%. The increases in deposits were primarily due to the recently completedbranch acquisitions that resulted in $60.6 million in new deposits.

 

12

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**Stockholders’ Equity**

 

Total stockholders’ equitydecreased $442,000, or .8%, to $52.6 million at December 31, 2005 from $53.0million at June 30, 2005.  This wasprimarily due to the decrease in the accumulated other comprehensive income(loss) of $1.1 million, stock repurchased during the six month period of$110,000 and dividends of $354,000 as of December 31, 2005. These factors werepartially offset by net income of $1.2 million. The unrealized loss in the available-for-sale securities wasattributable solely to interest rate movements. Management does not consider the loss to be other than temporary.

 

**Comparison of Operating Resultsfor the Three Months Ended December 31, 2005 and 2004**

 

## **Net Income**

 

Net income increased $822,000to $543,000 for the three months ended December 31, 2005 from a net loss of $279,000for the three months ended December 31, 2004. The quarter ended December 31, 2004 included a one-time expense of $1.2million to establish and fund the new Putnam Savings Foundation. Excluding thecharge for the charitable foundation, net income would have been $537,000 forthe quarter ended December 31, 2004 and the increase in net income for thequarter ended December 31, 2005 would have been $6,000, or 1.1%.  The increase in net income resulted from animprovement in net interest income and noninterest income, which was partiallyoffset by an increase in noninterest expense, excluding the new foundation.

 

**Interest and Dividend Income**

 

Interestand dividend income increased by $1.0 million, or 28.3%, to $4.6 million forthe three months ended December 31, 2005 from $3.6 million for the three monthsended December 31, 2004.  The increase ininterest and dividend income resulted primarily from an increase of $52.2million, or 16.9%, in average interest-bearing assets  and an increase of 45 basis points in theaverage yield on our interest-earning assets between the periods.  This increase was primarily due to the net cashfrom the recently completed branch acquisitions being deployed into loans andinvestments.  The yield increased to 5.11%for the three months ended December 31, 2005 from 4.66% for the three monthsended December 31, 2004.  Interest incomeon loans increased by $510,000, or 23.8%, to $2.6 million from $2.1million.  Interest and dividend income oninvestment securities increased $491,000, or 33.5%, to $2.0 million for thethree months ended December 31, 2005 from $1.5 million for the three monthsended December 31, 2004.

 

**InterestExpense**

 

Interestexpense increased by $601,000, or 44.3%, to $2.0 million for three months endedDecember 31, 2005 from $1.4 million for the three months ended December 31,2004.  The increase in interest expenseresulted primarily from an increase in average interest-bearing liabilities of$51.6 million, or 21.5% from period to period and an increase of 42 basispoints in the average cost of our interest-bearing liabilities to 2.66% for thethree months ended December 31, 2005 from 2.24% for the three months ended December31, 2004.  This increase was primarilydue to an increase of $46.8 million in average interest-bearing deposits and anincrease of $4.8 million in average other borrowed money from December 31, 2004to December 31, 2005.

 

**Net Interest and Dividend Income**

 

Net interest anddividend income increased $425,000, or 18.7%, to $2.7 million for the threemonths ended December 31, 2005 from $2.3 million for three months ended December31, 2004.  The primary reason for theimprovement in our net interest and dividend income was the $52.2 millionincrease in our average interest-earning assets and the increase in the netinterest margin to 2.96% for the three months ended December 31, 2005 from 2.92%for the three months ended December 31, 2004.

 

**Provisionfor Loan Losses**

 

Theprovision for loan losses for the quarter ended December 31, 2005 was $15,000compared to $25,000 recorded for the three months ended December 31, 2004.

 

13

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**NoninterestIncome**

 

Noninterestincome increased $276,000, or 96.8%, to $561,000 for the three months ended December31, 2005 from $285,000 for the three months ended December 31, 2004. Theincrease in noninterest income resulted primarily from an increase in servicefee income of $226,000 and an increase of $48,000 in commissions from brokerageservices.

 

**NoninterestExpense**

 

Noninterestexpense decreased by $526,000, or 17.3%, to $2.5 million for the three monthsended December 31, 2005 from $3.0 million for the three months ended December31, 2004.  The decrease in noninterestexpense resulted primarily from a one-time expense of $1.2 million to establishand fund the new Putnam Savings Foundation during the quarter ended December31, 2004.  Excluding the expense for thecharitable foundation, noninterest expense would have increased by $709,000, or39.1%, for the quarter ended December 31, 2005. This was primarily due to an increase in compensation and benefits,occupancy and equipment expense and other noninterest expenses.  Compensation and benefits expense increasedby $328,000, or 32.4%, to $1.3 million for the three months ended December 31,2005 from $1.0 million for the three months ended December 31, 2004.  The primary reasons for the increase was thecompensation and benefits expense associated with the acquisition of the threenew branches, in addition to increased staffing and higher medical insurancepremiums.  The current quarter included $36,000in Stock Award compensation expense as compared to none for the three monthsended December 31, 2004.  Occupancy andequipment expense increased by $148,000, or 71.2%, to $356,000 for the threemonths ended December 31, 2005 from $208,000 for the three months ended December31, 2004 primarily due to increased depreciation expense and rental expense forthe three new branches.  Othernoninterest expense, consisting primarily of marketing, office supplies, andprofessional expenses decreased by $1.0 million, or 54.9%, to $824,000 for thethree months ended December 31, 2005 from $1.8 million for the three monthsended December 31, 2004.  This decreasewas primarily due to the one-time charge of $1.2 million for the new charitablefoundation during the quarter ended December 31, 2004.  This was partially offset by increases in dataprocessing fees and other miscellaneous expenses and higher professional feesrelated to being a public company.

 

**Provisionfor Income Taxes**

 

The income tax expense increasedby $415,000 to $178,000 for the three months ended December 31, 2005 from a taxbenefit of $237,000 for the three months ended December 31, 2004.  The tax benefit for the three months endedDecember 31, 2004 was related to the one-time expense of $1.2 million toestablish the new charitable foundation. Our effective tax rate was 24.7% for the three months ended December 31,2005, compared to a tax benefit of 45.9% for the three months ended December 31,2004.  The effective tax rate differedfrom the statutory tax rate of 34% primarily due to the dividends-receiveddeduction applicable to certain securities in our investment portfolio,tax-exempt municipal income and non-taxable bank-owned life insurance income.

 

14

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**Comparison of Operating Resultsfor the Six Months Ended December 31, 2005 and 2004**

 

## **Net Income**

 

Net income increased $1.0million to $1.2 million for the six months ended December 31, 2005 from $146,000for the six months ended December 31, 2004. The six months ended December 31,2004 included a one-time expense of $1.2 million to establish and fund the newPutnam Savings Foundation. Excluding the expense for the charitable foundation,net income would have been $962,000 for the six months ended December 31, 2004and the increase in net income for the six months ended December 31, 2005 wouldhave been $193,000, or 20.1%.  Inaddition, the increase in net income resulted from an improvement in netinterest income and noninterest income, which was partially offset by anincrease in noninterest expense, excluding the new foundation.

 

**Interest and Dividend Income**

 

Interestand dividend income increased by $1.8 million, or 25.5%, to $8.8 million forthe six months ended December 31, 2005 from $7.0 million for the six monthsended December 31, 2004.  The increase ininterest and dividend income resulted primarily from an increase of $48.4million, or 16.2%, in average interest-earning assets and an increase of 37basis points in the average yield on our interest-earning assets between theperiods.  This increase was primarily dueto the net proceeds of the stock offering being deployed into loans andinvestments in addition to the pre-investment of a portion of the deposits thatwere acquired in the branch acquisition that closed in October 2005.  The yield increased to 5.05% for the sixmonths ended December 31, 2005 from 4.68% for the six months ended December 31,2004.  Interest income on loans increasedby $1.0 million, or 25.2%, to $5.2 million from $4.2 million.  Interest and dividend income on investmentsecurities increased $742,000, or 26.5%, to $3.5 million for the six monthsended December 31, 2005 from $2.8 million for the six months ended December 31,2004.

 

**InterestExpense**

 

Interestexpense increased by $1.0 million, or 38.2%, to $3.7 million for six monthsended December 31, 2005 from $2.7 million for the six months ended December 31,2004.  The increase in interest expenseresulted primarily from an increase in average interest-bearing liabilities of$35.2 million, or 14.6% from period to period and an increase of 45 basispoints in the average cost of our interest-bearing liabilities to 2.63% for thesix months ended December 31, 2005 from 2.18% for the six months ended December31, 2004.  This increase was primarilydue to an increase of $27.1 million in average interest-bearing deposits and anincrease of $8.1 million in average other borrowed money from December 31, 2004to December 31, 2005.

 

**Net Interest and Dividend Income**

 

Net interest anddividend income increased $775,000, or 17.8%, to $5.1 million for the six monthsended December 31, 2005 from $4.4 million for six months ended December 31,2004.  The primary reason for the improvementin our net interest and dividend income was the $13.1 million increase in ournet average interest-earning assets to $69.2 million for the six months ended December31, 2005 from $56.1 million for the six months ended December 31, 2004.  The net interest margin increased to 2. 94%for the six months ended December 31, 2005 from 2.90% for the six months ended December31, 2004.

 

**Provisionfor Loan Losses**

 

Theprovision for loan losses for the six months ended December 31, 2005 was $35,000compared to $48,000 for the six months ended December 31, 2004.

 

**NoninterestIncome**

 

Noninterestincome increased $506,000, or 90.2%, to $1.1 million for the six months ended December31, 2005 from $561,000 for the six months ended December 31, 2004. The increasein noninterest income resulted primarily from an increase in service fee incomeof $302,000, net investment securities gains of $101,000 and an increase of $78,000in commissions from brokerage services.

 

15

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**NoninterestExpense**

 

Noninterestexpense decreased by $193,000, or 4.0%, to $4.6 million for the six monthsended December 31, 2005 from $4.8 million for the six months ended December 31,2004.  The decrease in noninterestexpense resulted primarily from a one-time expense of $1.2 million to establishand fund the new Putnam Savings Foundation during the six months ended December31, 2004.  Excluding the expense for thecharitable foundation, noninterest expense would have increased by $1.0 million,or 29.2%, for the six months ended December 31, 2005.  This was primarily due to an increase incompensation and benefits, occupancy and equipment expense and othernoninterest expenses.  Compensation and benefitsexpense increased by $498,000, or 24.7%, to $2.5 million for the six monthsended December 31, 2005 from $2.0 million for the six months ended December 31,2004.  The primary reasons for theincrease were the compensation and benefits expense associated with theacquisition of the three new branches, in addition to increased staffing andhigher medical insurance premiums.  Thecurrent six month period included $36,000 in Stock Award compensation expenseas compared to none for the six months ended December 31, 2004.  Occupancy and equipment expense increased by$200,000, or 50.3%, to $598,000 for the six months ended December 31, 2005 from$398,000 for the six months ended December 31, 2004 primarily due to increaseddepreciation expense and rental expense for the three new branches.  Other noninterest expense, consistingprimarily of marketing, office supplies, and professional expenses decreased by$891,000, or 37.4%, to $1.5 million for the six months ended December 31, 2005from $2.4 million for the six months ended December 31, 2004.  This decrease was primarily due to theone-time expense of $1.2 million for the new charitable foundation during the sixmonth period ended December 31, 2004. This was partially offset by increases in data processing fees and othermiscellaneous expenses and higher professional fees related to being a publiccompany.

 

**Provisionfor Income Taxes**

 

The income tax expenseincreased by $478,000 to $411,000 for the six months ended December 31, 2005from a tax benefit of $67,000 for the six months ended December 31, 2004.  Our effective tax rate was 26.2% for the sixmonths ended December 31, 2005. The effective tax rate differed from thestatutory tax rate of 34% primarily due to the dividends-received deductionapplicable to certain securities in our investment portfolio, tax-exemptmunicipal income and non-taxable bank-owned life insurance income.

 

16

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## **Average Balance Sheet**

 

The followingtables set forth average balance sheets, average yields and costs, and certainother information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof wasnot material.  All average balances aredaily average balances.  Non-accrualloans were included in the computation of average balances, but have been reflectedin 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 orexpense.

 
| ** **                                                      | ** ** | **For the three months ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                                                  | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(Dollars in thousands)**                                                | ** ** |
| ** **                                                      | ** ** | **Average  Balance**                                                      | ** ** | **Interest/  Dividends** | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest/  Dividends** | ** ** | **Yield/  Cost** | ** ** |
| **Interest-earning  assets:**                                   |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Investment  securities                                          |       | $                                                                         | 181,082    |   | $ | 1,957 |   | 4.29 | % | $ | 159,113 |   | $ | 1,466 |   | 3.66 | % |
| Loans                                                           |       | 175,058                                                                   |       | 2,652 |   | 6.01 | % | 145,270 |   | 2,142 |   | 5.85 | % |
| Other earning  assets                                           |       | 4,932                                                                     |       | 44 |   | 3.54 | % | 4,512 |   | 19 |   | 1.67 | % |
| Total  interest-earnings assets                                 |       | 361,072                                                                   |       | 4,653 |   | 5.11 | % | 308,895 |   | 3,627 |   | 4.66 | % |
| Non-interest-earning  assets                                    |       | 20,586                                                                    |       |   |   |   |   | 12,448 |   |   |   |   |   |
| Total assets                                                    |       | $                                                                         | 381,658    |   |   |   |   |   | $ | 321,343 |   |   |   |   |   |
|                                                            |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                              |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                                    |       | $                                                                         | 33,568     |   | 147 |   | 1.74 | % | $ | 11,879 |   | 11 |   | 0.37 | % |
| Savings accounts                                                |       | 54,271                                                                    |       | 142 |   | 1.04 | % | 43,190 |   | 75 |   | 0.69 | % |
| Money market  accounts                                          |       | 32,999                                                                    |       | 163 |   | 1.96 | % | 44,614 |   | 190 |   | 1.69 | % |
| Time deposits                                                   |       | 113,246                                                                   |       | 956 |   | 3.35 | % | 87,608 |   | 652 |   | 2.95 | % |
| Borrowed money                                                  |       | 57,637                                                                    |       | 550 |   | 3.79 | % | 52,793 |   | 429 |   | 3.22 | % |
| Total  interest-bearing liabilities                             |       | 291,721                                                                   |       | 1,958 |   | 2.66 | % | 240,084 |   | 1,357 |   | 2.24 | % |
| Non-interest-bearing  demand deposits                           |       | 36,942                                                                    |       |   |   |   |   | 27,187 |   |   |   |   |   |
| Other  non-interest-bearing liabilities                         |       | 446                                                                       |       |   |   |   |   | 2,969 |   |   |   |   |   |
| Capital accounts                                                |       | 52,549                                                                    |       |   |   |   |   | 51,103 |   |   |   |   |   |
| Total  liabilities and capital accounts                         |       | $                                                                         | 381,658    |   |   |   |   |   | $ | 321,343 |   |   |   |   |   |
|                                                            |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                            |       |                                                                      |       | $ | 2,695 |   |   |   |   |   | $ | 2,270 |   |   |   |
| Interest rate  spread                                           |       |                                                                      |       |   |   | 2.45 | % |   |   |   |   | 2.42 | % |
| Net  interest-earning assets                                    |       | $                                                                         | 69,351     |   |   |   |   |   | $ | 68,811 |   |   |   |   |   |
| Net interest  margin                                            |       |                                                                      |       |   |   | 2.96 | % |   |   |   |   | 2.92 | % |
| Average earning  assets to average interest-bearing liabilities |       |                                                                      |       |   |   | 123.77 | % |   |   |   |   | 128.66 | % |

 

17

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| ** **                                                      | ** ** | **For the six months ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                                                | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(Dollars in thousands)**                                    | ** ** |
| ** **                                                      | ** ** | **Average**                                                             | ** ** | **Interest/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Interest/** | ** ** | **Yield/** | ** ** |
| ** **                                                      | ** ** | **Balance**                                                             | ** ** | **Dividends** | ** ** | **Cost** | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost** | ** ** |
| **Interest-earning  assets:**                                   |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Investment  securities                                          |       | $                                                                       | 168,493    |   | $ | 3,546 |   | 4.17 | % | $ | 146,590 |   | $ | 2,804 |   | 3.79 | % |
| Loans                                                           |       | 172,466                                                                 |       | 5,214 |   | 6.00 | % | 142,047 |   | 4,166 |   | 5.82 | % |
| Other earning  assets                                           |       | 5,569                                                                   |       | 59 |   | 2.10 | % | 9,517 |   | 57 |   | 1.19 | % |
| Total  interest-earnings assets                                 |       | 346,528                                                                 |       | 8,819 |   | 5.05 | % | 298,154 |   | 7,027 |   | 4.68 | % |
| Non-interest-earning  assets                                    |       | 15,863                                                                  |       |   |   |   |   | 15,699 |   |   |   |   |   |
| Total assets                                                    |       | $                                                                       | 362,391    |   |   |   |   |   | $ | 313,853 |   |   |   |   |   |
|                                                            |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                              |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                                    |       | $                                                                       | 34,000     |   | 298 |   | 1.74 | % | $ | 11,043 |   | 18 |   | 0.32 | % |
| Savings accounts                                                |       | 48,034                                                                  |       | 211 |   | 0.87 | % | 49,268 |   | 171 |   | 0.69 | % |
| Money market  accounts                                          |       | 30,319                                                                  |       | 279 |   | 1.83 | % | 46,336 |   | 380 |   | 1.63 | % |
| Time deposits                                                   |       | 104,298                                                                 |       | 1,746 |   | 3.32 | % | 82,923 |   | 1,242 |   | 2.97 | % |
| Borrowed money                                                  |       | 60,711                                                                  |       | 1,146 |   | 3.74 | % | 52,534 |   | 852 |   | 3.22 | % |
| Total  interest-bearing liabilities                             |       | 277,362                                                                 |       | 3,680 |   | 2.63 | % | 242,104 |   | 2,663 |   | 2.18 | % |
| Non-interest-bearing  demand deposits                           |       | 31,729                                                                  |       |   |   |   |   | 25,769 |   |   |   |   |   |
| Other  non-interest-bearing liabilities                         |       | 484                                                                     |       |   |   |   |   | 8,496 |   |   |   |   |   |
| Capital accounts                                                |       | 52,816                                                                  |       |   |   |   |   | 37,484 |   |   |   |   |   |
| Total  liabilities and capital accounts                         |       | $                                                                       | 362,391    |   |   |   |   |   | $ | 313,853 |   |   |   |   |   |
|                                                            |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                            |       |                                                                    |       | $ | 5,139 |   |   |   |   |   | $ | 4,364 |   |   |   |
| Interest rate  spread                                           |       |                                                                    |       |   |   | 2.42 | % |   |   |   |   | 2.49 | % |
| Net  interest-earning assets                                    |       | $                                                                       | 69,166     |   |   |   |   |   | $ | 56,050 |   |   |   |   |   |
| Net interest  margin                                            |       |                                                                    |       |   |   | 2.94 | % |   |   |   |   | 2.90 | % |
| Average earning  assets to average interest-bearing liabilities |       |                                                                    |       |   |   | 124.94 | % |   |   |   |   | 123.15 | % |

 

18

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## **Rate/Volume Analysis**

 

The followingtable sets forth the effects of changing rates and volumes on our net interestincome for the periods indicated.  Therate column shows the effects attributable to changes in rate (changes in ratemultiplied by prior volume).  The volumecolumn shows the effects attributable to changes in volume (changes in volumemultiplied by prior rate).  The netcolumn represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rateand volume that cannot be segregated have been allocated proportionately basedon the changes due to rate and the changes due to volume.

 
| ** **                              | ** ** | **For the three months ended December 31, 2005  compared to the three months ended December 31, 2004** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Increase (decrease) due to**                                                                                                                                     | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**    | ** ** | **Rate**                                                                                                                                                                          | ** ** | **Volume** | ** ** | **Net** | ** ** |
| **INTEREST-EARNING  ASSETS:**           |       |                                                                                                                                                                              |       |   |   |   |   |
| Interest and  Dividend Income:          |       |                                                                                                                                                                              |       |   |   |   |   |
| Investment  securities                  |       | $                                                                                                                                                                                 | 273        |   | $ | 218 |   | $ | 491 |   |
| Loans                                   |       | 60                                                                                                                                                                                |       | 450 |   | 510 |   |
| Other  interest-earning assets          |       | 23                                                                                                                                                                                |       | 2 |   | 25 |   |
| **TOTAL  INTEREST-EARNING ASSETS**      |       | 356                                                                                                                                                                               |       | 670 |   | 1,026 |   |
|                                    |       |                                                                                                                                                                              |       |   |   |   |   |
| **INTEREST-BEARING  LIABILITIES:**      |       |                                                                                                                                                                              |       |   |   |   |   |
| Interest  Expense:                      |       |                                                                                                                                                                              |       |   |   |   |   |
| NOW accounts                            |       | 91                                                                                                                                                                                |       | 45 |   | 136 |   |
| Savings accounts                        |       | 44                                                                                                                                                                                |       | 23 |   | 67 |   |
| Money Market  accounts                  |       | 139                                                                                                                                                                               |       | (166 | ) | (27 | ) |
| Time deposits                           |       | 96                                                                                                                                                                                |       | 208 |   | 304 |   |
| Other borrowed  money                   |       | 79                                                                                                                                                                                |       | 42 |   | 121 |   |
| **TOTAL  INTEREST-BEARING LIABILITIES** |       | 449                                                                                                                                                                               |       | 152 |   | 601 |   |
|                                    |       |                                                                                                                                                                              |       |   |   |   |   |
| **CHANGE  IN NET INTEREST INCOME**      |       | $                                                                                                                                                                                 | (93        | ) | $ | 518 |   | $ | 425 |   |
|                                         |            |                                                                                                                                                                                   |            |  |  |  |  |  |  |  |  |

 

19

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| ** **                              | ** ** | **For the six months ended December 31, 2005  compared to the six months ended December 31, 2004** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Increase(Decrease) Due to**                                                                                                                                       | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**    | ** ** | **Rate**                                                                                                                                                                      | ** ** | **Volume** | ** ** | **Net** | ** ** |
| **INTEREST-EARNING  ASSETS:**           |       |                                                                                                                                                                          |       |   |   |   |   |
| Interest and  Dividend Income:          |       |                                                                                                                                                                          |       |   |   |   |   |
| Investment  securities                  |       | $                                                                                                                                                                             | 298        |   | $ | 444 |   | $ | 742 |   |
| Loans                                   |       | 132                                                                                                                                                                           |       | 916 |   | 1,048 |   |
| Other  interest-earning assets          |       | 62                                                                                                                                                                            |       | (60 | ) | 2 |   |
| **TOTAL  INTEREST-EARNING ASSETS**      |       | 492                                                                                                                                                                           |       | 1,300 |   | 1,792 |   |
|                                    |       |                                                                                                                                                                          |       |   |   |   |   |
| **INTEREST-BEARING  LIABILITIES:**      |       |                                                                                                                                                                          |       |   |   |   |   |
| Interest  Expense:                      |       |                                                                                                                                                                          |       |   |   |   |   |
| NOW accounts                            |       | 190                                                                                                                                                                           |       | 90 |   | 280 |   |
| Savings accounts                        |       | 52                                                                                                                                                                            |       | (12 | ) | 40 |   |
| Money Market  accounts                  |       | 110                                                                                                                                                                           |       | (211 | ) | (101 | ) |
| Time deposits                           |       | 158                                                                                                                                                                           |       | 346 |   | 504 |   |
| Other borrowed  money                   |       | 151                                                                                                                                                                           |       | 143 |   | 294 |   |
| **TOTAL  INTEREST-BEARING LIABILITIES** |       | 661                                                                                                                                                                           |       | 356 |   | 1,017 |   |
|                                    |       |                                                                                                                                                                          |       |   |   |   |   |
| **CHANGE  IN NET INTEREST INCOME**      |       | $                                                                                                                                                                             | (169       | ) | $ | 944 |   | $ | 775 |   |

 

**Liquidity and Capital Resources**

 

The term liquidity refers to the ability of the Company and the Bank tomeet current and future short-term financial obligations.  The Company and the Bank further defineliquidity as the ability to generate adequate amounts of cash to fund loanoriginations, deposit withdrawals and operating expenses.  Liquidity management is both a daily andlong-term function of business management. The Bank’s primary sources ofliquidity are deposits, scheduled amortization and prepayments of loanprincipal and mortgage-related securities, and Federal Home Loan Bankborrowings.  The Bank can borrow funds fromthe Federal Home Loan Bank based on eligible collateral of loans andsecurities.  The Bank had Federal HomeLoan Bank borrowings as of December 31, 2005 of $64.3 million with unusedborrowing capacity of $84.2 million.  TheBank also had brokered CD’s as of December 31, 2005 of $1.6 million and theability to originate additional brokered CD’s, up to our policy limit of 10% oftotal assets.

 

The Bank’s primaryinvesting activities are the origination of loans and the purchase ofinvestment securities.  During the sixmonths ended December 31, 2005 and 2004, the Bank originated loans net ofprincipal payments of approximately $12.5 million and $12.5 million,respectively.  Purchases of securitiestotaled $73.1 million and $73.2 million, for the six months ended December 31, 2005and 2004, respectively.

 

Loan repayment andmaturing investment securities are a relatively predictable source offunds.  However, deposit flows, calls ofinvestment securities and prepayments of loans and mortgage-backed securitiesare strongly influenced by interest rates, general and economic conditions andcompetition in the marketplace.  Thesefactors reduce the predictability of the timing of these sources of funds.  Deposit flows are affected by the level ofinterest rates, by the interest rates and products offered by competitors andby other factors.  The Bank monitors itsliquidity position frequently and anticipates that it will have sufficientfunds to meet its current funding commitments.

 

Certificates of depositstotaled $115.4 million at December 31, 2005. The Bank relies on competitiverates, customer service and long-standing relationships with customers toretain deposits.  Based on the Bank’sexperience with deposit retention and current retention strategies, managementbelieves that, although it is not possible to predict future terms andconditions upon renewal, a significant portion of such deposits will remainwith the Bank.

 

20

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The Bank was wellcapitalized at December 31, 2005 and exceeded each of the applicable regulatorycapital requirements at such date.  Thetable below presents the capital required and maintained at December 31, 2005.

 

| ** **                 | ** ** | **Required** | ** ** | **Actual** | ** ** |
|----------------------------|------------|--------------|------------|------------|------------|
|                       |       |         |       |       |       |
| Tier 1 Capital             |       | 4            | %          | 8.44       | %          |
| Total Risk Based  Capital  |       | 8            | %          | 16.29      | %          |
| Tier 1 Risk  Based Capital |       | 4            | %          | 15.56      | %          |

 

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

 

**Off-Balance Sheet Arrangements**

 

In addition to the normal course of operations, we engage in a varietyof financial transactions that, in accordance with generally acceptedaccounting principles are not recorded in our financial statements.  These transactions involve, to varyingdegrees, elements of credit, interest rate, and liquidity risk.  Such transactions are used primarily tomanage customers’ requests for funding and take the form of loan commitments,lines of credit, and letters of credit.

 

For the six months endedDecember 31, 2005, we engaged in no off-balance sheet transactions reasonablylikely to have a material effect on our financial condition, results ofoperations or cash flows.

 

21

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**Item 3.  Controls and Procedures**

 

Under the supervision and with theparticipation of the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, the Company evaluated the effectiveness ofthe design and operation of its disclosure controls and procedures (as definedin Rule 13a-15(e) and Rule 15(d)-15(e) under the Exchange Act) as of the end ofthe period covered by this report.  Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of the period covered by this report, the Company’sdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed in the reports that the Company files or submits underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms and in timely altering them to material information relating to theCompany (or its consolidated subsidiaries) required to be filed in its periodicSEC filings.

 

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

 

**Part II. – OTHER INFORMATION**

 

**Item 1.  Legal Proceedings – Not applicable**

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

 

Completion of the Company’s stock offering resulted in the issuance of 6,943,125 shares of common stock, 3,729,846 shares (53.7%) of which were issued to the MHC and 3,089,691 shares (44.5%) of which were sold to eligible depositors of the Bank at $10.00 per share. In addition, the Company issued 123,588 shares (1.8%) to a charitable foundation established by Putnam Savings Bank.  Costs related to the Offering (primarily marketing fees paid to an underwriting firm, professional fees, registration fees, and printing and mailing costs) aggregated $1.1 million and have been deducted to arrive at net proceeds of $29.8 million from the Offering. The Company contributed 50% of the net proceeds of the Offering to the Bank for general corporate use. Net Offering proceeds retained by the Company were used to acquire investments and fund a loan to the Bank’s employee stock ownership plan.

 

**Item 3.  Defaults Upon Senior Securities – Notapplicable**

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

**The Company convened its 2005Annual Meeting of Stockholders on October 21, 2005.  At the meeting, the stockholders of theCompany considered and voted on the following proposals:**

 

**Ballot No. 1. The election of Robert G. Cocks, Jr., Maurice P. Beaulac and Mary E.Patenaude, each to serve as a director for a term of three years and until hisor her successor has been elected and qualified.**

 

**The results of Ballot No. 1 were as follows:**

 

| ** **            | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|-----------------------|------------|-----------|------------|--------------|------------|
|                  |       |      |       |         |       |
| Robert G. Cocks,  Jr. |       | 6,322,930 |       | 201,696      |       |
|                  |       |      |       |         |       |
| Maurice P.  Beaulac   |       | 6,234,077 |       | 290,549      |       |
|                  |       |      |       |         |       |
| Mary E.  Patenaude    |       | 6,320,030 |       | 204,596      |       |

 

22

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**Ballot No. 2. The ratification of the 2005 PSB Holdings, Inc. Stock Based IncentivePlan**

 

**The results of Ballot No.  2 were as follows:**

 

| ** **                                                                  | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|
|                                                                        |       |      |       |        |       |        |       |
| Number of votes                                                             |       | 5,025,152 |       | 608,383     |       | 1,614       |       |
|                                                                        |       |      |       |        |       |        |       |
| Percentage of  shares voting in person or by proxy                          |       | 89.2      | %          | 10.8        | %          | —      |       |
|                                                                        |       |      |       |        |       |        |       |
| ** **                                                                  | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|                                                                        |       |      |       |        |       |        |       |
| Number of votes                                                             |       |      |       |        |       |        |       |
| (Minority  Stockholders)                                                    |       | 1,295,306 |       | 608,383     |       | 1,614       |       |
|                                                                        |       |      |       |        |       |        |       |
| Percentage of  shares of Minority Stockholders voting in person or by proxy |       | 67.9      | %          | 31.9        | %          | 0.2         | %          |

 

**Ballot No. 3. The ratification of the appointment of Snyder& Haller, P.C. as theindependent registered public accounting firm of the Company for the fiscalyear ending June 30, 2006.**

 

**The results of Ballot No. 3 wereas follows:**

 

| ** **                                         | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|----------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|
|                                               |       |      |       |        |       |        |       |
| Number of votes                                    |       | 6,233,981 |       | 280,100     |       | 10,545      |       |
|                                               |       |      |       |        |       |        |       |
| Percentage of  shares voting in person or by proxy |       | 95.7      | %          | 4.3         | %          | —      |       |

 

**Item 5.    Other Information – Not applicable**

 

**Item 6.    Exhibits**

 

Exhibits

 
| 31.1 |   | 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.                                                                  |

 

23

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**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|   | **PSB HOLDINGS, INC.**       |
|--------|------------------------------|
|   | (Registrant)                 |
|   |                         |
|   |                         |
| Date   | February 13, 2005            |   | /s/ Thomas A. Borner. |   |
|   | Thomas A. Borner             |
|   | Chief Executive Officer      |
|   |                         |
|   |                         |
| Date   | February 13, 2005            |   | /s/ Robert J. Halloran, Jr. |   |
|   | Robert J. Halloran, Jr.      |
|   | Vice President and Treasurer |

 

24

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