UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC 20549
 ____________
 FORM
10-Q
 (Mark
One)
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the quarterly period
ended December 31, 2008
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from ______________ to _____________
  Commission
file number   0-50970
 
 
 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)
 (Zip
Code)
 
 (860) 928-6501
 (Issuer’s
telephone number)
 
 N/A
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 
 Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
 
 xYESoNO
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer
              o
              Accelerated
      filer
              oNon-accelerated
      filer
              o
              Smaller
      reporting company
              x
 (Do not
check if a smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 o YESx NO
 
 As of January 30, 2009, there were
6,530,509 shares of the registrant’s common stock outstanding.
 
 
  PSB
Holdings, Inc.
 
 Table of
Contents
 
 
 
 Part
      I.
              FINANCIAL
      INFORMATIONPage No.Item
      1.
              Financial
      StatementsCondensed
      Consolidated Balance Sheets at December 31, 2008 (Unaudited) and June 30,
      2008 (Audited)
              1Condensed
      Consolidated Statements of Income (Loss) for the Three Months Ended and
      Six Months Ended December 31, 2008 and 2007 (Unaudited)
              2Condensed
      Consolidated Statements of Changes in Stockholders’ Equity for the Six
      Months Ended December 31, 2008 and 2007 (Unaudited)
              3Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended December
      31, 2008 and 2007 (Unaudited)
              4Notes
      to Consolidated Financial Statements (Unaudited)
              5Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              18Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              33Item
      4.
              Controls
      and Procedures
              33Item
      4T.
              Controls
      and Procedures
              33Part
      II.
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              34Item
      1A.
              Risk
      Factors
              34Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              35Item
      3.
              Defaults
      Upon Senior Securities
              35Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              35Item
      5.
              Other
      Information
              35Item
      6.
              Exhibits
              36SIGNATURES
              37
 
 
 
 
 Part
I.  FINANCIAL INFORMATION
 
 Item
1.  Financial Statements
 
    
 
  PSB
Holdings, Inc.
 
 Condensed
Consolidated Balance Sheets
 (Unaudited)
  December
      31,
                
                
                June
      30,2008
                
                
                2008(Unaudited)
                
                
                (Audited)(in
      thousands, except share data)ASSETSCash
      and due from depository institutions
                
                $
                4,549
                
                
                $
                7,026Federal
      funds sold
                
                
                5,600
                
                
                
                1,120Investment
      securities available-for-sale, at fair value and FHLB
stock
                
                
                190,119
                
                
                
                220,026Loans
      held-for-sale
                
                
                171
                
                
                
                675Loans
      receivable,  net of allowance for loan losses of $1,888 as
      ofDecember
      31, 2008 and $1,758 as of June 30, 2008
                
                
                248,206
                
                
                
                242,728Other
      real estate owned
                
                
                1,211
                
                
                
                -Premises
      and equipment, net
                
                
                3,565
                
                
                
                3,706Intangible
      assets
                
                
                7,666
                
                
                
                7,769Other
      assets
                
                
                18,612
                
                
                
                11,449TOTAL
      ASSETS
                
                $
                479,699
                
                
                $
                494,499LIABILITIES AND
      STOCKHOLDERS' EQUITYLiabilitiesDeposits
                
                $
                292,184
                
                
                $
                283,724Borrowed
      funds
                
                
                146,818
                
                
                
                156,621Mortgagors'
      escrow accounts
                
                
                1,360
                
                
                
                1,423Other
      liabilities
                
                
                2,672
                
                
                
                3,294Total
      Liabilities
                
                
                443,034
                
                
                
                445,062Commitments
      and contingenciesStockholders'
      EquityPreferred
      stock, $.10 par value, 1,000,000 shares authorized,no
      shares issued and outstanding
                
                
                -
                
                
                
                -Common
      stock, $.10 par value,  12,000,000 shares
      authorized,6,943,125
      shares issued,  6,530,509 shares outstanding atDecember
      31, 2008 and at June 30, 2008
                
                
                694
                
                
                
                694Additional
      paid-in capital
                
                
                30,747
                
                
                
                30,795Unearned
      ESOP shares
                
                
                (2,089
                )
                
                
                (2,089
                )Unearned
      stock awards
                
                
                (429
                )
                
                
                (605
                )Retained
      earnings
                
                
                26,125
                
                
                
                28,663Treasury
      stock, at cost (412,616 shares at December 31, 2008and
      at June 30, 2008)
                
                
                (4,205
                )
                
                
                (4,205
                )Accumulated
      other comprehensive loss
                
                
                (14,178
                )
                
                
                (3,816
                )Total
      stockholders' equity
                
                
                36,665
                
                
                
                49,437TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                479,699
                
                
                $
                494,499
   See notes
to condensed consolidated financial statements.
 1
  PSB
Holdings, Inc.
 
 Condensed
Consolidated Statements of (Loss) Income
 (Unaudited)
 
 Three
      Months Ended
                
                
                Six
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007(in
      thousands, except share data)Interest
      and dividend income:Interest
      on loans
                
                $
                3,745
                
                
                $
                3,852
                
                
                $
                7,451
                
                
                $
                7,717Interest
      and dividends on investments
                
                
                2,792
                
                
                
                3,047
                
                
                
                5,595
                
                
                
                5,964Total
      interest and dividend income
                
                
                6,537
                
                
                
                6,899
                
                
                
                13,046
                
                
                
                13,681Interest
      expense:Deposits
      and escrow
                
                
                1,743
                
                
                
                2,212
                
                
                
                3,505
                
                
                
                4,357Borrowed
      funds
                
                
                1,491
                
                
                
                1,802
                
                
                
                3,063
                
                
                
                3,662Total
      interest expense
                
                
                3,234
                
                
                
                4,014
                
                
                
                6,568
                
                
                
                8,019Net
      interest and dividend income
                
                
                3,303
                
                
                
                2,885
                
                
                
                6,478
                
                
                
                5,662Provision
      for loan losses
                
                
                323
                
                
                
                35
                
                
                
                597
                
                
                
                47Net
      interest and dividend income after provisionfor
      loan losses
                
                
                2,980
                
                
                
                2,850
                
                
                
                5,881
                
                
                
                5,615Noninterest
      income (charge):Fees
      for services
                
                
                586
                
                
                
                613
                
                
                
                1,224
                
                
                
                1,199Mortgage
      banking activities
                
                
                18
                
                
                
                42
                
                
                
                46
                
                
                
                61Net
      commissions from brokerage service
                
                
                32
                
                
                
                41
                
                
                
                79
                
                
                
                68Loss
      on writedowns of securities
                
                
                (304
                )
                
                
                -
                
                
                
                (5,784
                )
                
                
                -Loss
      on sale of securities
                
                
                -
                
                
                
                (20
                )
                
                
                -
                
                
                
                (20
                )Other
      income
                
                
                266
                
                
                
                106
                
                
                
                371
                
                
                
                206Total
      noninterest income (charge)
                
                
                598
                
                
                
                782
                
                
                
                (4,064
                )
                
                
                1,514Noninterest
      expense:Compensation
      and benefits
                
                
                1,497
                
                
                
                1,496
                
                
                
                2,962
                
                
                
                3,000Occupancy
      and equipment
                
                
                273
                
                
                
                291
                
                
                
                543
                
                
                
                580Data
      processing
                
                
                164
                
                
                
                234
                
                
                
                360
                
                
                
                464Advertising
      and marketing
                
                
                106
                
                
                
                125
                
                
                
                212
                
                
                
                233Other
      noninterest expense
                
                
                578
                
                
                
                601
                
                
                
                1,106
                
                
                
                1,256Total
      noninterest expense
                
                
                2,618
                
                
                
                2,747
                
                
                
                5,183
                
                
                
                5,533Income
      (loss) before income tax (benefit) expense
                
                
                960
                
                
                
                885
                
                
                
                (3,366
                )
                
                
                1,596Income
      tax (benefit) expense
                
                
                (1,009
                )
                
                
                200
                
                
                
                (1,324
                )
                
                
                372NET
      INCOME (LOSS)
                
                $
                1,969
                
                
                $
                685
                
                
                $
                (2,042
                )
                
                $
                1,224Earnings
      (loss) per common shareBasic
                
                $
                0.31
                
                
                $
                0.10
                
                
                $
                (0.33
                )
                
                $
                0.19Diluted
                
                $
                0.31
                
                
                $
                0.10
                
                
                $
                (0.33
                )
                
                $
                0.18
   See notes
to condensed consolidated financial statements.
 2
  PSB
Holdings, Inc.
 
 Condensed
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)
 For the
Six Months Ended December 31, 2008 and 2007
  Common
      Stock
                
                
                Additional
      Paid-in Capital
                
                
                Unearned
      ESOP
                
                
                Unearned
      Stock
                  Awards
                
                
                Reatained
      Earnings
                
                
                Treasury
      Stock
                
                
                Accumulated
      Other Comprehensive Loss
                
                
                Total
      Stockholders' Equity(in
      thousands)Balances
      at June 30, 2007
                
                $
                694
                
                
                $
                30,465
                
                
                $
                (2,222
                )
                
                $
                (978
                )
                
                $
                26,441
                
                
                $
                (1,767
                )
                
                $
                (1,382
                )
                
                $
                51,251Dividends
      declared
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (375
                )
                
                
                -
                
                
                
                -
                
                
                
                (375
                )Treasury
      stock acquired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,113
                )
                
                
                -
                
                
                
                (2,113
                )Stock
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                21
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                21Incentive
      plan shares earned
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                271
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                271Comprehensive
      income:Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,224
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      change in unrealizedholding
      losses on available-for-sale
      securities,net
      of tax effect
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                138Comprehensive
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,362Balances
      at December 31, 2007
                
                $
                694
                
                
                $
                30,465
                
                
                $
                (2,222
                )
                
                $
                (686
                )
                
                $
                27,290
                
                
                $
                (3,880
                )
                
                $
                (1,244
                )
                
                $
                50,417Balances
      at June 30, 2008
                
                $
                694
                
                
                $
                30,795
                
                
                $
                (2,089
                )
                
                $
                (605
                )
                
                $
                28,663
                
                
                $
                (4,205
                )
                
                $
                (3,816
                )
                
                $
                49,437Dividends
      declared
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (496
                )
                
                
                -
                
                
                
                -
                
                
                
                (496
                )Stock
      based compensation
                
                
                -
                
                
                
                (48
                )
                
                
                -
                
                
                
                176
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                128Comprehensive
      loss:Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,042
                )
                
                
                -
                
                
                
                -
                
                
                
                -Net
      change in unrealizedholding
      losses on available-for-sale
      securities,net
      of tax effect
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (10,362
                )Comprehensive
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (12,404
                )Balances
      at December 31, 2008
                
                $
                694
                
                
                $
                30,747
                
                
                $
                (2,089
                )
                
                $
                (429
                )
                
                $
                26,125
                
                
                $
                (4,205
                )
                
                $
                (14,178
                )
                
                $
                36,665
   See notes
to condensed consolidated financial statements.
 3
 PSB
Holdings, Inc.
 
 Condensed
Consolidated Statements of Cash Flows
 (Unaudited)
 
 For
      the Six MonthsEnded
      December 31,2008
                
                
                2007(in
      thousands)Cash
      flows from operating activitiesNet
      (Loss) income
                
                $
                (2,042
                )
                
                $
                1,224Adjustments
      to reconcile net (loss)income to cashprovided
      by operating activities:Provision
      for loan losses
                
                
                597
                
                
                
                47Stock-based
      compensation
                
                
                50
                
                
                
                217Amortization
      of core deposit intangible
                
                
                103
                
                
                
                118Depreciation
                
                
                186
                
                
                
                277Net
      amortization (accretion) of available-for-sale securities
                
                
                62
                
                
                
                (59
                )Net
      decrease in loans held for sale
                
                
                504
                
                
                
                663Writedowns
      of securities
                
                
                5,784
                
                
                
                -Net
      loss on sale of securities
                
                
                -
                
                
                
                20Amortization
      of premium on purchased loans
                
                
                -
                
                
                
                11Increase
      in cash surrender value of bank owned life insurance
                
                
                (130
                )
                
                
                (130
                )Bank
      owned life insurance death benefit income
                
                
                (162
                )
                
                
                -Net
      change in:Deferred
      loan costs
                
                
                (42
                )
                
                
                (105
                )Other
      assets
                
                
                (1,883
                )
                
                
                39Other
      liabilities
                
                
                (519
                )
                
                
                (220
                )Net
      cash provided by operating activities
                
                
                2,508
                
                
                
                2,102Cash
      flows from investing activitiesProceeds
      from sales ofavailable-for-sale
      securities
                
                
                -
                
                
                
                24,626Proceeds
      from maturities ofavailable-for-sale
      securities
                
                
                13,454
                
                
                
                25,985Purchase
      of available-for-sale securities and Federal Home Loan Bank
      stock
                
                
                (5,088
                )
                
                
                (44,960
                )Loan
      originations net of principal payments
                
                
                (7,244
                )
                
                
                (6,226
                )Proceeds
      from the surrender of bank owned life insurance policy
                
                
                345
                
                
                
                -Purchase
      of premises and equipment
                
                
                (45
                )
                
                
                (132
                )Net
      cash provided (used) by investing activities
                
                
                1,422
                
                
                
                (707
                )Cash
      flows from financing activitiesNet
      increase (decrease) in savings, demand deposits and NOW
      accounts
                
                
                734
                
                
                
                (10,139
                )Net
      increase in time deposit accounts
                
                
                7,726
                
                
                
                3,159Proceeds
      from long term borrowings
                
                
                20,000
                
                
                
                46,000Repayments
      of long term borrowings
                
                
                (23,564
                )
                
                
                (34,105
                )Net
      change in short term borrowings
                
                
                (6,239
                )
                
                
                (8,764
                )Net
      (decrease) increase in mortgagors' escrow account
                
                
                (63
                )
                
                
                12Acquisition
      of treasury shares
                
                
                -
                
                
                
                (2,092
                )Dividends
      paid
                
                
                (521
                )
                
                
                (359
                )Net
      cash used by financing activities
                
                
                (1,927
                )
                
                
                (6,288
                )Increase
      (decrease) in cash and cash equivalents
                
                
                2,003
                
                
                
                (4,893
                )Cash
      and cash equivalents at beginning of year
                
                
                8,146
                
                
                
                13,198Cash
      and cash equivalents at end of period
                
                $
                10,149
                
                
                $
                8,305Supplemental
      disclosuresCash
      paid during the period for:Interest
                
                $
                6,561
                
                
                $
                8,029Income
      taxes
                
                $
                294
                
                
                $
                432Loans
      transferred to other real estate owned
                
                $
                1,211
                
                
                $
                -
   See notes
to condensed consolidated financial statements.
 4
  PSB
Holdings, Inc.
 
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)
 
 
 NOTE
1 – Organization
 
 PSB
Holdings, Inc. (Company) is a federally chartered holding company formed on May
27, 2003 for the purpose of acquiring all of the common stock of Putnam Bank
(formerly known as Putnam Savings Bank until its name change effective November
2, 2007) (Bank) concurrent with the Bank’s reorganization from a mutual savings
institution to the mutual holding company form of organization.  No
shares were offered to the public as part of this reorganization.
 
 On
October 4, 2004, the Company issued 6,943,125 shares of common stock, 3,729,846
shares (53.7%) of which were issued to Putnam Bancorp, MHC and 3,089,691 shares
(44.5%) of which were sold to eligible depositors of the Bank and others at
$10.00 per share. In addition, the Company issued 123,588 shares (1.8%) to a
charitable foundation established by the Bank.
 
 NOTE  2
– Basis of Presentation
 
 The
accompanying unaudited condensed consolidated interim financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements and the instructions
to Form 10-Q, and accordingly do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.  In the opinion
of management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments necessary, consisting of only normal
recurring accruals and the elimination of all significant intercompany accounts,
to present fairly the financial position, results of operations and cash flows
of the Company for the periods presented.  In preparing the interim
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period.  Material
estimates that are particularly susceptible to significant changes in the
near-term relate to the determination of the allowance for losses on loans and
the valuation of real estate acquired in connection with foreclosure or in
satisfaction of loans.  While management uses available information to
recognize losses on loans and foreclosed real estate, future additions to the
allowance may be necessary based on changes in economic conditions, particularly
in Connecticut.  Actual results could differ significantly from those
estimates.  The interim results of operations are not necessarily
indicative of the operating results to be expected for future periods, including
the year ending June 30, 2009.  These financial statements should be
read in conjunction with the 2008 consolidated financial statements and notes
thereto included in the Company’s Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission (SEC) on September 23, 2008.
 
 NOTE
3 – Recent Accounting Pronouncements
 
 The
Company adopted the provisions of FASB Interpretation 48, “Accounting for
Uncertainty in Income Taxes,” on October 1, 2007. Previously, the Company had
accounted for tax contingencies in accordance with Statement of Financial
Accounting Standards 5, Accounting for Contingencies. As required by
Interpretation 48, which clarifies Statement 109, Accounting for Income Taxes,
the Company recognizes the financial statement benefit of a tax position only
after determining that the relevant tax authority would more likely than not
sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. Tax
regulations within each jurisdiction are subject to the interpretation of the
related tax laws and regulations and require significant judgment to
apply.
 
 The
Company applied Interpretation 48 to all tax positions for which the statute of
limitations remained open. The adoption of Interpretation 48 did not have a
material impact on the results of operation or financial condition of the
Company.
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards SFAS No. 157, “Fair Value Measurements,” to
define fair value, establish a framework for measuring fair value and expand
disclosures about fair values.  The Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company’s adoption of SFAS
No. 157 did not have a material impact on the Company’s financial position or
results of operations.  See Note 11 for further
information.
  5
  In
September 2006, the Emerging Issues Task Force issued EITF Issue 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements” “EITF Issue 06-4”. EITF
Issue 06-4 requires that for endorsement split-dollar insurance arrangements
that provide  a benefit to an employee that extends to postretirement
periods, an employer should recognize a liability for future benefits in
accordance with SFAS No. 106 or APB No. 12 based on the
substantive agreement with the employee. If the employer has effectively agreed
to maintain a life insurance policy during postretirement periods, the costs of
the life insurance policy during the postretirement periods should be accrued in
accordance with either FASB Statement No. 106 or APB No. 12. If the
employer has agreed to provide a death benefit, the employer should recognize a
liability for the future death benefit in accordance with either SFAS
No. 106 or APB No. 12. EITF Issue 06-4 is effective for fiscal years
beginning after December 15, 2007.  The Company’s adoption of
EITF Issue 06-4 did not have a material impact on the Company’s financial
position or results of operations.
 
 During
the first quarter of 2007, FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” “SFAS 159”, which permits entities
to choose and measure many financial instruments and certain other items at fair
value.  The Company adopted SFAS No. 159 as of July 1,
2008.  The Company did not elect fair value treatment for any
financial assets or liabilities upon adoption.  See Note 11 for
further information.
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2008), “Business
Combinations” “SFAS 141(R)”.  SFAS 141(R) will significantly change
the accounting for business combinations.  Under SFAS 141(R), an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions.  It also amends the accounting treatment for
certain specific items including acquisition costs and non controlling minority
interests and includes a substantial number of new disclosure
requirements.  SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after July 1,
2009.  The Company does not expect the adoption of this statement to
have a material impact on its financial condition and results of
operations.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements and Amendment of ARB No. 51 (“SFAS No.
160”).  The new pronouncement requires all entities to report
noncontrolling (minority) interests in subsidiaries as a component of
stockholders’ equity.  SFAS No. 160 will be effective for fiscal years
beginning after December 15, 2008.  Early adoption is
prohibited.  Management does not anticipate that this statement will
have a material impact on the Company’s financial condition and results of
operations.
 
 In
February 2008, the FASB issued FSP FAS 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions.”  This FSP
provides guidance on how the transferor and transferee should separately account
for a transfer of a financial asset and a related repurchase financing if
certain criteria are met.  This guidance will be effective January 1,
2009.  The adoption of this new FSP is not expected to have a material
effect on the Company’s results of operations or financial
position.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133” SFAS
161.  SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities.  Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  The guidance in SFAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged.  This statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption.  The
Company does not expect the adoption of this statement to have a material impact
on its financial condition and results of operations.
 
 6
 
 In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets.”  This FSP provides guidance as to factors
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other
Intangible Assets.”  This guidance will be effective January 1,
2009.  The adoption is not expected to have a material effect on the
Company’s results of operations or financial position.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  This standard formalizes minor changes in
prioritizing accounting principles used in the preparation of financial
statements that are presented in conformity with GAAP.  This standard
became effective November 18, 2008.
 
 7
 
 NOTE
4 – Earnings Per Share
 
 As
presented, basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period.  Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. For purposes of
computing diluted EPS, the treasury stock method is used.
 
 The
following information was used in the computation of EPS on both a basic and
diluted basis for the three months ended and six months ended December 31, 2008
and December 31, 2007:
 
 Three
      Months Ended
                
                
                Three
      Months EndedDecember
      31, 2008
                
                
                December
      31, 2007Basic
      EPS computation:Net
      income
                
                $
                1,969,000
                
                
                $
                685,000Weighted
      average shares outstanding
                
                
                6,276,963
                
                
                
                6,534,918Basic
      EPS
                
                $
                0.31
                
                
                $
                0.10Diluted
      EPS computation:Net
      income
                
                $
                1,969,000
                
                
                $
                685,000Weighted
      average shares outstanding
                
                
                6,276,963
                
                
                
                6,534,918Dilutive
      potential shares
                
                
                47,078
                
                
                
                75,4606,324,041
                
                
                
                6,610,378Diluted
      EPS
                
                $
                0.31
                
                
                $
                0.10Six
      Months Ended
                
                
                Six
      Months EndedDecember
      31, 2008
                
                
                December
      31, 2007Basic
      EPS computation:Net
      (loss) income
                
                $
                (2,042,000
                )
                
                $
                1,224,000Weighted
      average shares outstanding
                
                
                6,270,346
                
                
                
                6,574,994Basic
      EPS
                
                $
                (0.33
                )
                
                $
                0.19Diluted
      EPS computation:Net
      (loss) income
                
                $
                (2,042,000
                )
                
                $
                1,224,000Weighted
      average shares outstanding
                
                
                6,270,346
                
                
                
                6,574,994Dilutive
      potential shares
                
                
                0
                
                
                
                83,8146,270,346
                
                
                
                6,658,808Diluted
      EPS
                
                $
                (0.33
                )
                
                $
                0.18
 
 8
 
 NOTE
5 – Investment Securities
 
 The
carrying value and estimated market values of investment securities are as
follows:
 
 December
      31, 2008Amortized
                
                
                Gross
      Unrealized
                
                
                FairCost
      Basis
                
                
                Gains
                
                
                (Losses)
                
                
                Value(in
      thousands)Debt
      securities:U.S.
      government and agency obligations:From
      one through five years
                
                $
                2,896
                
                
                $
                71
                
                
                $
                -
                
                
                $
                2,967From
      five through ten years
                
                
                3,247
                
                
                
                86
                
                
                
                -
                
                
                
                3,333After
      ten years
                
                
                17,972
                
                
                
                259
                
                
                
                (23
                )
                
                
                18,20824,115
                
                
                
                416
                
                
                
                (23
                )
                
                
                24,508State
      agency and municipal obligations:After
      ten years
                
                
                4,448
                
                
                
                69
                
                
                
                (19
                )
                
                
                4,4984,448
                
                
                
                69
                
                
                
                (19
                )
                
                
                4,498Corporate
      bonds and other obligations:Due
      within one year
                
                
                2,105
                
                
                
                -
                
                
                
                (13
                )
                
                
                2,092From
      one through five years
                
                
                5,047
                
                
                
                -
                
                
                
                (754
                )
                
                
                4,293After
      ten years
                
                
                7,070
                
                
                
                104
                
                
                
                (2,478
                )
                
                
                4,69614,222
                
                
                
                104
                
                
                
                (3,245
                )
                
                
                11,081Mortgage-backed
      securities
                
                
                145,591
                
                
                
                2,052
                
                
                
                (15,332
                )
                
                
                132,311Total
      debt securities
                
                
                188,376
                
                
                
                2,641
                
                
                
                (18,619
                )
                
                
                172,398Equity
      securities:Preferred
      stock
                
                
                15,046
                
                
                
                -
                
                
                
                (5,501
                )
                
                
                9,545FHLB
      restricted stock
                
                
                8,057
                
                
                
                -
                
                
                
                -
                
                
                
                8,057Mutual
      funds
                
                
                119
                
                
                
                -
                
                
                
                -
                
                
                
                119Total
      equity securities
                
                
                23,222
                
                
                
                -
                
                
                
                (5,501
                )
                
                
                17,721Total
      available-for-sale securities and FHLB Stock
                
                $
                211,598
                
                
                $
                2,641
                
                
                $
                (24,120
                )
                
                $
                190,119
  9
  NOTE 5 – Investment Securities–(Continued)
 
 June
      30, 2008Amortized
                
                
                Gross
      Unrealized
                
                
                FairCost
      Basis
                
                
                Gains
                
                
                (Losses)
                
                
                Value(in
      thousands)Debt
      securities:U.S.
      government and agency obligations:From
      one through five years
                
                $
                3,079
                
                
                $
                16
                
                
                $
                -
                
                
                $
                3,095From
      five through ten years
                
                
                2,232
                
                
                
                17
                
                
                
                (21
                )
                
                
                2,228After
      ten years
                
                
                13,987
                
                
                
                174
                
                
                
                (12
                )
                
                
                14,14919,298
                
                
                
                207
                
                
                
                (33
                )
                
                
                19,472State
      agency and municipal obligations:After
      ten years
                
                
                4,448
                
                
                
                99
                
                
                
                -
                
                
                
                4,5474,448
                
                
                
                99
                
                
                
                -
                
                
                
                4,547Corporate
      bonds and other obligations:Due
      within one year
                
                
                2,971
                
                
                
                7
                
                
                
                (1
                )
                
                
                2,977From
      one through five years
                
                
                8,045
                
                
                
                10
                
                
                
                (476
                )
                
                
                7,579After
      ten years
                
                
                8,042
                
                
                
                47
                
                
                
                (1,431
                )
                
                
                6,65819,058
                
                
                
                64
                
                
                
                (1,908
                )
                
                
                17,214Mortgage-backed
      securities
                
                
                156,063
                
                
                
                556
                
                
                
                (4,769
                )
                
                
                151,850Total
      debt securities
                
                
                198,867
                
                
                
                926
                
                
                
                (6,710
                )
                
                
                193,083Equity
      securities:Preferred
      stock
                
                
                19,000
                
                
                
                -
                
                
                
                -
                
                
                
                19,000FHLB
      restricted stock
                
                
                7,943
                
                
                
                -
                
                
                
                -
                
                
                
                7,943Total
      equity securities
                
                
                26,943
                
                
                
                -
                
                
                
                -
                
                
                
                26,943Total
      available-for-sale securities and FHLB Stock
                
                $
                225,810
                
                
                $
                926
                
                
                $
                (6,710
                )
                
                $
                220,026
  Gross
losses of $0 and $84,934 were realized on sales of available-for-sale securities
for the six months ended December 31, 2008 and December 31, 2007,
respectively.  Gross gains of $0 and $65,242 were realized on sales of
available-for-sale securities for the six months ended December 31, 2008 and
December 31, 2007, respectively.  There was an other-than-temporary
impairment charge on available-for-sale securities of $304,000 during the
quarter ended December 31, 2008 and $5.8 million during the six months ended
December 31, 2008.  See Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations-Overview.
  10
  NOTE
6 – Loans
 
 The
following table sets forth the composition of our loan portfolio at December 31,
2008 and June 30, 2008:
 
 December
      31,
                
                
                June
      30,2008
                
                
                2008Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent(Dollars
      in thousands)Mortgage
      Loans:Residential
      (1)
                
                $
                189,047
                
                
                
                74.02
                %
                
                $
                181,978
                
                
                
                72.59
                %Commercial
      real estate
                
                
                53,616
                
                
                
                20.99
                
                
                
                55,406
                
                
                
                22.10Residential
      construction
                
                
                2,860
                
                
                
                1.12
                
                
                
                3,223
                
                
                
                1.29Commercial
                
                
                8,650
                
                
                
                3.39
                
                
                
                8,687
                
                
                
                3.46Consumer
      and other
                
                
                1,221
                
                
                
                0.48
                
                
                
                1,394
                
                
                
                0.56Total
      loans
                
                
                255,394
                
                
                
                100.00
                %
                
                
                250,688
                
                
                
                100.00
                %Unadvanced
      construction loans
                
                
                (5,662
                )
                
                
                
                
                
                
                (6,522
                )249,732
                
                
                
                
                
                
                
                244,166Net
      deferred loan costs
                
                
                362
                
                
                
                
                
                
                
                320Allowance
      for loan losses
                
                
                (1,888
                )
                
                
                
                
                
                
                (1,758
                )Loans,
      net
                
                $
                248,206
                
                
                
                
                
                
                $
                242,728
  
 (1)
              Residential
      mortgage loans include one- to four-family mortgage loans, home equity
      loans, and home equity lines of
credit.
 
 11
 
 NOTE
7 – Non-performing Assets
 
 The table
below sets forth the amounts and categories of non-performing assets at the
dates indicated.
 
 At
      December 31,
                
                
                At
      June 30,2008
                
                
                2008(Dollars
      in thousands)Non-accrual
      loans:Residential
      mortgage loans (1)
                
                $
                268
                
                
                $
                -Commercial
      real estate
                
                
                1,398
                
                
                
                982Residential
      construction
                
                
                -
                
                
                
                -Commercial
                
                
                109
                
                
                
                -Consumer
      and other
                
                
                -
                
                
                
                -Total
      non-accrual loans
                
                
                1,775
                
                
                
                982Accruing
      loans past due 90 days or more:Residential
      mortgage loans (1)
                
                
                571
                
                
                
                -Commercial
      real estate
                
                
                923
                
                
                
                2,859Residential
      construction
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                195Consumer
      and other
                
                
                -
                
                
                
                -Total
                
                
                1,494
                
                
                
                3,054Total
      non-performing loans
                
                
                3,269
                
                
                
                4,036Real
      estate owned
                
                
                1,211
                
                
                
                -Other
      non-performing assets
                
                
                216
                
                
                
                -Total
      non-performing assets
                
                $
                4,696
                
                
                $
                4,036Total
      non-performing loans to total loans
                
                
                1.31
                %
                
                
                1.65
                %Total
      non-performing assets to total assets
                
                
                0.98
                
                
                
                0.82
 
 (1)
              Residential
      mortgage loans include one- to four-family mortgage loans, home equity
      loans, and home equity lines of
credit.
 
 12
  NOTE
8 – Allowance for Loan Losses
 
 The
following summarizes the changes in the allowance for loan losses for the
quarter and six months ended December 31, 2008, as compared to the prior year
periods:
 
 Three
      Months Ended
                
                
                Six
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007(in
      thousands)
                
                
                (in
      thousands)Balance,
      beginning of period
                
                $
                1,996
                
                
                $
                1,780
                
                
                $
                1,758
                
                
                $
                1,780Provision
      for loan losses
                
                
                323
                
                
                
                35
                
                
                
                597
                
                
                
                47Charge
      offs
                
                
                (437
                )
                
                
                (60
                )
                
                
                (487
                )
                
                
                (75
                )Recoveries
                
                
                6
                
                
                
                21
                
                
                
                20
                
                
                
                24Balance,
      end of period
                
                $
                1,888
                
                
                $
                1,776
                
                
                $
                1,888
                
                
                $
                1,776
  At
December 31, 2008, the Company had loans with balances of $1.78 million
(representing 11 loans) on nonaccrual status and $1.49 million (representing
three loans) past due over 90 days and still accruing.  At December
31, 2007, the Company had loans with balances of $1.72 million (representing ten
loans) on nonaccrual status and $602,000 (representing five loans) past due over
90 days and still accruing.  The Company had four loan relationships
that are considered impaired with a balance of $1.59 million as of December 31,
2008 and there were no impaired loan relationships as of December 31,
2007.
 
 NOTE
9 – Goodwill and Other Intangibles
 
 Intangible
assets include goodwill and a core deposit intangible associated with the Bank’s
purchase of three branches from another financial institution in October
2005.  The goodwill and core deposit intangible are evaluated for
impairment on an annual basis and the core deposit intangible is amortized on an
accelerated basis over a ten-year period.  The carrying amount of
goodwill and core deposit intangible as of December 31, 2008 was $6.9 million
and $754,000, respectively.  The amortization expense related to the
core deposit intangible for the three months ended December 31, 2008 and 2007
was $51,000 and $59,000, respectively.  The amortization expense
related to the core deposit intangible for the six months ended December 31,
2008 and 2007 was $103,000 and $118,000 respectively.
 
 December
      31,
                
                
                June
      30,2008
                
                
                2008(
      in thousands)Balances
      not subject to amortization:Goodwill
                
                $
                6,912
                
                
                $
                6,912Balances
      subject to amortization:Core
      Deposit Intangible
                
                
                754
                
                
                
                857Total
      intangible assets
                
                $
                7,666
                
                
                $
                7,769
 
 13
 
 The
following table shows the estimated future amortization expense for amortizing
intangible assets for the periods indicated:
  (in
      thousands)For
      the six months ending June 30, 2009
                
                $
                103For
      the twelve months ending June 30, 2010
                
                
                178For
      the twelve months ending June 30, 2011
                
                
                149For
      the twelve months ending June 30, 2012
                
                
                121Thereafter
                
                
                203Total
                
                $
                754
  NOTE
10 – Comprehensive (Loss) Income
 
 SFAS No.
130, “Reporting Comprehensive Income” establishes standards for disclosure of
comprehensive income, which includes net income and any changes in equity from
non-owner sources that are not recorded in the income statement (such as changes
in the net unrealized gains (losses) on securities).  The Company’s
one source of other comprehensive income is the net unrealized gain (loss) on
securities.
 
 Three
      Months Ended
                
                
                Six
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007(in
      thousands)
                
                
                (in
      thousands)Net
      Income (Loss)
                
                $
                1,969
                
                
                $
                685
                
                
                $
                (2,042
                )
                
                $
                1,224Other
      comprehensive (loss) income:Net
      unrealized holding (losses) gains onavailable-for-sale
      securities
                
                
                (9,015
                )
                
                
                (488
                )
                
                
                (21,479
                )
                
                
                356Reclassification
      adjustment for lossrecognized
      in net inome
                
                
                304
                
                
                
                20
                
                
                
                5,784
                
                
                
                20Other
      comprehensive (loss) gains before tax benefit (expense)
                
                
                (8,711
                )
                
                
                (468
                )
                
                
                (15,695
                )
                
                
                376Income
      tax benefit (expense) related to items of othercomprehensive
      (loss) income
                
                
                2,959
                
                
                
                157
                
                
                
                5,333
                
                
                
                (238
                )Other
      comprehensive (loss) income, net of tax
                
                
                (5,752
                )
                
                
                (311
                )
                
                
                (10,362
                )
                
                
                138Total
      comprehensive (loss) income
                
                $
                (3,783
                )
                
                $
                374
                
                
                $
                (12,404
                )
                
                $
                1,362
  14
  NOTE 11 – FAIR VALUE
MEASUREMENTS
 
 Effective
July 1, 2008, the Company adopted “SFAS 157”, Fair Value Measurements, which
provides a framework for measuring fair value under generally accepted
accounting principles.
 
 The
Company also adopted SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB Statement No.
115.  SFAS 159 allows an entity the irrevocable option to elect fair
value for the initial and subsequent measurement for certain financial assets
and liabilities on a contract-by-contract basis.  The Company did not
elect fair value treatment for any financial assets or liabilities upon
adoption.
 
 In
accordance with SFAS 157, the Company groups its financial assets and financial
liabilities measured at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value.
 
 Level 1 –
Valuations for assets and liabilities traded in active exchange markets, such as
the New York Stock Exchange.  Level 1 also includes U.S. Treasury,
other U.S. Government and agency mortgage-backed securities that are traded by
dealers or brokers in active markets.  Valuations are obtained from
readily available pricing sources for market transactions involving identical
assets or liabilities.
 
 Level 2 –
Valuations for assets and liabilities traded in less active dealer or broker
markets.  Valuations are obtained from third party pricing services
for identical or comparable assets or liabilities.
 
 Level 3 –
Valuations for assets and liabilities that are derived from other methodologies,
including option pricing models, discounted cash flow models and similar
techniques, and not based on market exchange, dealer, or broker traded
transactions.  Level 3 valuations incorporate certain assumptions and
projections in determining the fair value assigned to such assets and
liabilities.
 
 A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
 
 A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below.  These valuation
methodologies were applied to all of the Company’s financial assets and
financial liabilities carried at fair value for December 31, 2008.
 
 The
Company’s cash instruments are generally classified within level 1 or level 2 of
the fair value hierarchy because they are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency.
 
 The
Company’s investment and mortgage-backed securities available for sale are
generally classified within level 2 of the fair value hierarchy.  For
these securities, we obtain fair value measurements from independent pricing
services.  The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the U. S. treasury yield
curve, trading levels, market consensus prepayment speeds, credit information
and the instrument’s terms and conditions.
 
 Level 3
is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence.  In the absence of such evidence, management’s best
estimate is used.  Subsequent to inception, management only changes
level 3 inputs and assumptions when corroborated by evidence such as
transactions in similar instruments, completed or pending third-party
transactions in the underlying investment or comparable entities, subsequent
rounds of financing, recapitalization and other transactions across the capital
structure, offerings in the equity or debt markets, and changes in financial
ratios or cash flows.
 
 The
Company’s impaired loans are reported at the fair value of the underlying
collateral if repayment is expected solely from the
collateral.  Collateral values are estimated using level 2 inputs
based upon appraisals of similar properties obtained from a third
party.
  15
 The
following summarizes assets measured at fair value for the period ending
December 31, 2008 (in thousands):
  ASSETS
MEASURED AT FAIR VALUE ON A RECURRING BASIS
  Fair
      Value Measurements at Reporting Date Using:Quoted
      Prices in
                
                
                Significant
      Other
                
                
                SignificantActive
      Markets for
                
                
                Observable
      Inputs
                
                
                Unobservable
      InputsIdentical
      AssetsDecember
      31, 2008
                
                
                Level
      1
                
                
                Level
      2
                
                
                Level
      3Securities
      available for sale
                
                $
                182,062
                
                
                $
                -
                
                
                $
                182,062
                
                
                $
                -Impaired
      Loans
                
                
                1,561
                
                
                
                -
                
                
                
                1,561
                
                
                
                -Total
                
                $
                183,623
                
                
                $
                -
                
                
                $
                183,623
                
                
                $
                -
  Fair
      Value MeasurementsUsing
      Significant Unobservable Inputs(Level
      3)Available-for-saleSecurities
                
                
                TotalBeginning
      balance, July 1, 2008
                
                $
                15,000
                
                
                $
                15,000Total
      gains or losses (realized/unrealized)Included
      in earnings (or changes in net assets)
                
                
                -
                
                
                
                -Included
      in other comprehensive incomeAmortization
      of securities, netTransfers
      in and/or out of Level 3
                
                
                (15,000
                )
                
                
                (15,000
                )Ending
      balance, December 31, 2008
                
                $
                -
                
                
                $
                -The
      amount of total gains or losses for the period included inearnings
      (or changes in net assets) attributable to the changein
      unrealized gains or losses relating to assets still held at
      thereporting
      date
                
                $
                -
                
                
                $
                -
  16
  NOTE
12 – Stock-Based Incentive Plan
 
 At the
annual meeting of stockholders on October 21, 2005, stockholders of the Company
approved the PSB Holdings, Inc. 2005 Stock-Based Incentive Plan (the “Incentive
Plan”).  Under the Incentive Plan, the Company may grant up to 340,213
stock options and 136,085 shares of restricted stock to its employees, officers
and directors for an aggregate amount of up to 476,298 shares of the Company’s
common stock for issuance upon the grant or exercise of awards.  Both
incentive stock options and non-statutory stock options may be granted under the
Incentive Plan.
 
 On
November 7, 2005, the Company awarded 319,800 options to purchase the Company’s
common stock and 129,281 shares of restricted stock.  Stock option
awards were granted with an exercise price equal to the market price of the
Company’s stock at the date of grant ($10.60) with a maximum term of ten
years.
 
 On June
7, 2006, the Company awarded 18,000 options to purchase the Company’s common
stock and 6,000 shares of restricted stock.  Stock option awards were
granted with an exercise price equal to the market price of the Company’s stock
at the date of grant ($10.78) with a maximum term of ten years.
 
 On May
25, 2007, the Company awarded 29,000 options to purchase the Company’s common
stock and 9,500 shares of restricted stock.  Stock option awards were
granted with an exercise price equal to the market price of the Company’s stock
at the date of grant ($10.70) with a maximum term of ten years.
 
 Both
stock option and restricted stock awards granted to date vest at 20% per year
beginning on the first anniversary of the date of the grant.
 
 Stock
options and restricted stock awards are considered common stock equivalents for
the purpose of computing earnings per share on a diluted basis.
 
 In
accordance with SFAS No.123 (R) “Accounting for Stock Options and Other Stock
Based Compensation”, the Company has recorded share-based compensation expense
related to outstanding stock option and restricted stock awards based upon the
fair value at the date of grant over the vesting period of such awards on a
straight-line basis.  The fair value of each restricted stock
allocation, based on the market price at the date of grant, is recorded to
unearned stock awards.  Compensation expense related to unearned
restricted shares is amortized to compensation and benefits expense over the
vesting period of the restricted stock awards.   The fair value
of each stock option award is estimated on the date of grant using the
Black-Scholes option pricing method which includes several assumptions such as
volatility, expected dividends, expected term and risk-free rate for each stock
option award.  The Company recorded share-based compensation expense
in connection with the stock option and restricted stock awards for the three
months ended December 31, 2008 and December 31, 2007 of $46,000 and $80,000,
respectively. During the three months ended December 31, 2008, a reduction of
$28,000 was recorded in stock award expense due to forfeitures.  The
Company recorded share-based compensation expense in connection with the stock
option and restricted stock awards for the six months ended December 31, 2008
and December 31, 2007 of $50,000 and $217,000,
respectively.   During the six months ended December 31, 2008, a
reduction of $101,000 was recorded in stock award expense due to
forfeitures.
 
 The
weighted-average fair value of stock options granted on November 7, 2005, June
7, 2006 and May 25, 2007 using the Black-Scholes option pricing method was $2.00
per share, $1.97 per share and $1.84 per share,
respectively.  Assumptions used to determine the weighted-average fair
value of stock options granted were as follows:
 
 November
      7, 2005
                
                
                June
      7, 2006
                
                
                May
      25, 2007Grant
                
                
                Grant
                
                
                GrantDividend
      yield
                
                
                1.89
                %
                
                
                2.23
                %
                
                
                2.24
                %Expected
      volatility
                
                
                12.65
                %
                
                
                12.17
                %
                
                
                11.04
                %Risk-free
      rate
                
                
                4.56
                %
                
                
                4.95
                %
                
                
                4.86
                %Expected
      life in years
                
                
                6.5
                
                
                
                6.5
                
                
                
                6.5Fair
      value
                
                $
                2.00
                
                
                $
                1.97
                
                
                $
                1.84
  17
 
 NOTE
13 – Dividends
 
 On
December 3, 2008, the Board of Directors of the Company declared a cash dividend
of $0.09 a share for stockholders of record as of January 2, 2009 and payable on
January 16, 2009.  Putnam Bancorp, MHC, the mutual holding company,
was paid its portion of the dividend declared by the Company.  It is
expected that Putnam Bancorp, MHC will receive future dividends until such time
as the Office of Thrift Supervision grants a waiver of such
payments.
 
 NOTE
14 – Commitments to Extend Credit
 
 The
Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. These commitments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the Consolidated Balance Sheet.
 
 The
contractual amounts of outstanding commitments were as follows:
 
 December
      31,
                
                
                June
      30,2008
                
                
                2008(in
      thousands)Commitments
      to extend credit:Loan
      commitments
                
                $
                5,560
                
                
                $
                9,732Unadvanced
      construction loans
                
                
                5,601
                
                
                
                6,522Unadvanced
      lines of credit
                
                
                18,105
                
                
                
                18,522Standby
      letters of credit
                
                
                1,198
                
                
                
                2,050Outstanding
      commitments
                
                $
                30,464
                
                
                $
                36,826
 
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
 The
following analysis discusses changes in the financial condition and results of
operations at and for the three and six months ended December 31, 2008 and 2007,
and should be read in conjunction with the Company’s Condensed Consolidated
Financial Statements and the notes thereto, appearing in Part I, Item 1 of this
quarterly report.  These financial statements should be read in
conjunction with the 2008 Consolidated Financial Statements and notes thereto
included in the Company’s Annual Report on Form 10-KSB filed with the SEC on
September 23, 2008.
 
 The
year-end condensed balance sheet data were derived from audited financial
statements, but do not include all disclosures required by GAAP.
 
 Forward-Looking
Statements
 
 This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.  The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions.  Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identified by use of the words “believe,” “expect,”
“intend,” “anticipate,” “estimate,” “project,” or similar
expressions.  The Company’s ability to predict results or the actual
effect of future plans or strategies is inherently uncertain.  Factors
which could have a material adverse effect on the operations of the Company and
its subsidiary include, but are not limited to, changes in: interest rates,
general economic conditions, legislation and regulations, real estate values,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company’s market area and
accounting principles and guidelines.  These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.  Further information
concerning the Company and its business, including additional factors that could
materially affect the Company’s financial results, is included in the Company’s
filings with the Securities and Exchange Commission.
  18
  Except as
required by applicable law and regulation, the Company does not undertake – and
specifically disclaims any obligation – to publicly release the results of any
revisions that may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
  19
  Overview
 
 The
Company’s results of operation depend primarily on net interest and dividend
income, which is the difference between the interest and dividend income earned
on its interest-earning assets, such as loans and securities, and the interest
expense on its interest-bearing liabilities, such as deposits and borrowings.
The Company also generates noninterest income, primarily from fees and service
charges.  Gains on sales of loans and securities and cash surrender
value of life insurance policies are added sources of noninterest
income.  The Company’s noninterest expense primarily consists of
employee compensation and benefits, occupancy and equipment expense,
advertising, data processing, professional fees and other operating
expenses.
 
 During
the quarter ended September 30, 2008, the U.S. Treasury announced a plan to
place the Federal National Mortgage Association (“Fannie Mae”) and the Federal
Home Loan Mortgage Corporation (“Freddie Mac”) under conservatorship under the
authority of the Federal Housing Finance Agency.  The actions of the
U.S. Government adversely impacted the value of the preferred stock of Fannie
Mae and Freddie Mac.  The Bank owns $4.0 million of Freddie Mac
auction pass-through certificates (APT) issued by trusts sponsored by Merrill
Lynch.  The results of this action, along with general concern in the
market about the future value of Freddie Mac preferred stock, have caused the
values for the APT certificates to decrease materially.  The Company
had recorded a non-cash other-than-temporary impairment (“OTTI”) charge of $3.7
million in the quarter ended September 30, 2008. On October 29, 2008, the U.S.
Treasury clarified that ordinary loss treatment applies to these Freddie Mac APT
certificates. As an ordinary loss, under generally accepted accounting
principles banks may not record the effect of this tax change in their balance
sheets and income statements for financial and regulatory purposes until the
period in which the law was enacted, i.e., the fourth quarter of
2008.  During the quarter ended December 31, 2008, the market value
declined by an additional $274,000 and the Company recorded a non-cash OTTI
charge of $274,000 during the current quarter.  The carrying value of
the Freddie Mac APT certificates is now $46,000 as of December 31,
2008.  On September 15, 2008, Lehman Brothers Holdings Inc. ("LBHI")
filed a petition in the United States Bankruptcy Court for the Southern District
of New York seeking relief under Chapter 11 of the United States Bankruptcy
Code.  This action has adversely impacted the value of Lehman Brothers
corporate debt.  The Bank owns $2.0 million of this corporate debt.
The Company had recorded an OTTI charge of $1.8 million in the quarter ended
September 30, 2008. During the quarter ended December 31, 2008, the market value
declined by an additional $30,000 and the Company recorded a non-cash OTTI
charge of $30,000 during the current quarter.  The carrying value of
the Lehman Brothers corporate debt is $170,000 as of December 31, 2008. At this
time it is unclear when and if the values of both these investments will recover
in the future.  Both of these investments were rated investment grade
by Moody’s and Standard & Poor’s at the time of purchase.
 
 The net
interest margin increased from 2.47% for the quarter ended December 31, 2007 to
2.91% for the quarter ended December 31, 2008.  This resulted in an
$418,000 increase in net interest and dividend income over the
periods.  In addition, noninterest expense decreased $129,000 or 4.7%
during the quarter ended December 31, 2008 compared to the quarter ended
December 31, 2007.  The provision for loan losses increased $288,000
during the quarter ended December 31, 2008 as compared to the quarter ended
December 31, 2007.
 
 The net
interest margin increased from 2.43% for the six months ended December 31, 2007
to 2.81% for the six months ended December 31, 2008.  This resulted in
an $816,000 increase in net interest and dividend income over the
periods.  In addition, noninterest expense decreased $350,000 or 6.3%
during the six months ended December 31, 2008 compared to the six months ended
December 31, 2007.  The provision for loan losses increased $550,000
during the six months ended December 31, 2008 as compared to the six months
ended December 31, 2007.
 
 Critical
Accounting Policies
 
 Critical
accounting policies are those that involve significant judgments and assumptions
by management that have, or could have, a material impact on our income or the
carrying value of our assets.  Our critical accounting policies are
those related to our allowance for loan losses, goodwill and the impairment of
securities.
 
 Allowance for Loan
Losses.  The allowance for loan losses is the amount estimated
by management as necessary to cover credit losses inherent in the loan portfolio
at the balance sheet date.  The allowance is established through the
provision for loan losses which is charged against income.
  20
  Management
performs a quarterly evaluation of the adequacy of the allowance for loan
losses.  We consider a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal and external loan reviews and other relevant factors.  This
evaluation is inherently subjective as it requires material estimates by
management that may be susceptible to significant change.
 
 The
analysis has two components:  specific and general
allocations.  Specific allocations are made for loans for which
collection is questionable and the loan is downgraded.  Additionally,
the size of the allocation is measured by determining an expected collection or,
for collateral-dependent loans, the fair value of the collateral adjusted for
market conditions and selling expenses. For the general allocations, we consider
a variety of factors in establishing this estimate including, but not limited
to, current economic conditions, delinquency statistics, geographic and industry
concentrations, the adequacy of the underlying collateral, the financial
strength of the borrower, historical loan charge offs, results of internal and
external loan reviews and other relevant factors.  This evaluation is
inherently subjective as it requires material estimates by management that may
be susceptible to significant change. Actual loan losses may be significantly
more than the allowances we have established which could have a material
negative effect on our financial results.
 
 Goodwill.  The
Company’s goodwill (the amount paid in excess of fair value of acquired net
assets) is reviewed at least annually to ensure that there have been no events
or circumstances resulting in an impairment of the recorded amount of excess
purchase price.  Adverse changes in the economic environment,
operations of acquired business units, or other factors could result in a
decline in projected fair values.  If the estimated fair value is less
than the carrying amount, a loss would be recognized to reduce the carrying
amount to implied fair value.
 
 Other-Than-Temporary Impairment of
Securities.Management periodically reviews all investment
securities with significant declines in fair value for potential
other-than-temporary impairment pursuant to the guidance provided by SFAS No.
115, “Accounting for Certain Investments in Debt and Equity Securities”.In November
2006, the Financial Accounting Standards Board issued Staff Position (“FSP”) FAS
115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments”.  The FSP addressed the
determination as to when an investment is considered impaired, whether the
impairment is other-than-temporary, and the measurement of an impairment
loss.  It also included accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments.  The guidance in this FSP amended
SFAS No. 115“Accounting for Certain
Investments in Debt and Equity Securities, SFAS No. 124”, “Accounting for
Certain Investments Held by Not-for-Profit Organizations”, and APB Opinion 18,
“The Equity Method of Accounting for Investments in Common Stock”.Management
evaluates the Company’s investment portfolio on an ongoing basis and determined
that $6 million of investments were other-than-temporarily impaired as of
September 30, 2008 and was written-down by $5.5 million as of the quarter
ended September 30, 2008 and an additional write-down of $304,000 during
the quarter ended December 31, 2008, resulting in a charge to income of the same
amounts.  There were no other-than-temporarily impaired investments as
of December 31, 2007.
 
 Management
has discussed the development and selection of these critical accounting
policies with the Audit Committee of the Board of Directors.
  21
 
 Comparison
of Financial Condition at December 31, 2008 and June 30, 2008
 
 Assets
 
 Total
assets decreased to $479.7 million at December 31, 2008 from $494.5 million at
June 30, 2008.  Investments in securities decreased $29.9 million
during the six months ended December 31, 2008, and represented $190.1 million or
39.6% of total assets at December 31, 2008.  Net loans have continued
to grow to $248.2 million at December 31, 2008 from $242.7 million at June 30,
2008 and now represent 51.7% of total assets.  Cash flows from the
investment portfolio have been used to fund this loan growth.
 
 Allowance
for Loan Losses
 
 The table
below indicates the relationships between the allowance for loan losses, total
loans outstanding and nonperforming loans at December 31, 2008 and June 30,
2008.
 
 December
      31,
                
                
                June
      30,2008
                
                
                2008(Dollars
      in thousands)Allowance
      for loan losses
                
                $
                1,888
                
                
                $
                1,758Gross
      loans outstanding
                
                
                249,732
                
                
                
                244,166Nonperforming
      loans
                
                
                3,269
                
                
                
                4,036Allowance/gross
      loans outstanding
                
                
                0.76
                %
                
                
                0.72
                %Allowance/nonperforming
      loans
                
                
                57.8
                %
                
                
                43.6
                %
 
 Past
Due and Nonperforming Loans
 
 The
following table sets forth information regarding past due and non-performing
loans:
 
 December
      31,
                
                
                June
      30,2008
                
                
                2008(in
      thousands)Past
      due 30 days through 89 days and accruing
                
                $
                4,998
                
                
                $
                4,230Past
      due 90 days or more and accruing
                
                $
                1,494
                
                
                $
                3,054Past
      due 90 days or more and nonaccruing
                
                $
                1,775
                
                
                $
                982
 
 Liabilities
 
 Total
liabilities decreased to $443.0 million at December 31, 2008 from $445.1 million
at June 30, 2008.  Total deposits increased to $292.2 million at
December 31, 2008 from $283.7 million at June 30, 2008, an increase of $8.5
million or 3.0%. Borrowed funds decreased to $146.8 million at December 31, 2008
from $156.6 million at June 30, 2008, a decrease of $9.8 million or
6.3%.
 
 Stockholders’
Equity
 
 Shareholders’
equity decreased to $36.7 million at December 31, 2008 from $49.4 million at
June 30, 2008, primarily due to the net loss of $2.0 million and an increase in
other comprehensive loss of $10.4 million.  Included in this increase
in other comprehensive loss is the change from carrying the Company’s
Auction-rate Preferred securities at par to a market value provided by Merrill
Lynch. The unrealized losses on these securities are not necessarily predictive
of the ultimate performance of the underlying collateral, which are all
performing.
  22
 Comparison
of Operating Results for the Three and Six Months Ended December 31, 2008 and
2007
 
 Net
(Loss) Income
 
 Net
income amounted to $2.0 million for the quarter ended December 31, 2008 compared
to net income of $685,000 for the quarter ended December 31,
2007.  This was primarily attributable to the tax benefit recognized
in the current quarter mentioned above in the Overview and an increase in net
interest and dividend income of $418,000 and a decrease in noninterest expense
of $129,000.  The Company had an additional impairment charge on the
Freddie Mac and Lehman Brothers investments of $304,000 for the quarter ended
December 31, 2008.  The provision for loan losses increased by
$288,000.
 
 The net
loss amounted to $2.0 million for the six months ended December 31, 2008
compared to net income of $1.2 million for the six months ended December 31,
2007.  The decrease in net income reflected an OTTI charge on
investments of $5.8 million for the six months ended December 31, 2008. This was
partially offset by an increase in net interest and dividend income of $816,000
and a decrease in noninterest expense of $350,000 and a decrease in income tax
expense of $1.7 million.  The provision for loan losses increased by
$550,000.
 
 23
 
 Interest
and Dividend Income
 
 Interest
and dividend income amounted to $6.5 million for the quarter ended December 31,
2008 as compared to $6.9 million for the quarter ended December 31, 2007, a
decrease of $362,000 or 5.2%.  The decrease in yield on loans had the
greatest impact on interest income when comparing the quarters.  The
yield on loans decreased 48 basis points.  This was partially offset
by an increase in average loan balances of $12.1 million when comparing the
quarters ended December 31, 2008 and 2007.  Average investment
securities decreased $22.6 million and the yield increased 22 basis
points.  Average other earning assets decreased $2.9 million and the
yield decreased by 433 basis points when comparing the quarters ended December
31, 2008 and 2007.  The decrease in yield is due to reductions in
short-term rates implemented by the Federal Open Market Committee since December
31, 2007.
 
 Interest
and dividend income amounted to $13.1 million for the six months ended December
31, 2008 as compared to $13.7 million for the six months ended December 31,
2007, a decrease of $635,000 or 4.6%.  The decrease in yield on loans
had the greatest impact on interest income when comparing these time
periods.  The yield on loans decreased 50 basis
points.  This was partially offset by an increase in average loan
balances of $10.9 million when comparing the six months ended December 31, 2008
and 2007.  Average investment securities decreased $13.7 million and
the yield increased six basis points.  Included in the change in
investment security yields for the six months ended December 31, 2008 was the
accrued interest and dividend income reversed on the Freddie Mac Auction Rate
Preferred and Lehman Brothers investments that were written
down.  Average other earning assets decreased $963,000 and the yield
decreased by 351 basis points when comparing the six months ended December 31,
2008 and 2007.  The decrease in yield is due to reductions in
short-term rates implemented by the Federal Open Market Committee since December
31, 2007.
 
 Interest
Expense
 
 Interest
expense amounted to $3.2 million for the quarter ended December 31, 2008 as
compared to $4.0 million for the quarter ended December 31, 2007, a decrease of
$780,000 or 19.4%.  The decrease in rates on interest-bearing
liabilities had the greatest impact on interest expense.  The average
rates paid on interest-bearing liabilities decreased by 84 basis points during
the periods. The average balance of interest-bearing deposits grew by $3.0
million, and the average rate paid decreased by 79 basis points when comparing
the quarters ended December 31, 2008 and 2007.  The average balance of
borrowed money increased by $3.9 million, and the average rate paid decreased by
93 basis points when comparing the quarters ended December 31, 2008 and
2007.  Average brokered deposits decreased $5.1 million for the
quarter ended December 31, 2008 as compared to the quarter ended December 31,
2007.  We replaced brokered deposits with Federal Home Loan Bank of
Boston (FHLBB) advances, which were significantly lower in cost than the
brokered deposits.
 
 Interest
expense amounted to $6.6 million for the six months ended December 31, 2008 as
compared to $8.0 million for the six months ended December 31, 2007, a decrease
of $1.5 million or 18.1%.  The decrease in rates on interest-bearing
liabilities had the greatest impact on interest expense.  The average
rates paid on interest-bearing liabilities decreased by 80 basis points during
the periods. The average balance of interest-bearing deposits grew by $2.0
million, and the average rate paid decreased by 71 basis points when comparing
the six months ended December 31, 2008 and 2007.  The average balance
of borrowed money increased by $6.9 million, and the average rate paid decreased
by 98 basis points when comparing the six months ended December 31, 2008 and
2007.  Average brokered deposits decreased $6.5 million for the six
months ended December 31, 2008 as compared to the six months ended December 31,
2007.  We replaced brokered deposits with Federal Home Loan Bank of
Boston (FHLBB) advances, which were significantly lower in cost than the
brokered deposits.
 
 Net
Interest and Dividend Income
 
 Net
interest and dividend income amounted to $3.3 million for the quarter ended
December 31, 2008 as compared to $2.9 million for the quarter ended December 31,
2007, an increase of $418,000 or 14.5%.  Net interest spread increased
69 basis points to 2.57% as compared to 1.88% and net interest margin increased
44 basis points to 2.91% as compared to 2.47% when comparing the quarters ended
December 31, 2008 and 2007.
 
 Net
interest and dividend income amounted to $6.5 million for the six months ended
December 31, 2008 as compared to $5.7 million for the six months ended December
31, 2007, an increase of $816,000 or 14.4%.  Net interest spread
increased 58 basis points to 2.43% as compared to 1.85% and net interest margin
increased 38 basis points to 2.81% as compared to 2.43% when comparing the six
months ended December 31, 2008 and 2007.
  24
  Due to
the large portion of fixed rate loans and securities in the Company’s asset
portfolio, interest rate risk is a concern and the Company continues to monitor
and adjust the asset and liability mix as much as possible to take advantage of
the benefits and reduce the risks or potential negative effects of a rising rate
environment.  Management attempts to mitigate the interest rate risk
through balance sheet composition.  One strategy has been to extend
out FHLBB advance maturities and take advantage of relatively low cost
funding.
 
 Provision
for Loan Losses
 
 The
provision for loan losses amounted to $323,000 for the quarter ended December
31, 2008 and $35,000 for the quarter ended December 31, 2007. This increase in
the level of provision was primarily a result of a single commercial loan
charge-off of $400,000 during the period ended December 31, 2008. The balance of
this loan was transferred to Other Real Estate Owned as of December 31,
2008.  The allowance for loan losses is based on management’s estimate
of the probable losses inherent in the portfolio, considering the impact of
certain factors.  Among the factors management may consider are prior
loss experience, current economic conditions and their effects on borrowers, the
character and size of the portfolio, trends in nonperforming loans and
delinquency rates and the performance of individual loans in relation to
contractual terms.  The provision for loan losses reflects adjustments
to the allowance based on management’s review of the portfolio in light of those
conditions. The ratio of the allowance to gross loans outstanding was 0.76% as
of December 31, 2008 compared to 0.72% as of June 30, 2008.  Net
charge-offs were $431,000 for the quarter ended December 31, 2008.
 
 The
provision for loan losses amounted to $597,000 for the six months ended December
31, 2008 and $47,000 for the six months ended December 31, 2007. This increase
in the level of provision was primarily a result of the single commercial loan
charge-off described above.  The ratio of the allowance to gross loans
outstanding was 0.76% as of December 31, 2008 compared to 0.72% as of June 30,
2008.  Net charge-offs were $467,000 for the six months ended December
31, 2008.
 
 Noninterest
Income (Charge)
 
 Noninterest
income amounted to $598,000 for the quarter ended December 31, 2008 as compared
to noninterest income of $782,000 for the quarter ended December 31, 2007, a
decrease of $184,000 or 23.5%. This decrease was primarily due to OTTI
investment write-downs of $304,000. The write-downs included $274,000 in Freddie
Mac pass-through auction-rate securities issued by trusts consisting solely of
Freddie Mac preferred stock and $30,000 in Lehman Brothers corporate
debt.  The current carrying values as of December 31, 2008 of the
Freddie Mac auction-rate securities and Lehman Brothers corporate debt was
$46,000 and $170,000, respectively.   This decrease in the
quarter ended December 31, 2008 was partially offset by increased BOLI
income.
 
 Noninterest
charge amounted to $4.1 million for the six months ended December 31, 2008 as
compared to noninterest income of $1.5 million for the six months ended December
31, 2007, a decrease of $5.6 million or 368.4%. This decrease was primarily due
to OTTI investment write-downs of $5.8 million. The write-downs included $3.95
million in Freddie Mac pass-through auction-rate securities issued by trusts
consisting solely of Freddie Mac preferred stock and $1.83 million in Lehman
Brothers corporate debt.  The current carrying values as of December
31, 2008 of the Freddie Mac auction-rate securities and Lehman Brothers
corporate debt was $46,000 and $170,000, respectively.   This
decrease in the six months ended December 31, 2008 was partially offset by
increased BOLI income and service fees.
  25
 Noninterest
Expense
 
 Noninterest
expense amounted to $2.6 million for the quarter ended December 31, 2008 as
compared to $2.7 million for the quarter ended December 31, 2007, a decrease of
$129,000 or 4.7%.  Compensation and benefits expense increased $1,000
or 0.1%.  Occupancy and equipment expense decreased $18,000 or 6.2%
due primarily to lower depreciation expense.  Data processing,
advertising & marketing and other noninterest expense decreased $112,000 or
11.7% primarily due to decreases in data processing, Director stock award
expense, and legal expense.  This was partially offset by increases in
FDIC assessments and item processing expenses.
 
 Noninterest
expense amounted to $5.2 million for the six months ended December 31, 2008 as
compared to $5.5 million for the six months ended December 31, 2007, a decrease
of $350,000 or 6.3%.  Compensation and benefits expense decreased
$38,000 or 1.3%.  This decrease was primarily due to a reduction in
employee stock award expense due to forfeitures.  This decrease was
partially offset by an increase in salary expense.  Occupancy and
equipment expense decreased $37,000 or 6.4% due primarily to lower depreciation
expense. Data processing, advertising & marketing and other noninterest
expense decreased $275,000 or 14.1% primarily due to decreases in data
processing, Director stock awards, postage expense and item processing
expense.  This was partially offset by increases in FDIC assessments
and miscellaneous expenses.
 
 Provision
for Income Taxes
 
 The
income tax benefit amounted to $1.0 million for the quarter ended December 31,
2008 as compared to $200,000 in income tax expense for the quarter ended
December 31, 2007. This benefit was due to the “other-than-temporary impairment”
charge of $3.95 million of Freddie Mac pass-through auction rate securities
owned by the Bank recognized primarily during the quarter ended September 30,
2008. On October
29, 2008, the U.S. Treasury clarified that ordinary loss treatment applies to
these Freddie Mac APT certificates. As an ordinary loss,  under
generally accepted accounting principles companies could not record the effect
of this tax change in their balance sheets and income statements for financial
and regulatory purposes until the period in which the law was enacted, i.e., the
fourth quarter of 2008.
 
 The
income tax benefit amounted to $1.3 million for the six months ended December
31, 2008 as compared to $372,000 in income tax expense for the six months ended
December 31, 2007. This benefit was due to the “other-than-temporary impairment”
charges of $1.83 million against the Lehman Brothers securities and the $3.95
million of Freddie Mac pass-through auction rate securities owned by the
Bank.
 
 26
  Average
Balance Sheet
 
 The
following tables set forth average balance sheets, average yields and costs, and
certain other information for the periods indicated.  No
tax-equivalent yield adjustments were made, as the effect thereof was not
material.  All average balances are daily average
balances.  Non-accrual loans were included in the computation of
average balances, but have been reflected in the table as loans carrying a zero
yield.  The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income
or expense.  Yields and costs are annualized.
 
 For
      the Three Months Ended December 31,2008
                
                
                2007(Dollars
      in thousands)Average
                
                
                Interest/
                
                
                Yield/
                
                
                Average
                
                
                Interest/
                
                
                Yield/Interest-earning
      assets:
                
                Balance
                
                
                Dividends
                
                
                Cost
                
                
                Balance
                
                
                Dividends
                
                
                CostInvestment
      securities
                
                $
                196,254
                
                
                $
                2,791
                
                
                
                5.64
                %
                
                $
                218,866
                
                
                $
                2,990
                
                
                
                5.42
                %Loans
                
                
                251,707
                
                
                
                3,745
                
                
                
                5.90
                %
                
                
                239,554
                
                
                
                3,852
                
                
                
                6.38
                %Other
      earning assets
                
                
                2,140
                
                
                
                1
                
                
                
                0.19
                %
                
                
                5,000
                
                
                
                57
                
                
                
                4.52
                %Total
      interest-earnings assets
                
                
                450,101
                
                
                
                6,537
                
                
                
                5.76
                %
                
                
                463,420
                
                
                
                6,899
                
                
                
                5.91
                %Non-interest-earning
      assets
                
                
                32,363
                
                
                
                
                
                
                
                
                
                
                
                28,029Total
      assets
                
                $
                482,464
                
                
                
                
                
                
                
                
                
                
                $
                491,449Interest-bearing
      liabilities:NOW
      accounts
                
                $
                38,204
                
                
                
                224
                
                
                
                2.33
                %
                
                $
                27,518
                
                
                
                195
                
                
                
                2.81
                %Savings
      accounts
                
                
                45,155
                
                
                
                69
                
                
                
                0.61
                %
                
                
                47,751
                
                
                
                90
                
                
                
                0.75
                %Money
      market accounts
                
                
                11,918
                
                
                
                50
                
                
                
                1.66
                %
                
                
                15,688
                
                
                
                76
                
                
                
                1.92
                %Time
      deposits
                
                
                153,699
                
                
                
                1,400
                
                
                
                3.61
                %
                
                
                154,978
                
                
                
                1,851
                
                
                
                4.74
                %Borrowed
      money
                
                
                153,279
                
                
                
                1,491
                
                
                
                3.86
                %
                
                
                149,348
                
                
                
                1,802
                
                
                
                4.79
                %Total
      interest-bearing liabilities
                
                
                402,255
                
                
                
                3,234
                
                
                
                3.19
                %
                
                
                395,283
                
                
                
                4,014
                
                
                
                4.03
                %Non-interest-bearing
      demand deposits
                
                
                36,982
                
                
                
                
                
                
                
                
                
                
                
                39,545Other
      non-interest-bearing liabilities
                
                
                4,492
                
                
                
                
                
                
                
                
                
                
                
                3,729Capital
      accounts
                
                
                38,735
                
                
                
                
                
                
                
                
                
                
                
                52,892Total
      liabilities and capital accounts
                
                $
                482,464
                
                
                
                
                
                
                
                
                
                
                $
                491,449Net
      interest income
                
                
                
                
                
                $
                3,303
                
                
                
                
                
                
                
                
                
                
                $
                2,885Interest
      rate spread
                
                
                
                
                
                
                
                
                
                
                2.57
                %
                
                
                
                
                
                
                
                
                
                
                1.88
                %Net
      interest-earning assets
                
                $
                47,846
                
                
                
                
                
                
                
                
                
                
                $
                68,137Net
      interest margin
                
                
                
                
                
                
                
                
                
                
                2.91
                %
                
                
                
                
                
                
                
                
                
                
                2.47
                %Average
      earning assets toaverage
      interest-bearing liabilities
                
                
                
                
                
                
                
                
                
                
                111.89
                %
                
                
                
                
                
                
                
                
                
                
                117.24
                %
  27
  For
      the Six Months Ended December 31,2008
                
                
                2007(Dollars
      in thousands)Average
                
                
                Interest/
                
                
                Yield/
                
                
                Average
                
                
                Interest/
                
                
                Yield/Interest-earning
      assets:
                
                Balance
                
                
                Dividends
                
                
                Cost
                
                
                Balance
                
                
                Dividends
                
                
                CostInvestment
      securities
                
                $
                205,750
                
                
                $
                5,582
                
                
                
                5.38
                %
                
                $
                219,476
                
                
                $
                5,888
                
                
                
                5.32
                %Loans
                
                
                249,475
                
                
                
                7,451
                
                
                
                5.92
                %
                
                
                238,552
                
                
                
                7,717
                
                
                
                6.42
                %Other
      earning assets
                
                
                2,284
                
                
                
                13
                
                
                
                1.13
                %
                
                
                3,247
                
                
                
                76
                
                
                
                4.64
                %Total
      interest-earnings assets
                
                
                457,509
                
                
                
                13,046
                
                
                
                5.66
                %
                
                
                461,275
                
                
                
                13,681
                
                
                
                5.88
                %Non-interest-earning
      assets
                
                
                30,091
                
                
                
                
                
                
                
                
                
                
                
                29,026Total
      assets
                
                $
                487,600
                
                
                
                
                
                
                
                
                
                
                $
                490,301Interest-bearing
      liabilities:NOW
      accounts
                
                $
                37,826
                
                
                
                448
                
                
                
                2.35
                %
                
                $
                27,114
                
                
                
                364
                
                
                
                2.66
                %Savings
      accounts
                
                
                45,231
                
                
                
                137
                
                
                
                0.60
                %
                
                
                48,308
                
                
                
                181
                
                
                
                0.74
                %Money
      market accounts
                
                
                12,174
                
                
                
                103
                
                
                
                1.68
                %
                
                
                16,410
                
                
                
                160
                
                
                
                1.93
                %Time
      deposits
                
                
                152,369
                
                
                
                2,817
                
                
                
                3.67
                %
                
                
                153,748
                
                
                
                3,652
                
                
                
                4.71
                %Borrowed
      money
                
                
                155,825
                
                
                
                3,063
                
                
                
                3.90
                %
                
                
                148,930
                
                
                
                3,662
                
                
                
                4.88
                %Total
      interest-bearing liabilities
                
                
                403,425
                
                
                
                6,568
                
                
                
                3.23
                %
                
                
                394,510
                
                
                
                8,019
                
                
                
                4.03
                %Non-interest-bearing
      demand deposits
                
                
                36,569
                
                
                
                
                
                
                
                
                
                
                
                39,950Other
      non-interest-bearing liabilities
                
                
                4,171
                
                
                
                
                
                
                
                
                
                
                
                3,716Capital
      accounts
                
                
                43,435
                
                
                
                
                
                
                
                
                
                
                
                52,125Total
      liabilities and capital accounts
                
                $
                487,600
                
                
                
                
                
                
                
                
                
                
                $
                490,301Net
      interest income
                
                
                
                
                
                $
                6,478
                
                
                
                
                
                
                
                
                
                
                $
                5,662Interest
      rate spread
                
                
                
                
                
                
                
                
                
                
                2.43
                %
                
                
                
                
                
                
                
                
                
                
                1.85
                %Net
      interest-earning assets
                
                $
                54,084
                
                
                
                
                
                
                
                
                
                
                $
                66,765Net
      interest margin
                
                
                
                
                
                
                
                
                
                
                2.81
                %
                
                
                
                
                
                
                
                
                
                
                2.43
                %Average
      earning assets toaverage
      interest-bearing liabilities
                
                
                
                
                
                
                
                
                
                
                113.41
                %
                
                
                
                
                
                
                
                
                
                
                116.92
                %
  28
 
 The
following tables set forth the effects of changing rates and volumes on our net
interest income for the periods indicated.  The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior
volume).  The volume column shows the effects attributable to changes
in volume (changes in volume multiplied by prior rate).  The net
column represents the sum of the prior columns.  For purposes of this
table, changes attributable to changes in both rate and volume that cannot be
segregated have been allocated proportionately based on the changes due to rate
and the changes due to volume.
  For
      the Three Months Ended December 31, 2008Compared
      to the Three Months Ended December 31, 2007Increase(Decrease)
      Due toINTEREST
      INCOME
                
                Rate
                
                
                Volume
                
                
                NetInvestment
      securities
                
                $
                640
                
                
                $
                (839
                )
                
                $
                (199
                )Loans
                
                
                (987
                )
                
                
                880
                
                
                
                (107
                )Other
      interest-earning assets
                
                
                (35
                )
                
                
                (21
                )
                
                
                (56
                )TOTAL
      INTEREST INCOME
                
                
                (382
                )
                
                
                20
                
                
                
                (362
                )INTEREST
      EXPENSE:NOW
      accounts
                
                
                (176
                )
                
                
                205
                
                
                
                29Savings
      accounts
                
                
                (16
                )
                
                
                (5
                )
                
                
                (21
                )Money
      Market accounts
                
                
                (9
                )
                
                
                (17
                )
                
                
                (26
                )Time
      deposits
                
                
                (436
                )
                
                
                (15
                )
                
                
                (451
                )Other
      borrowed money
                
                
                (605
                )
                
                
                294
                
                
                
                (311
                )TOTAL
      INTEREST INCOME
                
                
                (1,242
                )
                
                
                462
                
                
                
                (780
                )CHANGE
      IN NET INTEREST INCOME
                
                $
                860
                
                
                $
                (442
                )
                
                $
                418
  29
 For
      the Six Months Ended December 31, 2008Compared
      to the Six Months Ended December 31, 2007Increase(Decrease)
      Due toINTEREST
      INCOME
                
                Rate
                
                
                Volume
                
                
                NetInvestment
      securities
                
                $
                176
                
                
                $
                (482
                )
                
                $
                (306
                )Loans
                
                
                (1,045
                )
                
                
                779
                
                
                
                (266
                )Other
      interest-earning assets
                
                
                (45
                )
                
                
                (18
                )
                
                
                (63
                )TOTAL
      INTEREST INCOME
                
                
                (914
                )
                
                
                279
                
                
                
                (635
                )INTEREST
      EXPENSE:NOW
      accounts
                
                
                (112
                )
                
                
                196
                
                
                
                84Savings
      accounts
                
                
                (33
                )
                
                
                (11
                )
                
                
                (44
                )Money
      Market accounts
                
                
                (19
                )
                
                
                (38
                )
                
                
                (57
                )Time
      deposits
                
                
                (803
                )
                
                
                (32
                )
                
                
                (835
                )Other
      borrowed money
                
                
                (1,033
                )
                
                
                434
                
                
                
                (599
                )TOTAL
      INTEREST INCOME
                
                
                (2,000
                )
                
                
                549
                
                
                
                (1,451
                )CHANGE
      IN NET INTEREST INCOME
                
                $
                1,086
                
                
                $
                (270
                )
                
                $
                816
 
 Market
Risk, Liquidity and Capital Resources
 
 Market
Risk
  The
majority of our assets and liabilities are monetary in
nature.  Consequently, our most significant form of market risk is
interest rate risk (“IRR”).  Our assets, consisting primarily of
mortgage loans, have longer maturities than our liabilities, consisting
primarily of deposits and other borrowings.  As a result, a principal
part of our business strategy is to manage IRR and reduce the exposure of our
net interest income (“NII”) to changes in market interest
rates.  Accordingly, our Board of Directors has established an
Asset/Liability Management Committee which is responsible for evaluating the IRR
inherent in our assets and liabilities, for determining the level of risk that
is appropriate given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with
the guidelines approved by the Board of Directors.  With the
assistance of an IRR management consultant, the committee monitors the level of
IRR on a regular basis and generally meets at least on a quarterly basis to
review our asset/liability policies and IRR position.
  We have
sought to manage our IRR in order to minimize the exposure of our earnings and
capital to changes in interest rates.  As part of our ongoing
asset/liability management, we currently use the following strategies to manage
our IRR: (i) using alternative funding sources, such as advances from the
Federal Home Loan Bank of Boston, to “match fund” certain investments and/or
loans; (ii) continued emphasis on increasing core deposits; (iii) offering
adjustable rate and shorter-term home equity loans, commercial real estate
loans, construction loans and commercial and industrial loans; (iv) offering a
variety of consumer loans, which typically have shorter-terms; (v) investing in
mortgage-backed securities with variable rates or fixed rates with shorter
durations.  Shortening the average maturity of our interest-earning
assets by increasing our investments in shorter-term loans and securities, as
well as loans and securities with variable rates of interest, helps to better
match the maturities and interest rates of our assets and liabilities, thereby
reducing the exposure of our NII to changes in market interest
rates.
 
 Net interest income at-risk measures
the risk of a decline in earnings due to potential short-term and long term
changes in interest rates.  The table below represents an analysis of
our IRR as measured by the estimated changes in NII, resulting from an
instantaneous and sustained parallel shift in the yield curve (+200 and -200
basis points) at June 30, 2008 and September 30, 2008.
 
 30
 
 Net
      Interest Income At-RiskEstimated
      Increase (Decrease)
                
                Estimated
      Increase (Decrease)Change
      in Interest Rates
                
                in
      NII
                
                in
      NII(Basis
      Points)
                
                September
      30, 2008
                
                June
      30, 2008-
      100
                
                2.41%
                
                1.17%Stable+
      200
                
                -12.19%
                
                -7.48%
  The
preceding income simulation analysis does not represent a forecast of NII and
should not be relied upon as being indicative of expected operating
results.  These hypothetical estimates are based upon numerous
assumptions, which are subject to change, including: the nature and timing of
interest rate levels including the yield curve shape, prepayments on loans and
securities, deposit decay rates, pricing decisions on loans and deposits,
reinvestment/replacement of asset and liability cash flows, and
others.  Also, as market conditions vary prepayment/refinancing levels
will likely deviate from those assumed, the varying impact of interest rate
changes on caps and floors embedded in adjustable rate loans, early withdrawal
of deposits, changes in product preferences, and other internal/external
variables.  We do not believe that there has been a material change in
our NII position between September 30, 2008 and December 31, 2008.
  Net Portfolio Value Simulation
Analysis.The Office of Thrift Supervision requires the
computation of amounts by which the net present value of an institution’s cash
flow from assets, liabilities and off-balance sheet items (the institution’s net
portfolio value or “NPV”) would change in the event of a range of assumed
changes in market interest rates.  The Office of Thrift Supervision
provides all institutions that file a Consolidated Maturity/Rate Schedule as a
part of their quarterly Thrift Financial Report an interest rate sensitivity
report of net portfolio value.  The Office of Thrift Supervision
simulation model uses a discounted cash flow analysis and an option-based
pricing approach to measuring the interest rate sensitivity of net portfolio
value.  Historically, the Office of Thrift Supervision model estimated
the economic value of each type of asset, liability and off-balance sheet
contract under the assumption that the United States Treasury yield curve
increases or decreases instantaneously by 100 to 300 basis point
increments.  However, given the current low level of market interest
rates, we did not prepare a net portfolio value calculation for an interest rate
decrease of greater than 100 basis points.  A basis point equals
one-hundredth of one percent, and 200 basis points equals two percent, an
increase in interest rates from 3% to 5% would mean, for example, a 200 basis
point increase in the “Change in Interest Rates” column below.  The
Office of Thrift Supervision provides us the results of the interest rate
sensitivity model, which is based on information we provide to the Office of
Thrift Supervision to estimate the sensitivity of our net portfolio
value.
  The
tables below set forth, at September 30, 2008, indicated the estimated changes
in our net portfolio value that would result from the designated instantaneous
changes in the United States Treasury yield curve.  Computations of
prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, loan
prepayments and deposit decay, and should not be relied upon as indicative of
actual results.  This data is for Putnam Bank only and does not
include any yield curve changes in the assets of PSB Holdings,
Inc.  We do not believe that there has been a material change in our
NPV position between September 30, 2008 and December 31, 2008.
  31
 NPV
      as a Percentage of PresentValue
      of Assets (3)Estimated
      Increase (Decrease) inChange
      in
                
                
                
                
                
                NPV
                
                
                
                
                
                IncreaseInterest
      Rates
                
                
                Estimated
                
                
                
                
                
                
                
                
                
                
                
                (Decrease)(basis
      points) (1)
                
                
                NPV
      (2)
                
                
                Amount
                
                
                Percent
                
                
                NPV
      Ratio (4)
                
                
                (basis
      points)+300
                
                
                $
                10,402
                
                
                $
                (26,535
                )
                
                
                -72
                %
                
                
                2.31
                %
                
                -527+200
                
                
                $
                20,266
                
                
                $
                (16,670
                )
                
                
                -45
                %
                
                
                4.37
                %
                
                -321+100
                
                
                $
                29,677
                
                
                $
                (7,259
                )
                
                
                -20
                %
                
                
                6.23
                %
                
                -1350
                
                
                $
                36,936
                
                
                $
                -
                
                
                
                0
                %
                
                
                7.58
                %
                
                0-100
                
                
                $
                40,630
                
                
                $
                3,694
                
                
                
                10
                %
                
                
                8.20
                %
                
                62
  
 (1)
              Assumes
      an instantaneous uniform change in interest rates at all
      maturities.(2)
              NPV
      is the discounted present value of expected cash flows from assets,
      liabilities and off-balance sheet contracts.(3)
              Present
      value of assets represents the discounted present value of incoming cash
      flows on interest-earning assets.(4)
              NPV
      ratio represents NPV divided by the present value of
    assets.
 
 Liquidity
 
 The term
liquidity refers to the ability of the Company and the Bank to meet current and
future short-term financial obligations.  The Company and the Bank
further define liquidity as the ability to generate adequate amounts of cash to
fund loan originations, deposit withdrawals and operating
expenses.  Liquidity management is both a daily and long-term function
of business management. The Bank’s primary sources of liquidity are deposits,
scheduled amortization and prepayments of loan principal and mortgage-related
securities, and Federal Home Loan Bank of Boston borrowings.  The Bank
can borrow funds from the Federal Home Loan Bank of Boston based on eligible
collateral of loans and securities.  The Bank had Federal Home Loan
Bank of Boston borrowings as of December 31, 2008 of $142.7 million with unused
borrowing capacity of $57.5 million.  The Bank had no brokered
certificates of deposits as of December 31, 2008.  The Bank has an
internal limit of wholesale borrowings to total assets ratio of
40.0%.  As of December 31, 2008, the ratio of wholesale borrowings to
total assets was 29.9%.
 
 The
Bank’s primary investing activities are the origination of loans and the
purchase of investment securities.  During the six months ended
December 31, 2008 and 2007, the Bank originated loans for the portfolio net of
principal payments of $7.2 million and $6.2 million,
respectively.  Purchases of securities totaled $5.1 million and $45.0
million, for the six months ended December 31, 2008 and 2007,
respectively.
 
 Loan
repayment and maturing investment securities are a relatively predictable source
of funds.  However, deposit flows, calls of investment securities and
prepayments of loans and mortgage-backed securities are strongly influenced by
interest rates, general and economic conditions and competition in the
marketplace.  These factors reduce the predictability of the timing of
these sources of funds.  Deposit flows are affected by the level of
interest rates, by the interest rates and products offered by competitors and by
other factors.  The Bank monitors its liquidity position frequently
and anticipates that it will have sufficient funds to meet its current funding
commitments.
 
 Certificates
of deposits totaled $157.6 million at December 31, 2008. The Bank relies on
competitive rates, customer service and long-standing relationships with
customers to retain deposits.  Based on the Bank’s experience with
deposit retention and current retention strategies, management believes that,
although it is not possible to predict future terms and conditions upon renewal,
a significant portion of such deposits will remain with the Bank.
 
 The Bank
was well capitalized at December 31, 2008 and exceeded each of the applicable
regulatory capital requirements at such date.
  32
  Required
                
                
                ActualRatio
      of Tier 1 Capital to total assets
                
                4%
                
                
                7.98%Ratio
      of Total Risk Based Capital to risk-weighted assets
                8%
                
                
                15.57%Ratio
      of Tier 1 Risk Based Capital to risk-weighted assets
                4%
                
                
                14.86%
 
 Management
is not aware of any known trends, events or uncertainties that will have or are
reasonably likely to have a material effect on the Company’s or the Bank’s
liquidity, capital or operations, nor is management aware of any current
recommendations by regulatory authorities which, if implemented, would have a
material effect on the Company’s or the Bank’s liquidity, capital or
operations.
 
 Off-Balance
Sheet Arrangements
 
 In
addition to the normal course of operations, we engage in a variety of financial
transactions that, in accordance with generally accepted accounting principles
are not recorded in our financial statements.  These transactions
involve, to varying degrees, elements of credit, interest rate, and liquidity
risk.  Such transactions are used primarily to manage customers’
requests for funding and take the form of loan commitments, lines of credit, and
letters of credit.
 
 For the
quarter ended December 31, 2008, we engaged in no off-balance sheet transactions
reasonably likely to have a material effect on our financial condition, results
of operations or cash flows.
 
 Item
3.  Quantitative and Qualitative Disclosures About Market
Risk
 
 Not
applicable to smaller reporting companies
 
 Item
4.  Controls and Procedures
 
 Not
applicable
 
 Item
4T.  Controls and Procedures
 
 Under the
supervision and with the participation of the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, the Company evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15(d)-15(e) under the Exchange
Act) as of the end of the period covered by this report.  Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms and in timely altering them to material information relating to
the Company (or its consolidated subsidiaries) required to be filed in its
periodic SEC filings.
 
 There has
been no change in the Company’s internal control over financial reporting in
connection with the quarterly evaluation that occurred during the Company’s last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
  33
 Part
II. – OTHER INFORMATION
 
 Item
1.           Legal
Proceedings – Not applicable
 
 Item
1A.        Risk Factors
 
 The risks
set forth below, in addition to the other risks described in this quarterly
report, represent material changes from those risk factors previously disclosed
the Company’s previous filings with the Securities and Exchange Commission, and
may adversely affect our business, financial condition and operating
results.  In addition to the risks set forth below and the other risks
described in this quarterly report, there may also be additional risks and
uncertainties that are not currently known to us or that we currently deem to be
immaterial that could materially and adversely affect our business, financial
condition or operating results.  As a result, past financial
performance may not be a reliable indicator of future performance, and
historical trends should not be used to anticipate results or trends in future
periods. Further, to the extent that any of the information contained in this
Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk
factors set forth below also are cautionary statements identifying important
factors that could cause our actual results to differ materially from those
expressed in any forward-looking statements made by or on behalf of
us.
  Recent
Legislation in Response to Market and Economic Conditions May Significantly
Affect Our Operations, Financial Condition, and Earnings.
  Instability
and volatility in the credit markets has led to the adoption of legislation and
regulatory actions which have the potential to significantly affect financial
institutions and holding companies, including us. Under the Emergency Economic
Stabilization Act of 2008 (“EESA”), the U.S. Department of the Treasury has the
authority to expend up to $700 billion to assist in stabilizing and providing
liquidity to the U.S. financial system. Although it was originally contemplated
that these funds would be used primarily to purchase troubled assets under the
Troubled Asset Relief Program (“TARP”), on October 14, 2008, the Treasury
announced the Capital Purchase Program (“CPP”) under which it will purchase up
to $250 billion of non-voting senior preferred shares of certain qualified
financial institutions in an attempt to encourage U.S. financial institutions to
build capital to increase the flow of financing to U.S. businesses and consumers
and to support the U.S. economy. In addition, Congress has temporarily increased
FDIC deposit insurance from $100,000 to $250,000 per depositor through
December 31, 2009. The FDIC has also announced the creation of the
Temporary Liquidity Guarantee Program (“TLGP”) which is intended to strengthen
confidence and encourage liquidity in the U.S. financial institutions by
temporarily guaranteeing newly issued senior unsecured debt of participating
organizations and providing full coverage for noninterest-bearing transaction
deposit accounts (such as business checking accounts, interest-bearing
transaction accounts paying 50 basis points or less and lawyers’ trust
accounts), regardless of dollar amount until December 31,
2009.
  We can
provide no assurances that these actions will have the beneficial effects that
are intended, particularly with respect to the extreme levels of volatility and
limited credit availability currently being experienced. These new laws,
regulations, and changes will increase our FDIC insurance premiums and may also
increase our costs of regulatory compliance and of doing business, and otherwise
affect our operations. At this time, we cannot fully determine the extent of
these effects, or any other effects, on us caused by these and future laws and
regulations. However, they may significantly affect the markets in which we do
business, the markets for and value of our investments, and our ongoing
operations, costs and profitability.
  Lack
of Consumer Confidence in Financial Institutions May Decrease Our Level of
Deposits.
 
 Our level
of deposits may be affected by lack of consumer confidence in financial
institutions, which have caused fewer depositors to be willing to maintain
deposits that are not FDIC-insured accounts. That may cause depositors to
withdraw deposits and place them in other institutions or to invest uninsured
funds in investments perceived as being more secure, such as securities issued
by the United States Treasury. These consumer preferences may cause us to
be forced to pay higher interest rates to retain deposits and may constrain
liquidity as we seek to meet funding needs caused by reduced deposit
levels.
  34
 
 Future
Legislative or Regulatory Actions Responding to Perceived Financial and Market
Problems Could Impair Our Rights Against Borrowers.
 
 There
have been proposals made by members of Congress and others that would reduce the
amount distressed borrowers are otherwise contractually obligated to pay under
their mortgage loans and limit an institution’s ability to foreclose on mortgage
collateral. Were proposals such as these, or other proposals limiting our rights
as a creditor, to be implemented, we could experience increased credit losses or
increased expense in pursuing our remedies as a creditor.
 
 Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceedsa)
      Not applicableb)
      Not applicablec)
      Not applicableItem
      3.
              Defaults
      Upon Senior Securities – Not applicableItem
      4.
              Submission
      of Matters to a Vote of Security
Holders
 
 The
Company convened its 2008 Annual Meeting of Stockholders on November 7,
2008.  At the meeting, the stockholders of the Company considered and
voted on the following proposals:
 
 Proposal
No. 1.  The election of Mary E. Patenaude, Robert J. Halloran, Jr.,
and Jitendra K. Sinha, each to serve as a director for a term of three years and
until his or her successor has been elected and qualified.
 
 For
                
                
                WithheldMary
      E. Patenaude
                
                
                5,782,723
                
                
                
                23,281Robert
      J. Halloran, Jr.
                
                
                5,722,090
                
                
                
                83,914Jitendra
      K. Sinha
                
                
                5,782,723
                
                
                
                23,281
 
 The term
in office of directors Thomas A. Borner, Richard A. Loomis, Paul  M.
Kelly, Charles H. Puffer, Charles W. Bentley, Jr. and John P. Miller continued
after the 2008 Annual Meeting.
 
 Proposal
No. 2.  The ratification of the appointment of Shatswell, MacLeod
& Company, P.C. as the independent registered public accounting firm of the
Company for the fiscal year ending June 30, 2009.
 
 For
                
                Against
                
                AbstainNumber
      of votes
                5,773,249
                
                16,586
                
                16,169Percentage
      of shares voting in person or by proxy
                99.7%
                
                0.3%
 
 Item
      5.
              Other
      Informationa.
              Not
      applicable.b.
              There
      were no material changes to the procedures by which security holders may
      recommend nominees to the Company’s Board of Directors during the period
      covered by this Form 10-Q.
 
 35
  Item
      6.
              ExhibitsExhibits31.1
              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.
  36
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 PSB
      HOLDINGS, INC.(Registrant)Date
              February 13, 2009
              
              /s/  Thomas A.
    BornerThomas
      A. BornerChief
      Executive OfficerDate
              February 13, 2009
              
              /s/  Robert J. Halloran,
      Jr.Robert
      J. Halloran, Jr.President,
      Chief Financial Officer and
Treasurer






37