PSB 10Q 2010 Q2 Quarterly report

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, 2009

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.

x YES o NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o YES o NO

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

Large accelerated filer o Accelerated filer �� o

Non-accelerated filer o Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

o YES x NO

As of February 1, 2010, there were 6,529,209 shares of the registrant’s common stock outstanding.

PSB Holdings, Inc.

Table of Contents

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets at December 31, 2009 (Unaudited) and June 30, 2009 (Audited)	1

	Condensed Consolidated Statements of Income (Loss) for the Three and Six Months Ended December 31, 2009 and 2008 (Unaudited)	2

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended December 31, 2009 and 2008 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2009 and 2008 (Unaudited)	4

	Notes to Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

Item 4T.	Controls and Procedures	35

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Submission of Matters to a Vote of Security Holders	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

SIGNATURES		37

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PSB Holdings, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

	December 31,			June 30,
	2009			2009
	(Unaudited)			(Audited)
	(in thousands except share data)
ASSETS
Cash and due from depository institutions	$	20,975		$	5,509
Federal funds sold		-			550
Total cash and cash equivalents		20,975			6,059
Securities available for sale (at fair value)		120,753			164,888
Securities held-to-maturity (fair value of $37,168 as of December 31, 2009 and $1,945 as of June 30, 2009)		37,436			2,000
Federal Home Loan Bank stock, at cost		8,056			8,056
Loans held-for-sale		425			1,200
Loans		263,319			266,517
Allowance for loan losses		(2,207	)		(2,200	)
Net loans		261,112			264,317
Premises and equipment		5,458			5,159
Accrued interest receivable		1,635			1,891
Other real estate owned		984			1,211
Goodwill		6,912			6,912
Intangible assets		562			651
Bank owned life insurance		6,052			5,912
Other assets		9,898			9,093

Total assets	$	480,258		$	477,349

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest-bearing	$	36,149		$	35,246
Interest-bearing		288,068			272,853
Total deposits		324,217			308,099
Mortgagors’ escrow accounts		1,505			1,564
Federal Home Loan Bank advances		102,500			120,500
Securities sold under agreements to repurchase		5,972			4,471
Other liabilities		1,974			2,819
Total liabilities		436,168			437,453

Commitments and Contingencies

Stockholders’ Equity
Preferred stock, $0.10 par value, 1,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock, $0.10 par value, 12,000,000 shares authorized, 6,943,125 shares issued, 6,529,209 shares outstanding at December 31, 2009 and June 30, 2009		694			694
Additional paid-in capital		30,700			30,656
Retained earnings		21,219			20,383
Accumulated other comprehensive loss		(2,140	)		(5,277	)
Unearned ESOP shares		(1,940	)		(1,940	)
Unearned stock awards		(232	)		(409	)
Treasury stock, at cost (413,916 shares at December 31, 2009 and June 30, 2009)		(4,211	)		(4,211	)
Total stockholders’ equity		44,090			39,896

Total liabilities and stockholders’ equity	$	480,258		$	477,349

See notes to condensed consolidated financial statements.

PSB Holdings, Inc.

Condensed Consolidated Statements of Income (Loss)

(Unaudited)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
	(in thousands, except share data)						(in thousands, except share data)
Interest and dividend income:
Interest on loans	$	3,754		$	3,745		$	7,494		$	7,451
Interest and dividends on investments		2,029			2,792			4,302			5,595
Total interest and dividend income		5,783			6,537			11,796			13,046

Interest expense:
Deposits and escrow		1,542			1,743			3,157			3,505
Borrowed funds		1,045			1,491			2,297			3,063
Total interest expense		2,587			3,234			5,454			6,568
Net interest and dividend income		3,196			3,303			6,342			6,478

Provision for loan losses		265			323			507			597
Net interest and dividend income after provision for loan losses		2,931			2,980			5,835			5,881

Noninterest income (charge):
Fees for services		595			586			1,192			1,224
Mortgage banking activities		67			18			132			46
Net commissions from brokerage service		24			32			37			79
Loss on writedowns of securities		(603	)		(304	)		(932	)		(5,784	)
Gain on sale of securities		512			-			842			-
Other income		105			266			214			372
Total noninterest income (charge)		700			598			1,485			(4,063	)

Noninterest expense:
Compensation and benefits		1,519			1,497			3,021			2,962
Occupancy and equipment		301			273			606			543
Data processing		196			164			390			360
Advertising and marketing		82			93			146			183
Prepayment penalties on borrowings		41			-			172			-
FDIC deposit insurance		149			50			353			101
Writedown of other real estate owned		-			-			321			-
Other noninterest expense		626			541			1,084			1,035
Total noninterest expense		2,914			2,618			6,093			5,184
Income (loss) before income tax expense (benefit)		717			960			1,227			(3,366	)

Income tax expense (benefit)		189			(1,009	)		296			(1,324	)
NET INCOME (LOSS)	$	528		$	1,969		$	931		$	(2,042	)

Earnings (loss) per common share
Basic	$	0.08		$	0.31		$	0.15		$	(0.32	)
Diluted	$	0.08		$	0.31		$	0.15		$	(0.32	)

See notes to condensed consolidated financial statements.

PSB Holdings, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended December 31, 2009 and 2008

(Unaudited)

	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Unearned ESOP Shares			Unearned Stock Awards			Treasury Stock			Total Stockholders’ Equity
	(in thousands)

Balances at June 30, 2008	$	694	$	30,795		$	28,663		$	(3,816	)	$	(2,089	)	$	(605	)	$	(4,205	)	$	49,437

Dividends declared		-		-			(496	)		-			-			-			-			(496	)
Stock-based compensation		-		(48	)		-			-			-			176			-			128

Comprehensive loss:
Net loss		-		-			(2,042	)		-			-			-			-			-
Net change in unrealized holding losses on available-for-sale securities, net of tax effect		-		-			-			(10,362	)		-			-			-
Comprehensive loss																						(12,404	)

Balances at December 31, 2008	$	694	$	30,747		$	26,125		$	(14,178	)	$	(2,089	)	$	(429	)	$	(4,205	)	$	36,665

Balances at June 30, 2009	$	694	$	30,656		$	20,383		$	(5,277	)	$	(1,940	)	$	(409	)	$	(4,211	)	$	39,896

Dividends declared		-		-			(95	)		-			-			-			-			(95	)
Stock-based compensation		-		44			-			-			-			177			-			221

Comprehensive income:
Net income		-		-			931			-			-			-			-			-
Net change in unrealized holding losses on available-for-sale securities, net of tax effect		-		-			-			3,137			-			-			-
Comprehensive income																						4,068

Balances at December 31, 2009	$	694	$	30,700		$	21,219		$	(2,140	)	$	(1,940	)	$	(232	)	$	(4,211	)	$	44,090

See notes to condensed consolidated financial statements.

PSB Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the Six Months
	Ended December 31,
	2009			2008
	(in thousands)
Cash flows from operating activities
Net income (loss)	$	931		$	(2,042	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of securities, net		127			62
Gain on sales and calls of securities, net		(842	)		-
Write down of securities		932			5,784
Net decrease in loans held-for-sale		775			504
Change in deferred loan costs, net		6			(42	)
Provision for loan losses		507			597
Loss on sale of other real estate owned		31			-
Writedown of other real esate owned		321			-
Depreciation and amortization		275			186
Amortization of core deposit intangible		89			103
(Increase) decrease in accrued interest receivable and other assets		(2,181	)		47
Increase in cash surrender value of bank owned life insurance		(140	)		(130	)
Bank owned life insurance benefit income		-			(162	)
Decrease in other liabilities		(626	)		(519	)
Deferred tax expense (benefit)		-			(1,930	)
Stock-based compensation		143			50
Net cash provided by operating activities		348			2,508
Cash flows from investing activities
Purchase of available-for-sale securities		-			(5,088	)
Proceeds from sales of available-for-sale securities		21,077			-
Proceeds from maturities of available-for-sale securities		27,654			13,454
Purchase of held-to-maturity securities		(35,960	)		-
Proceeds from maturities of held-to-maturity securities		465			-
Loan originations net of principal collections, net		1,493			(7,264	)
Recoveries of loans previously charged off		25			20
Proceeds from sale of other real estate owned		1049			-
Proceeds from the surrender of bank owned life insurance policy		-			345
Capital expenditures		(559	)		(45	)
Net cash provided by investing activities		15,244			1,422
Cash flows from financing activities
Net increase (decrease) in savings, demand deposits and NOW accounts		25,681			734
Net (decrease) increase in time deposit accounts		(9,563	)		7,726
Net decrease in mortgagors’ escrow account		(59	)		(63	)
Net change in short term Federal Home Loan Bank advances		-			(4,000	)
Proceeds from Federal Home Loan Bank advances		-			20,000
Repayments of Federal Home Loans Bank advances		(18,000	)		(23,564	)
Net increase (decrease) in securities sold under agreement to repurchase		1,501			(2,239	)
Dividends paid		(236	)		(521	)
Net cash used by financing activities		(676	)		(1,927	)
Increase in cash and cash equivalents		14,916			2,003
Cash and cash equivalents at beginning of year		6,059			8,146
Cash and cash equivalents at end of period	$	20,975		$	10,149
Supplemental disclosures
Cash paid during the period for:
Interest	$	5,511		$	6,561
Income taxes paid	$	20		$	294
Loans transferred to other real estate owned	$	1,174		$	1,211

See notes to condensed consolidated financial statements.

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 (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, 2010. These financial statements should be read in conjunction with the 2009 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on September 28, 2009.

NOTE 3 – Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standard Codification 105-10, “Generally Accepted Accounting Principles.” This standard establishes the FASB Accounting Standard Codification (“Codification” or “ASC”) as the source of authoritative U.S. GAAP recognized by the FASB for nongovernmental entities. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification is a reorganization of existing U.S. GAAP and does not change existing U.S. GAAP. The Company adopted this standard during the third quarter of 2009. The adoption had no impact on the Company’s financial position or results of operations.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets”, and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” These standards are effective for the first interim reporting period of 2010. SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a qualifying special-purpose entity (“QSPE”) and changes some of the requirements for derecognizing financial assets. SFAS No. 167 amends the consolidation guidance in ASC 810-10. Specifically, the amendments will (a) eliminate the exemption for QSPEs from the new guidance, (b) shift the determination of which enterprise should consolidate a variable interest entity (“VIE”) to a current control approach, such that an entity that has both the power to make decisions and right to receive benefits or absorb losses that could potentially be significant, will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE. The Company is evaluating the impact that these standards will have on its financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, “Measuring Liabilities at Fair Value,” which updates ASC 820-10, “Fair Value Measurements and Disclosures.” The updated guidance clarifies that the fair value of a liability can be measured in relation to the quoted price of the liability when it trades as an asset in an active market, without adjusting the price for restrictions that prevent the sale of the liability. This guidance is effective beginning July 1, 2009. The Company does not expect that the guidance will change its valuation techniques for measuring liabilities at fair value.

In May 2009, the FASB updated ASC 855, “Subsequent Events.” ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted this guidance during the second quarter of 2009. In accordance with the update, the Company evaluates subsequent events through the date its financial statements are available for issuance. The adoption of this guidance did not have an impact on the Company’s financial position or results of operations.

In April 2009, the FASB updated ASC 320-10, “Investments – Debt and Equity Securities.” The guidance amends the other-than-temporary impairment (“OTTI”) guidance for debt securities. If the fair value of a debt security is less than its amortized cost basis at the measurement date, the updated guidance requires the Company to determine whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, an entity must recognize full impairment. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the guidance requires that the credit loss portion of impairment be recognized in earnings and the temporary impairment related to all other factors be recorded in other comprehensive income. In addition, the guidance requires additional disclosures regarding impairments on debt and equity securities. The Company adopted this guidance effective April 1, 2009. The adoption of this guidance did not have an impact on the Company’s financial position or results of operations.

In April 2009, the FASB updated ASC 820-10, “Fair Value Measurements and Disclosures,” to provide guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This issuance provides guidance on estimating fair value when there has been a significant decrease in the volume and level of activity for the asset or liability and for identifying transactions that may not be orderly. The guidance requires entities to disclose the inputs and valuation techniques used to measure fair value and to discuss changes in valuation techniques and related inputs, if any, in both interim and annual periods. The Company adopted this guidance during 2009 and the adoption did not have a material impact on the Company’s financial position and results of operations. The enhanced disclosures related to this guidance are included in Note 11, “Fair Value Measurements,” to the consolidated Financial Statements.

In April 2009, the FASB updated ASC 825-10 “Financial Instruments.” This update amends the fair value disclosure guidance in ASC 825-10-50 and requires an entity to disclose the fair value of its financial instruments in interim reporting periods as well as in annual financial statements. The methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods and assumptions used during the reporting period are also required to be disclosed both on an interim and annual basis. The Company adopted this guidance during 2009. The required disclosures have been included in Note 11, “Fair Value Measurements,” to the consolidated Financial Statements.

In June 2008, the FASB updated ASC 260-10, “Earnings Per Share.” The guidance concludes that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities that should be included in the earnings allocation in computing earnings per share under the two-class method. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior period earnings per share data presented must be adjusted retrospectively. The adoption of this update, effective July 1, 2009, did not have a material impact on the Company’s financial position, results of operations, and earnings per share.

In March 2008, the FASB updated ASC 815, “Derivatives and Hedging.” This guidance 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 Statements of Financial Accounting Standards No. 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 ASC 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of this guidance did not have a material impact on its financial condition and results of operations.

In February 2008, the FASB updated ASC 860, “Transfers and Servicing.” This guidance clarifies 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 became effective July 1, 2009. The adoption of this guidance did not have a material effect on the Company’s results of operations or financial position.

In December 2007, the FASB updated ASC 810-10, “Consolidation”, which provides new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest should be reported as a component of equity in the consolidated financial statements. This guidance also required expanded disclosures that identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of an entity. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In December 2007, the FASB updated ASC 805, “Business Combinations.” The updated guidance will significantly change the accounting for business combinations. Under ASC 805, 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. ASC 805 applies prospectively to business combinations for which the acquisition date is on or after July 1, 2009. The adoption of this statement did not have a material impact on the Company’s financial condition and results of operations.

NOTE 4 – Earnings (Loss) Per Share (EPS)

The Company has adopted the EPS guidance included in ASC 260-10. As presented below, basic earnings or loss per share is computed by dividing income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings or loss 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 and six months ended December 31, 2009 and December 31, 2008:

	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	December 31, 2009		December 31, 2008		December 31, 2009		December 31, 2008
Net income (loss)	$	528,000	$	1,969,000	$	931,000	$	(2,042,000	)
Dividends and undistributed earnings (loss) allocated to unvested shares of stock awards		2,381		13,199		5,301		(17,471	)
Net income (loss) available to common shareholders		525,619		1,955,801		925,699		(2,024,529	)
Average basic common shares		6,309,519		6,276,963		6,302,691		6,270,346
Dilutive effect of stock options		0		0		0		0
Average diluted common shares		6,309,519		6,276,963		6,302,691		6,270,346

Basic EPS:	$	0.08	$	0.31	$	0.15	$	(0.32	)
Diluted EPS:	$	0.08	$	0.31	$	0.15	$	(0.32	)

NOTE 5 – Investment Securities

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

	Carrying Value at
	December 31, 2009					June 30, 2009
			Percent					Percent
	Balance		of total			Balance		of total
(Dollars in thousands)
Securities, available-for-sale:
U.S. Government and agency securities	$	11,659		7.4	%	$	19,667		11.8	%
Corporate bonds and other securities		5,208		3.3	%		9,263		5.6	%
Mortgage-backed securities		94,044		59.5	%		123,596		74.0	%
Equity securities		9,842		6.2	%		12,362		7.4	%
Total securities, available-for-sale		120,753		76.4	%		164,888		98.8	%
Securities, held-to-maturity:
U.S. Government and agency securities		17,747		11.2	%		2,000		1.2	%
Mortgage-backed securities		19,689		12.4	%		0		0.0	%
Total securities, held-to-maturity		37,436		23.6	%		2,000		1.2	%
Total securities	$	158,189		100.0	%	$	166,888		100.0	%

There were gross gains of $512,000 realized on sales of available-for-sale securities for the three months ended December 31, 2009 and no gross gains for the three months ended December 31, 2008. There were no gross losses realized on sales of available-for-sale securities for the three months ended December 31, 2009 and December 31, 2008. There was an other-than-temporary impairment charge on available-for-sale securities of $603,000 during the quarter ended December 31, 2009 and $304,000 during the three months ended December 31, 2008. There were gross gains of $877,000 realized on sales of available-for-sale securities for the six months ended December 31, 2009 and no gross gains for the six months ended December 31, 2008. There were gross losses of $35,000 realized on sales of available-for-sale securities for the six months ended December 31, 2009 and no gross losses for the six months ended December 31, 2008. There was an other-than-temporary impairment charge on available-for-sale securities of $932,000 during the six months ended December 31, 2009 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.

The following is a summary of the estimated fair value and related unrealized losses segregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at:

December 31, 2009:	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
US Government Agencies	$	1,949	$	59	$	-	$	-	$	1,949	$	59
Corporate bonds		-		-		5,208		1,787		5,208		1,787
Mortgage-backed securities		3,721		538		13,851		4,687		17,572		5,225
Equity securities		-		-		6,307		693		6,307		693

Total investment securities	$	5,670	$	597	$	25,366	$	7,167	$	31,036	$	7,764

June 30, 2009:	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
US Government Agencies	$	984	$	16	$	-	$	-	$	984	$	16
Corporate bonds		-		-		5,493		2,528		5,493		2,528
Mortgage-backed securities		5,268		1,053		16,123		5,730		21,391		6,783
Equity securities		12,227		2,773		-		-		12,227		2,773

Total investment securities	$	18,479	$	3,842	$	21,616	$	8,258	$	40,095	$	12,100

The Company had at December 31, 2009 and June 30, 2009, 26 and 29 individual investment securities respectively in which the fair value of the security is less than the amortized cost of the security. Management has the intent and ability to hold these securities until cost recovery occurs and considers these declines to be temporary.

Auction-rate trust preferred securities. At December 31, 2009, our auction-rate trust preferred securities (“ARP”) portfolio totaled $9.8 million, or 6.2% of total securities, all of which were classified as available-for-sale. Auction-rate trust preferred securities are a floating rate preferred stock, on which the dividend rate generally resets every 90 days based on an auction process to reflect the yield demand for the instruments by potential purchasers. At December 31, 2009, our investments in auction-rate trust preferred securities consisted of investments in four corporate issuers. These securities were originally purchased by the Company because they represented highly liquid, tax-preferred investments secured, in most cases, by preferred stock issued by high quality, investment grade companies (generally other financial institutions) (“collateral preferred shares”). The ARP shares, or certificates, purchased by the Company are Class A certificates, which, among other rights, entitle the holder to priority claim on dividends paid into the Trust holding the preferred shares.

In most cases, the trusts which issued the ARP certificates own various callable preferred shares of stock by a single entity. In addition to the call dates for redemption established by the collateral preferred shares, each trust has a maturity date upon which the trust itself will terminate. The value of the remaining collateral preferred shares is not guaranteed, and may be more or less than the stated par value of the collateral preferred shares, and is dependent on the market value of those collateral preferred shares on the date of the trust’s maturity.

The certificates issued by the trusts traded in an active, open auction market, with each individual trust establishing the frequency of its auctions, typically every 90 days (the “reset date”). The results of an auction would be the exchange of certificates, at par, between participants entering or exiting the market, and resetting of the yield to be earned by holders of the Class A certificates as well as the holders of other classes of trust certificates.

Beginning in February 2008, auctions for these securities began to fail when investors declined to bid on the securities. Four of the largest investment banks that make a market in these securities (Merrill Lynch, Citigroup, USB, AG and Morgan Stanley) declined to act as bidders of last resort, as they had in the past. The auction failures did not result in the loss of any principal value to the certificate holders, but prevented many sellers from exiting, or redeeming, their certificates at the reset date. These unsuccessful sellers were required to continue to hold the certificates until the next scheduled reset date. To compensate these unsuccessful sellers, the failed auctions triggered a penalty-rate feature which provided that owners of the Class A certificates were entitled to a higher portion of the dividends, and thus a higher yield, on the Class A certificates.

During this time, the Company attempted to divest itself of the ARPs, but was prevented from doing so due to the continued failure of the auction market. The Company continued to carry its investments at par value, despite the increased liquidity risk, because the credit strength of the issuers of the collateral preferred shares remained high, and the yield remained above-market.

On September 7, 2008, the U. S. Department of the Treasury placed Fannie Mae and Freddie Mac under conservatorship and assumed an equity position in these entities, which takes priority over both common and preferred stocks. Putnam Bank owns $4,000,000 in Freddie Mac auction-rate preferred securities and recorded an other-than-temporary impairment loss totaling $3.95 million during the quarters ended September 30, 2008 and December 31, 2008. The current book value of this investment as of December 31, 2009 was $46,000.

The turmoil in the financial markets caused the value of the underlying collateral preferred shares to decline dramatically. Market values for the ARPs from Merrill Lynch, the Company’s safekeeping agent, also declined, and the Company recorded a temporary impairment adjustment to the carrying value of the ARPs which are classified as available-for-sale. A temporary impairment reduces the carrying value of the investment security with an offsetting reduction in the capital accounts of the Company.

The Company had difficulty identifying market prices of comparable instruments for ARPs due to the inactive market. As a result, during the quarter ended June 30, 2009, the Company modified its methodology for determining the fair value of the ARPs classified as Level 3, and used the quoted market values of the underlying collateral preferred shares, adjusted for the higher yield earned by the Company through the Class A certificates compared with the nominal rate available to a direct owner of the collateral preferred shares. The Company continued to record a temporary impairment adjustment on the ARPs, primarily due to the depressed market values of the underlying collateral preferred shares.

The Company adopted the guidance in ASC 820-10, “Fair Value Measurements and Disclosures,” in the second quarter of 2009. The Company concluded that the market value of the underlying collateral preferred shares did not represent orderly transactions and adopted the use of a discounted cash flow model to determine if there was any other-than-temporary impairment of its investments in the ARPs. The resulting discounted cash flow for each of ARP classified as Level 3 showed no impairment in the fair value of the securities.

The Company has the ability and intent to hold these securities for the time necessary to collect the expected cash flows.

On September 30, 2009, Pitney Bowes announced cash tender offers for any and all of the $375 million aggregate amount outstanding of variable term voting preferred stock issued by Pitney Bowes International Holdings, Inc. This offer included the $5 million in auction-rate preferred securities that the Company owns. The Company tendered its shares and on October 15, 2009 was notified that these shares would be exchanged for cash prior to the reset date of October 30, 2009. On October 19, 2009, the Company received $5 million plus accrued dividends.

The chart below includes information as of December 31, 2009 on the various issuers of Auction Rate Preferred securities owned by the Company:

Issuer	Goldman Sachs	Merrill Lynch	Bank of America	Freddie Mac	Freddie Mac
Par amount	$3,000,000	$5,000,000	$2,000,000	$2,000,000	$2,000,000
Book Value	$3,000,000	$5,000,000	$2,000,000	$23,000	$23,000
Purchase Date	12-12-07	09-04-07	11-20-07	11-09-07	01-03-08
Maturity Date	08-23-26	05-28-27	08-17-47	06-30-20	06-30-20
Next Reset Date	02-19-10	02-26-10	02-16-10	01-08-10	04-01-10
Reset Frequency	Quarterly	Quarterly	Quarterly	Quarterly	Quarterly
Failed Auction	Yes	Yes	Yes	Yes	Yes
Receiving Default Rates	Yes	Yes	Yes	No	No
Current Rate	4.654%	4.739%	4.679%	0.000%	0.000%
Dividends Current:	Yes	Yes	Yes	No	No

Federal Home Loan Bank Stock. At December 31, 2009, the Company owned $8.1 million of Federal Home Loan Bank stock. The Company evaluated its investment in FHLB stock for other-than-temporary impairment as of December 31, 2009, consistent with its accounting policies. The regional banks within the Federal Home Loan Bank System have experienced higher levels of other-than-temporary impairment in their private label mortgage-backed securities and home equity loans, which has raised concerns about whether their capital levels could be reduced below regulatory requirements. In response to unprecedented market conditions and potential future losses, the FHLB has implemented an initiative to preserve capital by the adoption of a revised retained earnings target, declaration of a moratorium on excess stock repurchases and the suspension of cash dividend payments. The Company anticipates a decline in the dividend yield on its holdings in FHLB stock since the FHLB announced that dividend payments in 2009 and 2010 are unlikely. There can be no assurance that the impact of recent market conditions on the financial condition of the Federal Home Loan Banks or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of FHLB stock held by the Bank. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment, the liquidity position of the FHLB of Boston, the actions taken by the FHLB of Boston to address its regulatory capital situation and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the par value, the Company has not recognized an other-than-temporary impairment loss. Moody’s Investor Service has affirmed the FHLB of Boston’s credit rating of Aaa on July 7, 2009. Even though the Company did not recognize an other-than-temporary impairment loss during the six months ended December 31, 2009, continued deterioration in the FHLB of Boston’s financial position may result in future impairment losses.

NOTE 6 – Loans

The following table sets forth the composition of our loan portfolio at December 31, 2009 and June 30, 2009:

	December 31, 2009						June 30, 2009
	Amount			Percent			Amount			Percent
	(Dollars in thousands)

Mortgage Loans:
Residential (1)	$	197,880			74.37	%	$	200,680			74.57	%
Commercial real estate		57,993			21.80			56,500			20.99
Residential construction		1,760			0.66			1,887			0.70
Commercial		7,127			2.68			8,958			3.33
Consumer and other		1,294			0.49			1,097			0.41

Total loans		266,054			100.00	%		269,122			100.00	%

Unadvanced construction loans		(3,053	)					(2,929	)
		263,001						266,193
Net deferred loan costs		318						324
Allowance for loan losses		(2,207	)					(2,200	)

Loans, net	$	261,112					$	264,317

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

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,
	2009			2009
	(Dollars in thousands)
Non-accrual loans:
Residential mortgage loans (1)	$	1,364		$	1,277
Commercial real estate		4,545			5,073
Residential construction		-			-
Commercial		215			99
Consumer and other		-			-
Total non-accrual loans		6,124			6,449

Accruing loans past due 90 days or more:
Residential mortgage loans (1)		-			-
Commercial real estate		3,961			-
Residential construction		-			-
Commercial		-			-
Consumer and other		-			-
Total		3,961			-
Total non-performing loans		10,085			6,449

Other real estate owned		984			1,211
Other non-performing assets		46			46
Total non-performing assets		11,115			7,706

Troubled debt restructurings in compliance with restructured terms		310			259
	$	11,425		$	7,965


Total non-performing loans to total loans		3.79	%		2.40	%
Total non-performing assets to total assets		2.31			1.61
Total non-performing assets and troubled debt restructurings to total assets		2.38			1.67

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

Total non-performing assets increased $3.4 million to $11.1 million at December 31, 2009 from $7.7 million at June 30, 2009. Non-performing assets as of December 31, 2009 consisted of $984,000 in Other Real Estate Owned which reflects the repossession of a six lot residential development project at a carrying value of $303,000, one nine unit multi-family residence at a carrying value of $212,000, one mixed use property with a carrying value of $93,000 and one in-substance foreclosure of a condominium project at a carrying value of $376,000, $46,000 in Freddie Mac auction-rate trust preferred securities and $10.1 million in non-performing loans. These loans consisted of four residential loans totaling $1.4 million, three commercial and industrial loans totaling $215,000 and 36 commercial real estate loans (24 of these are two loan relationships) totaling $8.5 million. Non-performing assets as of June 30, 2009 consisted of $1.2 million in Other Real Estate Owned which reflects the repossession of one condominium development project, $46,000 in Freddie Mac auction-rate trust preferred securities and $6.4 million in non-performing loans. These loans consisted of four residential loans totaling $1.3 million, two commercial and industrial loans totaling $97,000 and 17 commercial real estate loans totaling $5.1 million.

The Bank’s increase in non-performing loans is a direct correlation to the deteriorating real estate climate. Management is focused on working with borrowers and guarantors to resolve these trends by restructuring or liquidating assets when prudent. Many of our commercial relationships are secured by development loans, in particular condominiums which have experienced a significant reduction in demand. The Bank reviews the strength of the guarantors; requires face to face discussions and offers restructuring suggestions that provide the borrowers with short term relief and exit strategies. Overall, we expect to see improvement as solutions are identified and executed. The Bank obtains a current appraisal on all real estate secured loans that are 180 days or more past due if the appraisal on file is older than one year. If the determination is made that there is the potential for collateral shortfall, an allocated reserve will be assigned to the loan for the expected deficiency. It is the policy of the Bank to charge off or write down loans or other assets when, in the opinion of the Credit Committee and Loan Review, the ultimate amount recoverable is less than the book value, or the collection of the amount is expected to be unduly prolonged. The level of non-performing assets is expected to fluctuate in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with management’s degree of success in resolving problem assets. Management takes a proactive approach with respect to the identification and resolution of problem loans. In addition, in connection with a regularly scheduled Office of Thrift Supervision (“OTS”) examination, the Holding Company and Bank agreed to develop and implement a plan to reduce classified assets. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

NOTE 8 – Allowance for Loan Losses

The following summarizes the changes in the allowance for loan losses for the three and six months ended December 31, 2009, as compared to the prior year periods:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
	(in thousands)						(in thousands)
Balance, beginning of period	$	2,128		$	1,996		$	2,200		$	1,758
Provision for loan losses		265			323			507			597
Charge offs		(201	)		(437	)		(525	)		(487	)
Recoveries		15			6			25			20
Balance, end of period	$	2,207		$	1,888		$	2,207		$	1,888

At December 31, 2009, the Company had 18 loans with balances of $6.1 million on nonaccrual status and 24 loans with balances of $4.0 million past due 90 days or more and still accruing. At December 31, 2008, the Company had 11 loans with balances of $1.8 million on nonaccrual status and three loans with balances of $1.5 million past due 90 days or more and still accruing. The Company had 15 loan relationships that are considered impaired with a balance of $5.9 million as of December 31, 2009 and there were four impaired loan relationships with a balance of $1.6 million December 31, 2008.

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, 2009 was $6.9 million and $562,000, respectively. The amortization expense related to the core deposit intangible for the three months ended December 31, 2009 and 2008 was $44,000 and $51,000, respectively. The amortization expense related to the core deposit intangible for the six months ended December 31, 2009 and 2008 was $89,000 and $103,000, respectively.

	December 31,		June 30,
	2009		2009
	(in thousands)
Balances not subject to amortization:
Goodwill	$	6,912	$	6,912
Balances subject to amortization:
Core Deposit Intangible		562		651
Total intangible assets	$	7,474	$	7,563

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, 2010	$	89
For the twelve months ending June 30, 2011		149
For the twelve months ending June 30, 2012		121
For the twelve months ending June 30, 2013		93
For the twelve months ending June 30, 2014		65
For the twelve months ending June 30, 2015		37
For the twelve months ending June 30, 2016		8
Total	$	562

NOTE 10 – Comprehensive (Loss) Income

Comprehensive income (loss), 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 only source of other comprehensive income (loss) is the net unrealized gain (loss) on securities.

	Three Months Ended December 31,						Six Months Ended December 31,
	2009			2008			2009			2008
	(in thousands)						(in thousands)

Net Income (Loss)	$	528		$	1,969		$	931		$	(2,042	)

Other comprehensive income (loss):
Net unrealized holding gains (losses) on available-for-sale securities		2,056			(9,015	)		4,664			(21,479	)
Reclassification adjustment for loss recognized in net income		91			304			90			5,784
Other comprehensive income (loss) before tax (expense) benefit		2,147			(8,711	)		4,754			(15,695	)
Income tax (expense) benefit related to items of other comprehensive income (loss)		(729	)		2,959			(1,617	)		5,333
Other comprehensive income (loss), net of tax		1,418			(5,752	)		3,137			(10,362	)
Total comprehensive income (loss)	$	1,946		$	(3,783	)	$	4,068		$	(12,404	)

NOTE 11 – FAIR VALUE MEASUREMENTS

In accordance with ASC 820, 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, 2009.

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 and other debt 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.

The following summarizes assets measured at fair value for the period ending December 31, 2009 (in thousands):

	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
	December 31, 2009		Level 1		Level 2		Level 3

Securities available for sale
U. S. Government agency securities	$	11,659	$	-	$	11,659	$	-
Corporate securities		5,208		-		5,208		-
Mortgage backed securities insured or guaranteed by U.S. Government enterprises		75,145		-		75,145		-
Non-agency mortgage-backed securities		18,899		-		18,899		-
Equity securities		9,842		-		-		9,842
Impaired Loans		5,883		-		5,883		-
Total	$	126,636	$	-	$	116,794	$	9,842

	Fair Value Measurements
	Using Significant Unobservable Inputs
	(Level 3)
	Available-for-sale
	Securities		Total
Beginning balance, July 1, 2009	$	7,466	$	7,466
Total gains or losses
Included in earnings		-		-
Included in other comprehensive income		2,376		2,376
Principal payments on securities		-		-
Amortization of securities, net		-		-
Transfers in and/or out of Level 3		-		-
Ending balance, December 31, 2009	$	9,842	$	9,842

The following summarizes assets measured at fair value for the period ending June 30, 2009 (in thousands):

	Fair Value Measurements at June 30, 2009 Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
	June 30, 2009		Level 1		Level 2		Level 3
(In Thousands)
Securities available-for-sale
U. S. Government agency securities	$	19,667	$	-	$	19,667	$	-
Corporate securities		9,263		-		9,263		-
Mortgage-backed securities insured or guaranteed by U. S. Government enterprises		103,330		-		103,330		-
Non-agency mortgage-backed securities		20,266		-		20,266		-
Equity securities		12,362		-		4,896		7,466
Impaired Loans		3,267		-		3,267		-
Total	$	168,155	$	-	$	160,689	$	7,466

	Fair Value Measurements
	Using Significant Unobservable Inputs
	(Level 3)
	Available-for-sale
(In Thousands)	Securities			Total
Beginning balance, July 1, 2008	$	19,000		$	19,000
Total gains or losses (realized/unrealized)
Included in earnings		(13,472	)		(13,472	)
Included in other comprehensive loss		14,080			14,080
Principal payments on securities		(1,114	)		(1,114	)
Accretion of securities, net		1			1
Transfers out of Level 3		(11,029	)		(11,029	)
Ending balance, June 30, 2009	$	7,466		$	7,466

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.

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, 2009 and December 31, 2008 of $71,000 and $46,000, 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, 2009 and December 31, 2008 of $143,000 and $50,000, 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, 2007
	Grant			Grant			Grant
Dividend 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			6.5
Fair value	$	2.00		$	1.97		$	1.84

NOTE 13 – Dividends

The Company did not declare a dividend during the second quarter of fiscal 2010.

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,
	2009		2009
	(in thousands)
Commitments to extend credit:
Loan commitments	$	1,326	$	4,687
Unadvanced construction loans		3,053		2,929
Unadvanced lines of credit		16,228		16,859
Standby letters of credit		957		898
Outstanding commitments	$	21,564	$	25,373

NOTE 15 – Subsequent Events

Subsequent events have been evaluated through February 12, 2010, which is the date the financial statements were available for issuance.

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, 2009 and 2008, 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 2009 Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on September 28, 2009.

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.

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.

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 quarter ended December 31, 2008. The carrying value of the Freddie Mac APT certificates is now $46,000 as of December 31, 2009. 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 owned $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 quarter ended December 31, 2008. Both Lehman Brothers bonds were sold prior to June 30, 2009. These investments were rated investment grade by Moody’s and Standard & Poor’s at the time of purchase.

The net interest margin decreased from 2.91% for the quarter ended December 31, 2008 to 2.86% for the quarter ended December 31, 2009. This resulted in a $107,000 decrease in net interest and dividend income over the periods. In addition, noninterest expense increased $295,000 or 11.3% during the quarter ended December 31, 2009 compared to the quarter ended December 31, 2008. The provision for loan losses decreased $58,000 during the quarter ended December 31, 2009 as compared to the quarter ended December 31, 2008.

The net interest margin increased from 2.81% for the six months ended December 31, 2008 to 2.82% for the six months ended December 31, 2009. Net interest-earning assets decreased $6.3 million from December 31, 2008 to December 31, 2009. This resulted in a $136,000 decrease in net interest and dividend income over the periods. In addition, noninterest expense increased $909,000 or 17.5% during the six months ended December 31, 2009 compared to the six months ended December 31, 2008. The provision for loan losses decreased $90,000 during the six months ended December 31, 2009 as compared to the six months ended December 31, 2008.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions by management that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses, goodwill and the impairment of securities.

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal and external loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change.

The analysis has two components: specific and general allocations. Specific allocations are made for loans for which collection is questionable and the loan is downgraded. Additionally, the size of the allocation is measured by determining an expected collection or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. For the general allocations, we consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, 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 ASC 320-10 “Investments-Debt and Equity Securities”. The guidance addresses 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. Management evaluates the Company’s investment portfolio on an ongoing basis and determined that $932,000 of investments were other-than-temporarily impaired and written down during the six months ended December 31, 2009 and $5.8 million of investments were other-than-temporarily impaired and written down during the six months ended December 31, 2008.

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

Comparison of Financial Condition at December 31, 2009 and June 30, 2009

Assets

Total assets increased to $480.3 million at December 31, 2009 from $477.3 million at June 30, 2009. Investments in available-for-sale securities decreased $44.1 million during the six months ended December 31, 2009, and represented $120.8 million or 25.1% of total assets at December 31, 2009. This decrease was primarily due to $21.1 million in sales and $27.7 million in pay downs and maturities during the six months ended December 31, 2009. Investments in held-to-maturity securities increased $35.4 million during the six months ended December 31, 2009, and represented $37.4 million or 7.8% of total assets at December 31, 2009. This increase was due to all new security purchases being classified as held-to-maturity because of the low interest rate environment. Net loans have decreased to $261.1 million at December 31, 2009 from $264.3 million at June 30, 2009 and now represent 54.4% of total assets. Included in other assets as of December 31, 2009 was $2.7 million in prepaid FDIC assessments.

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, 2009 and June 30, 2009. For additional information, see “Comparison of Operating Results for the Three and Six Months Ended December 31, 2009 and 2008 – Provision for loan losses.”

	December 31,			June 30,
	2009			2009
	(Dollars in thousands)
Allowance for loan losses	$	2,207		$	2,200
Gross loans outstanding		263,319			266,517
Nonperforming loans		10,085			6,449

Allowance/gross loans outstanding		0.84	%		0.83	%
Allowance/nonperforming loans		21.9	%		34.1	%

Past Due and Nonperforming Loans

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

	December 31,		June 30,
	2009		2009
	(in thousands)

Past due 30 days through 89 days and accruing	$	5,528	$	3,445

Past due 90 days or more and accruing	$	3,961	$	-

Past due 90 days or more and nonaccruing	$	6,124	$	6,449

The past due 90 days or more and still accruing are three loan relationships that have matured but are current for interest payments as of December 31, 2009. Two loan relationships that total $3.6 million are condominium development projects and one loan relationship totaling $400,000 consists of five individual lots within a recreational park. Management believes that a full recovery of principal and interest is expected on all three relationships.

Liabilities

Total liabilities decreased to $436.2 million at December 31, 2009 from $437.5 million at June 30, 2009. Total deposits increased to $324.2 million at December 31, 2009 from $308.1 million at June 30, 2009, an increase of $16.1 million or 5.2%. Federal Home Loan Bank advances decreased to $102.5 million at December 31, 2009 from $120.5 million at June 30, 2009, a decrease of $18.0 million or 14.9%. Securities sold under agreements to repurchase increased to $6.0 million at December 31, 2009 from $4.5 million at June 30, 2009, an increase of $1.5 million or 33.6%.

Stockholders’ Equity

Stockholders’ equity increased to $44.1 million at December 31, 2009 from $39.9 million at June 30, 2009, primarily due to net income of $931,000 and a reduction in other comprehensive loss of $3.1 million.

Comparison of Operating Results for the Three and Six Months Ended December 31, 2009 and 2008

Net Income (Loss)

Net income amounted to $528,000 or $.08 per basic and diluted share for the quarter ended December 31, 2009 compared to net income of $2.0 million or $.31 per basic and diluted share for the quarter ended December 31, 2008. The net income for the December 31, 2008 quarter was due primarily to the previously reported tax benefit related to write-downs of Freddie Mac pass-through auction-rate securities that had been previously recorded during the quarter ended September 30, 2008. The Company recorded an other-than-temporary impairment charge of $603,000 during the quarter ended December 31, 2009 compared to $304,000 during the quarter ended December 31, 2008. Net interest and dividend income decreased by $107,000 and the provision for loan losses decreased by $58,000. Net gains on sales of securities increased by $512,000 during the quarter ended December 31, 2009. Noninterest expense increased by $295,000 during the quarter ended December 31, 2009.

Net income amounted to $931,000 or $.15 per basic and diluted share for the six months ended December 31, 2009 compared to a net loss of $2.0 million or ($.32) per basic share and diluted share for the six months ended December 31, 2008. The net loss for the six months ended December 31, 2008 reflected an OTTI charge on investments of $5.8 million compared to $932,000 for the six months ended December 31, 2009. Net interest and dividend income decreased $136,000, the provision for loan losses decreased $90,000, net gains on sale of securities increased $842,000 and noninterest expense increased $909,000 during the six months ended December 31, 2009. Income tax expense increased $1.6 million to $296,000 for the six months ended December 31, 2009 compared to a tax benefit of $1.3 million for the six months ended December 31, 2008.

Interest and Dividend Income

Interest and dividend income amounted to $5.8 million for the quarter ended December 31, 2009 as compared to $6.5 million for the quarter ended December 31, 2008, a decrease of $754,000 or 11.5%. The decrease was primarily due to a reduction of $6.8 million in average earning assets. Average investment securities decreased $33.9 million to $162.3 million for the quarter ended December 31, 2009 compared to $196.2 million for the quarter ended December 31, 2008. This was partially offset by an increase in average loans of $15.4 million to $267.1 million for the quarter ended December 31, 2009 compared to $251.7 million for the quarter ended December 31, 2008. The yield on average earning assets decreased 58 basis points to 5.18% for the quarter ended December 31, 2009 compared to 5.76% for the quarter ended December 31, 2008. The decrease in yield was primarily due to a decrease in yield on loans of 32 basis points to 5.58% for the quarter ended December 31, 2009 compared to 5.90% for the quarter ended December 31, 2008. The yield on investment securities decreased 68 basis points to 4.96% for the quarter ended December 31, 2009 compared to 5.64% for the quarter ended December 31, 2008.

Interest and dividend income amounted to $11.8 million for the six months ended December 31, 2009 as compared to $13.0 million for the six months ended December 31, 2008, a decrease of $1.2 million or 9.6%. The decrease was primarily due to a reduction of $11.2 million in average earning assets. Average investment securities decreased $38.9 million to $166.9 million for the six months ended December 31, 2009 compared to $205.7 million for the six months ended December 31, 2008. This was partially offset by an increase in average loans of $18.3 million to $267.8 million for the six months ended December 31, 2009 compared to $249.5 million for the six months ended December 31, 2008. The yield on average earning assets decreased 42 basis points to 5.24% for the six months ended December 31, 2009 compared to 5.66% for the six months ended December 31, 2008. The decrease in yield was primarily due to a decrease in yield on loans of 37 basis points to 5.55% for the six months ended December 31, 2009 compared to 5.92% for the six months ended December 31, 2008. The yield on investment securities decreased 27 basis points to 5.11% for the six months ended December 31, 2009 compared to 5.38% for the six months ended December 31, 2008.

Interest Expense

Interest expense amounted to $2.6 million for the quarter ended December 31, 2009 as compared to $3.2 million for the quarter ended December 31, 2008, a decrease of $647,000 or 20.0%. The decrease was primarily due to a change in rates of interest-bearing liabilities. The cost of average interest-bearing liabilities decreased 58 basis points to 2.61% for the quarter ended December 31, 2009 from 3.19% for the quarter ended December 31, 2008. The average rate on interest-bearing deposits decreased by 63 basis points to 2.15% for the quarter ended December 31, 2009 compared to 2.78% for the quarter ended December 31, 2008. The average rate on borrowed money decreased by eight basis points to 3.78% for the quarter ended December 31, 2009 compared to 3.86% for the quarter ended December 31, 2008.

Interest expense amounted to $5.5 million for the six months ended December 31, 2009 as compared to $6.6 million for the six months ended December 31, 2008, a decrease of $1.1 million or 17.0%. The decrease was primarily due to a change in rates of interest-bearing liabilities. The cost of average interest-bearing liabilities decreased 51 basis points to 2.72% for the six months ended December 31, 2009 from 3.23% for the six months ended December 31, 2008. The average rate on interest-bearing deposits decreased by 57 basis points to 2.24% for the six months ended December 31, 2009 compared to 2.81% for the six months ended December 31, 2008. The average rate on borrowed money decreased by five basis points to 3.85% for the six months ended December 31, 2009 compared to 3.90% for the six months ended December 31, 2008.

Net Interest and Dividend Income

Net interest and dividend income amounted to $3.2 million for the quarter ended December 31, 2009 as compared to $3.3 million for the quarter ended December 31, 2008, a decrease of $107,000 or 3.2%. Net interest spread remained unchanged at 2.57% and net interest margin decreased five basis points to 2.86% as compared to 2.91% when comparing the quarters ended December 31, 2009 and 2008.

Net interest and dividend income amounted to $6.34 million for the six months ended December 31, 2009 as compared to $6.48 million for the six months ended December 31, 2008, a decrease of $136,000 or 2.1%. Net interest spread increased 10 basis points to 2.53% as compared to 2.43% and net interest margin increased one basis point to 2.82% as compared to 2.81% when comparing the six months ended December 31, 2009 and 2008.

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.

Provision for Loan Losses

The provision for loan losses amounted to $265,000 for the quarter ended December 31, 2009 as compared to $323,000 for the quarter ended December 31, 2008, a decrease of $58,000 or 18.0%. The provision for loan losses amounted to $507,000 for the six months ended December 31, 2009 as compared to $597,000 for the six months ended December 31, 2008, a decrease of $90,000 or 15.1%. 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 0.84% as of December 31, 2009 compared to 0.83% as of June 30, 2009. Net charge-offs were $186,000 for the quarter ended December 31, 2009 compared to $431,000 for the quarter ended December 31, 2008. Net charge-offs were $500,000 for the six months ended December 31, 2009 compared to $467,000 for the six months ended December 31, 2008. The ratio of the allowance to nonperforming loans was 21.9% as of December 31, 2009 compared to 34.1% as of June 30, 2009. Management believes that the nonperforming loans will not have a material effect on the adequacy of the allowance for loan losses.

Noninterest Income (Charge)

Noninterest income totaled $700,000 for the quarter ended December 31, 2009 compared to $599,000 for the quarter ended December 31, 2008, an increase of $101,000 or 16.9%. This increase was primarily due to an increase in net gains on securities sales of $512,000 during the quarter ended December 31, 2009. Write-downs of investments of $603,000 for the quarter ended December 31, 2009 compared to $304,000 of investment write-downs for the quarter ended December 31, 2008. The impairment charges for the quarter ended December 31, 2009 consisted of private label CMOs. The impairment charges for the quarter ended December 31, 2008 consisted of Freddie Mac pass-through auction-rate securities issued by trusts consisting solely of Freddie Mac preferred stock and Lehman Brothers corporate debt.

Noninterest income totaled $1.5 million for the six months ended December 31, 2009 compared to noninterest charges of $4.1 million for the six months ended December 31, 2008. This was primarily due to write-downs of investments of $5.8 million for the six months ended December 31, 2008 compared to $932,000 of investment write-downs for the six months ended December 31, 2009. The impairment charges for the six months ended December 31, 2009 consisted of private label CMOs. The impairment charges for the six months ended December 31, 2008 consisted of Freddie Mac pass-through auction-rate securities issued by trusts consisting solely of Freddie Mac preferred stock and Lehman Brothers corporate debt. Net gains on sales of investments increased $842,000 for the six months ended December 31, 2009.

Noninterest Expense

Noninterest expense amounted to $2.9 million for the quarter ended December 31, 2009 as compared to $2.6 million for the quarter ended December 31, 2008, an increase of $295,000 or 11.3%. Compensation and benefits expense increased $22,000 or 1.5%. Occupancy and equipment expense increased $28,000 or 10.3% due primarily to increased depreciation expense. This increase includes expenses related to the opening of the Bank’s new branch in Norwich, CT in September 2009. Other noninterest expenses increased $245,000 or 28.9% to $1.1 million for the quarter ended December 31, 2009 compared to $849,000 for the quarter ended December 31, 2008. This increase was primarily due to increases in FDIC assessments of $99,000 and $41,000 in prepayment penalties on Federal Home Loan Bank advances during the quarter ended December 31, 2009, described below.

Noninterest expense amounted to $6.1 million for the six months ended December 31, 2009 as compared to $5.2 million for the six months ended December 31, 2008, an increase of $909,000 or 17.5%. Compensation and benefits expense increased $59,000 or 2.0%. This increase was primarily due to a change in employee stock award expense due to forfeitures recorded during the six months ended December 31, 2008. Occupancy and equipment expense increased $63,000 or 11.6% due primarily to increased depreciation expense. This increase includes expenses related to the opening of the Bank’s new branch in Norwich, CT in September 2009. Other noninterest expenses increased $787,000 or 46.9% to $2.5 million for the six months ended December 31, 2009 compared to $1.7 million for the six months ended December 31, 2008. This increase was primarily due to other real estate owned write-downs of $321,000 on a property sold in October 2009, an increase in FDIC assessments of $252,000 and $172,000 in prepayment penalties on $18.0 million of Federal Home Loan Bank advances, with a weighted average rate of 4.71%, paid off prior to maturity during the six months ended December 31, 2009.

Provision for Income Taxes

Income tax expense amounted to $189,000 for the quarter ended December 31, 2009 compared to a tax benefit of $1.0 million for the quarter ended December 31, 2008. The tax benefit related to the Freddie Mac write-down was not available until the quarter ended December 31, 2008.

Income tax expense amounted to $296,000 for the six months ended December 31, 2009 compared to a tax benefit of $1.3 million for the six months ended December 31, 2008.

Average Balance Sheets

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,
	2009							2008
	(Dollars in thousands)

	Average		Interest		Yield/			Average		Interest		Yield/
Interest-earning assets:	Balance		Income/Expense		Cost			Balance		Income/Expense		Cost
Investment securities	$	162,290	$	2,028		4.96	%	$	196,210	$	2,791		5.64	%
Loans		267,109		3,754		5.58	%		251,708		3,745		5.90	%
Other earning assets		13,949		1		0.03	%		2,183		1		0.18	%
Total interest-earnings assets		443,348		5,783		5.18	%		450,101		6,537		5.76	%
Non-interest-earning assets		32,964							32,363
Total assets	$	476,312						$	482,464

Interest-bearing liabilities:
NOW accounts	$	79,579		367		1.83	%	$	38,205		224		2.33	%
Savings accounts		45,669		54		0.47	%		45,155		69		0.61	%
Money market accounts		10,501		29		1.10	%		11,918		50		1.66	%
Time deposits		148,315		1,092		2.92	%		153,699		1,400		3.61	%
Borrowed money		109,748		1,045		3.78	%		153,279		1,491		3.86	%
Total interest-bearing liabilities		393,812		2,587		2.61	%		402,256		3,234		3.19	%
Non-interest-bearing demand deposits		35,384							36,981
Other non-interest-bearing liabilities		4,069							4,492
Capital accounts		43,047							38,735
Total liabilities and capital accounts	$	476,312						$	482,464

Net interest income			$	3,196						$	3,303
Interest rate spread						2.57	%						2.57	%
Net interest-earning assets	$	49,536						$	47,845
Net interest margin						2.86	%						2.91	%
Average earning assets to average interest-bearing liabilities						112.58	%						111.89	%

	For the Six Months Ended December 31,
	2009							2008
	(Dollars in thousands)

	Average		Interest/		Yield/			Average		Interest/		Yield/
Interest-earning assets:	Balance		Dividends		Cost			Balance		Dividends		Cost
Investment securities	$	166,868	$	4,299		5.11	%	$	205,729	$	5,582		5.38	%
Loans		267,780		7,494		5.55	%		249,474		7,451		5.92	%
Other earning assets		11,610		3		0.05	%		2,306		13		1.12	%
Total interest-earnings assets		446,258		11,796		5.24	%		457,509		13,046		5.66	%
Non-interest-earning assets		33,451							30,091
Total assets	$	479,709						$	487,600

Interest-bearing liabilities:
NOW accounts	$	71,878		687		1.90	%	$	37,826		448		2.35	%
Savings accounts		45,858		108		0.47	%		45,230		137		0.60	%
Money market accounts		10,982		61		1.10	%		12,174		103		1.68	%
Time deposits		151,350		2,301		3.02	%		152,370		2,817		3.67	%
Borrowed money		118,368		2,297		3.85	%		155,825		3,063		3.90	%
Total interest-bearing liabilities		398,436		5,454		2.72	%		403,425		6,568		3.23	%
Non-interest-bearing demand deposits		35,338							36,569
Other non-interest-bearing liabilities		4,120							4,171
Capital accounts		41,815							43,435
Total liabilities and capital accounts	$	479,709						$	487,600

Net interest income			$	6,342						$	6,478
Interest rate spread						2.53	%						2.43	%
Net interest-earning assets	$	47,822						$	54,084
Net interest margin						2.82	%						2.81	%
Average earning assets to average interest-bearing liabilities						112.00	%						113.41	%

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, 2009

	Compared to the Three Months Ended December 31, 2008
		Increase(Decrease) Due to
INTEREST INCOME		Rate			Volume			Net

Investment securities		$	(315	)	$	(448	)	$	(763	)
Loans			(860	)		869			9
Other interest-earning assets			(6	)		6			(0	)
TOTAL INTEREST INCOME			(1,181	)		427			(754	)

INTEREST EXPENSE:

NOW accounts			(293	)		436			143
Savings accounts			(20	)		5			(15	)
Money Market accounts			(16	)		(5	)		(21	)
Time deposits			(260	)		(48	)		(308	)
Other borrowed money			(31	)		(415	)		(446	)
TOTAL INTEREST INCOME			(620	)		(27	)		(647	)

CHANGE IN NET INTEREST INCOME		$	(561	)	$	454		$	(107	)

	For the Six Months Ended December 31, 2009

	Compared to the Six Months Ended December 31, 2008
		Increase(Decrease) Due to
INTEREST INCOME		Rate			Volume			Net

Investment securities		$	(271	)	$	(1,012	)	$	(1,283	)
Loans			(982	)		1,025			43
Other interest-earning assets			(42	)		32			(10	)
TOTAL INTEREST INCOME			(1,295	)		45			(1,250	)

INTEREST EXPENSE:

NOW accounts			(240	)		479			239
Savings accounts			(34	)		5			(29	)
Money Market accounts			(33	)		(9	)		(42	)
Time deposits			(497	)		(19	)		(516	)
Other borrowed money			(39	)		(727	)		(766	)
TOTAL INTEREST INCOME			(843	)		(271	)		(1,114	)

CHANGE IN NET INTEREST INCOME		$	(452	)	$	316		$	(136	)

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 (+100 and +200 basis points) at June 30, 2009 and September 30, 2009.

Net Interest Income At-Risk

	Estimated Increase (Decrease)	Estimated Increase (Decrease)
Change in Interest Rates	in NII	in NII
(Basis Points)	September 30, 2009	June 30, 2009


+ 100	-0.82%	-1.50%
+ 200	-2.89%	-4.14%

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, 2009 and December 31, 2009.

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, 2009, 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, 2009 and December 31, 2009.

							NPV as a Percentage of Present
							Value of Assets (3)
			Estimated Increase (Decrease) in
Change in			NPV					Increase
Interest Rates	Estimated							(Decrease)
(basis points) (1)	NPV (2)		Amount			Percent	NPV Ratio (4)	(basis points)

+300	$	30,049	$	(11,282	)	-27%	6.53%	-201
+200	$	35,379	$	(5,951	)	-14%	7.53%	-100
+100	$	39,207	$	(2,123	)	-5%	8.21%	-33
0	$	41,330	$	-		0%	8.53%	0
-100	$	41,010	$	(320	)	-1%	8.39%	-14

(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, 2009 of $102.5 million with unused borrowing capacity of $25.4.million. The Bank has an internal limit of wholesale borrowings to total assets ratio of 40.0%. As of December 31, 2009, the ratio of wholesale borrowings to total assets was 21.4%.

The Bank’s primary investing activities are the origination of loans and the purchase of investment securities. During the six months ended December 31, 2009 and 2008, the Bank’s net loan principal (collections) originations were ($1.5) million and $7.3 million, respectively. Purchases of securities totaled $36.0 million and $5.1 million, for the six months ended December 31, 2009 and 2008, respectively.

Loan repayments 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 $146.6 million at December 31, 2009. 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, 2009 and exceeded each of the applicable regulatory capital requirements at such date.

	Required	Actual

Ratio of Tier 1 Capital to total assets	4%	7.05%
Ratio of Total Risk Based Capital to risk-weighted assets	8%	12.42%
Ratio of Tier 1 Risk Based Capital to risk-weighted assets	4%	11.59%

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 six months ended December 31, 2009, 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.

Part II. – OTHER INFORMATION

Item 1.	Legal Proceedings – Not applicable

Item 1A.	Risk Factors – Not applicable

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

	a) Not applicable

	b) Not applicable

	c) Not applicable

Item 3.	Defaults Upon Senior Securities – Not applicable

Item 4.	Submission of Matters to a Vote of Security Holders

The Company convened its 2009 Annual Meeting of Stockholders on November 6, 2009. At the meeting, the stockholders of the Company considered and voted on the following proposals:

Proposal No. 1. The election of Thomas A. Borner, Richard A. Loomis and John P. Miller, each to serve as a director for a term of three years and until his or her successor has been elected and qualified.

	For		Withheld
Thomas A. Borner		5,508,216		337,431
Richard A. Loomis		5,696,071		149,576
John P. Miller		5,748,013		97,634

The term in office of directors Mary E. Patenaude, Jitendra K. Sinha, Paul M. Kelly, Charles H. Puffer, Charles W. Bentley, Jr. and Robert J. Halloran, Jr. continued after the 2009 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, 2010.

The results of Ballot No.2 were as follows:

	For			Against			Abstain
Number of votes		5,836,868			6,797			1,982
Percentage of shares voting in person or by proxy		89.40	%		0.10	%		0.03	%

Item 5.

Other Information

Not applicable.

There were no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors during the period covered by this Form 10-Q.

Item 6.

Exhibits

Exhibits
31.1		Chief Executive Officer Certification pursuant to 17 CFR 240.13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Chief Financial Officer Certification pursuant to 17 CFR 240.13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350.
32.2		Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350.

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 12, 2010	/s/ Thomas A. Borner
		Thomas A. Borner
		Chief Executive Officer

Date	February 12, 2010	/s/ Robert J. Halloran, Jr.
		Robert J. Halloran, Jr.
		President, Chief Financial Officer and Treasurer

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PSB (PSBX) Inactive 10-Q2010 Q2 Quarterly report

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