PSB 10Q 2011 Q3 Quarterly report

PSB (PSBX) Inactive 10-Q2011 Q3 Quarterly report

Content analysis

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011
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 April 30, 2011, there were 6,528,863 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 March 31, 2011 (Unaudited) and June 30, 2010 (Audited)	1

	Condensed Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited)	2

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended March 31, 2011 and 2010 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010 (Unaudited)	4

	Notes to Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	42

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	[Reserved]	43

Item 5.	Other Information	43

Item 6.	Exhibits	43

SIGNATURES		44

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PSB Holdings, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

	March 31,			June 30,
	2011			2010
	(Unaudited)			(Audited)
	(in thousands except share data)
ASSETS
Cash and due from depository institutions	$	6,931		$	21,711
Interest-bearing demand deposits with other banks		475			1,580
Total cash and cash equivalents		7,406			23,291
Securities available for sale (at fair value)		61,851			85,893
Securities held-to-maturity (fair value of $115,643 as of March 31, 2011 and $83,698 as of June 30, 2010)		116,193			83,249
Federal Home Loan Bank stock, at cost		8,056			8,056
Loans held-for-sale		514			1,470
Loans		255,477			257,423
Allowance for loan losses		(2,819	)		(2,651	)
Net loans		252,658			254,772
Premises and equipment		4,972			5,292
Accrued interest receivable		1,520			1,698
Other real estate owned		2,038			1,561
Goodwill		6,912			6,912
Intangible assets		361			473
Bank owned life insurance		6,397			6,191
Other assets		7,754			10,501

Total assets	$	476,632		$	489,359

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest-bearing	$	34,346		$	36,206
Interest-bearing		296,739			298,940
Total deposits		331,085			335,146
Mortgagors’ escrow accounts		994			1,627
Federal Home Loan Bank advances		88,500			100,500
Securities sold under agreements to repurchase		7,005			5,896
Other liabilities		2,133			2,335
Total liabilities		429,717			445,504

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, 6,528,863 shares outstanding at March 31, 2011 and June 30, 2010		694			694
Additional paid-in capital		30,668			30,633
Retained earnings		22,749			21,550
Accumulated other comprehensive loss		(1,126	)		(2,776	)
Unearned ESOP shares		(1,821	)		(1,821	)
Unearned stock awards		(36	)		(212	)
Treasury stock, at cost (414,262) shares at
March 31, 2011 and June 30, 2010)		(4,213	)		(4,213	)
Total stockholders’ equity		46,915			43,855

Total liabilities and stockholders’ equity	$	476,632		$	489,359

See notes to condensed consolidated financial statements.

PSB Holdings, Inc.

Condensed Consolidated Statements of Income

(Unaudited)


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
	(in thousands, except share data)						(in thousands, except share data)
Interest and dividend income:
Interest on loans	$	3,442		$	3,602		$	10,378		$	11,096
Interest and dividends on investments		1,415			1,815			4,581			6,117
Total interest and dividend income		4,857			5,417			14,959			17,213

Interest expense:
Deposits and escrow		1,154			1,377			3,637			4,533
Borrowed funds		883			1,011			2,785			3,308
Total interest expense		2,037			2,388			6,422			7,841
Net interest and dividend income		2,820			3,029			8,537			9,372

Provision for loan losses		218			257			660			764
Net interest and dividend income after provision for loan losses		2,602			2,772			7,877			8,608

Noninterest income:
Fees for services		497			532			1,560			1,725
Mortgage banking activities		9			53			122			185
Net commissions from brokerage service		36			26			112			63
Other than temporary impairment losses on investments Gross impairment losses		(403	)		(2,741	)		(2,217	)		(5,271	)
Less: Impairments recognized in OCI		319			1,803			1,606			3,400
Net impairment losses recognized in earnings		(84	)		(938	)		(611	)		(1,871	)
Gain on sale of securities		-			570			254			1,412
Income from legal settlement		420			-			420			-
Other income		98			107			317			317
Total noninterest income		976			350			2,174			1,831

Noninterest expense:
Compensation and benefits		1,456			1,483			4,391			4,504
Occupancy and equipment		368			313			976			919
Data processing		194			187			599			577
Advertising and marketing		38			56			159			202
Prepayment penalties on borrowings		7			-			26			172
FDIC deposit insurance		225			205			633			557
Writedown of other real estate owned		-			-			95			321
Other noninterest expense		570			575			1,603			1,657
Total noninterest expense		2,858			2,819			8,482			8,909
Income before income tax expense		720			303			1,569			1,530

Income tax expense		190			52			370			348
NET INCOME	$	530		$	251		$	1,199		$	1,182
Earnings per common share
Basic	$	0.08		$	0.04		$	0.19		$	0.19
Diluted	$	0.08		$	0.04		$	0.19		$	0.19

See notes to condensed consolidated financial statements.

PSB Holdings, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Nine Months Ended March 31, 2011 and 2010

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

Dividends declared		-		-		(95	)		-			-			-			-			(95	)
Stock-based compensation		-		67		-			-			-			176			-			243

Comprehensive loss:
Net income		-		-		1,182			-			-			-			-			-
Net change in unrealized holding losses on available-for-sale securities, net of tax effect		-		-		-			3,072			-			-			-
Comprehensive income																					4,254

Balances at March 31, 2010	$	694	$	30,723	$	21,470		$	(2,205	)	$	(1,940	)	$	(233	)	$	(4,211	)	$	44,298


Balances at June 30, 2010	$	694	$	30,633	$	21,550		$	(2,776	)	$	(1,821	)	$	(212	)	$	(4,213	)	$	43,855

Stock-based compensation		-		35		-			-			-			176			-			211

Comprehensive income:
Net income		-		-		1,199			-			-			-			-			-
Net change in unrealized holding losses on available-for-sale securities, net of tax effect		-		-		-			1,650			-			-			-
Comprehensive income																					2,849

Balances at March 31, 2011	$	694	$	30,668	$	22,749		$	(1,126	)	$	(1,821	)	$	(36	)	$	(4,213	)	$	46,915

See notes to condensed consolidated financial statements.

PSB Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the Nine Months
	Ended March 31,
	2011			2010
	(in thousands)
Cash flows from operating activities
Net income	$	1,199		$	1,182
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net		902			256
Gain on sales and calls of securities, net		(254	)		(1,412	)
Write down of securities		611			1,871
Net decrease in loans held-for-sale		956			1,075
Change in deferred loan costs, net		99			24
Provision for loan losses		660			764
(Gain) loss on sale of other real estate owned		(50	)		30
Writedown of other real esate owned		95			321
Depreciation and amortization		370			401
Amortization of core deposit intangible		112			133
Decrease (increase) in accrued interest receivable and other assets		2,067			(2,366	)
Increase in cash surrender value of bank owned life insurance		(206	)		(208	)
Decrease in other liabilities		(103	)		(452	)
Stock-based compensation		112			214
Net cash provided by operating activities		6,570			1,833
Cash flows from investing activities
Purchase of available-for-sale securities		-			(1,000	)
Proceeds from sales of available-for-sale securities		6,636			32,705
Proceeds from maturities of available-for-sale securities		19,498			33,888
Purchase of held-to-maturity securities		(81,681	)		(62,459	)
Proceeds from maturities of held-to-maturity securities		47,886			3,081
Loan originations net of principal collections		597			4,257
Recoveries of loans previously charged off		49			61
Proceeds from sale of other real estate owned		187			680
Capital expenditures - premises and equipment		(42	)		(566	)
Capital expenditures - other real estate owned		-			(16	)
Net cash (used in) provided by investing activities		(6,870	)		10,631
Cash flows from financing activities
Net (decrease) increase in savings, demand deposits and NOW accounts		(2,161	)		32,306
Net decrease in time deposit accounts		(1,900	)		(12,861	)
Net decrease in mortgagors’ escrow account		(633	)		(631	)
Net change in short term Federal Home Loan Bank advances		-			(14,000	)
Proceeds from Federal Home Loan Bank advances		10,000			7,000
Repayments of Federal Home Loans Bank advances		(22,000	)		(11,000	)
Net increase in securities sold under agreement to repurchase		1,109			8,164
Dividends paid		-			(236	)
Net cash (used in) provided by financing activities		(15,585	)		8,742
(Decrease) increase in cash and cash equivalents		(15,885	)		21,206
Cash and cash equivalents at beginning of year		23,291			6,059
Cash and cash equivalents at end of period	$	7,406		$	27,265
Supplemental disclosures
Cash paid during the period for:
Interest	$	6,460		$	7,905
Income taxes (received) paid	$	(864	)	$	395
Loans transferred to other real estate owned	$	709		$	1,598
Increase in due to broker	$	-		$	4,996
Deferred gain in sale of other real estate owned	$	-		$	40
Loans originated to finance sale of other real estate owned	$	-		$	714

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, 2011. These financial statements should be read in conjunction with the 2010 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 24, 2010.

NOTE 3 – Recent Accounting Pronouncements

In December 2010, the FASB issued ASU 2010-28, “Intangibles - Goodwill and Other.” This ASU is to addresses when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods beginning after December 15, 2010. For nonpublic entities, the amendments are effective for fiscal years and interim periods beginning after December 15, 2011.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011. Additional disclosures are also required under this ASU. The Company is currently evaluating the impact of this ASU. The ASU is expected to cause more loan modifications to be classified as TDRs and the Company is evaluating its modification programs and practices in light of the new ASU.

In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. Early adoption is not permitted.

NOTE 4 – Earnings Per Share (EPS)

The Company has adopted the EPS guidance included in ASC 260-10. As presented below, basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For purposes of computing diluted EPS, the treasury stock method is used.

The following information was used in the computation of EPS on both a basic and diluted basis for the three and nine months ended March 31, 2011 and March 31, 2010:

	Quarter Ended		Quarter Ended		Nine Months Ended		Nine Months Ended
	March 31, 2011		March 31, 2010		March 31, 2011		March 31, 2010
Net income	$	530,000	$	251,000	$	1,199,000	$	1,182,000
Dividends and undistributed earnings allocated to unvested shares of stock awards		284		867		2,118		5,983
Net income available to common shareholders	$	529,716	$	250,133	$	1,196,882	$	1,176,017
Average basic common shares		6,349,782		6,319,928		6,338,747		6,308,353
Dilutive effect of stock options		0		0		0		0
Average diluted common shares		6,349,782		6,319,928		6,338,747		6,308,353

Basic EPS:	$	0.08	$	0.04	$	0.19	$	0.19
Diluted EPS:	$	0.08	$	0.04	$	0.19	$	0.19

NOTE 5 – Investment Securities

The carrying value of investment securities are as follows:

	Carrying Value at
	March 31, 2011					June 30, 2010
			Percent					Percent
	Balance		of total			Balance		of total
(Dollars in thousands)
Securities, available-for-sale:
U.S. Government and agency securities	$	716		0.4	%	$	6,101		3.6	%
Corporate bonds and other securities		4,844		2.7	%		4,368		2.6	%
Mortgage-backed securities		46,018		25.8	%		66,967		39.6	%
Equity securities		10,273		5.8	%		8,457		5.0	%
Total securities, available-for-sale		61,851		34.7	%		85,893		50.8	%
Securities, held-to-maturity:
U.S. Government and agency securities		24,103		13.5	%		45,275		26.8	%
Mortgage-backed securities		92,090		51.8	%		37,974		22.4	%
Total securities, held-to-maturity		116,193		65.3	%		83,249		49.2	%
Total securities	$	178,044		100.0	%	$	169,142		100.0	%

There were no gross gains or gross losses realized on sales of available-for-sale securities for the three months ended March 31, 2011 and $570,000 of gross gains for the three months ended March 31, 2010. There was an other-than-temporary impairment charge on available-for-sale securities of $84,000 during the three months ended March 31, 2011 and $938,000 during the three months ended March 31, 2010. The loss on write-downs of securities included total other-than-temporary impairment losses of $403,000 and $2.7 million, net of $319,000 and $1.8 million recognized in other comprehensive income for the three months ended March 31, 2011 and 2010, respectively, before taxes. There were gross gains of $254,000 realized on sales of available-for-sale securities for the nine months ended March 31, 2011 and $1.4 million of gross gains for the nine months ended March 31, 2010. There were no gross losses realized on sales of available-for-sale securities for the nine months ended March 31, 2011 and $35,000 for the nine months ended March 31, 2010. There was an other-than-temporary impairment charge on available-for-sale securities of $611,000 during the nine months ended March 31, 2011 and $1.9 million during the nine months ended March 31, 2010. The loss on write-downs of securities included total other-than-temporary impairment losses of $2.2 million and $5.3 million, net of $1.6 million and $3.4 million recognized in other comprehensive income for the nine months ended March 31, 2011 and 2010, respectively, before taxes. 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:

March 31, 2011:	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value			Losses		Value			Losses		Value			Losses
U.S. Government and agency securities	$	19,413		$	270	$	-		$	-	$	19,413		$	270
Corporate bonds and other obligations		-			-		4,844			1,155		4,844			1,155
Mortgage-backed securities		48,043			705		973			151		49,016			856
Equity securities		-			-		6,676			324		6,676			324
Total temporarily impaired securities		67,456			975		12,493			1,630		79,949			2,605
Other-than-temporarily impaired debt securities (1)
Mortgage-backed securities		2,531			431		6,891			2,032		9,422			2,463
Total temporarily-impaired and other-than-temporarily impaired securities	$	69,987		$	1,406	$	19,384		$	3,662	$	89,371		$	5,068


June 30, 2010:	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value			Losses		Value			Losses		Value			Losses
Corporate bonds and other obligations	$	-		$	-	$	4,368		$	1,630	$	4,368		$	1,630
Mortgage-backed securities		12,307			101		1,032			188		13,339			289
Equity securities		2,744			256		5,660			1,340		8,404			1,596
Total temporarily impaired securities		15,051			357		11,060			3,158		26,111			3,515
Other-than-temporarily impaired debt securities (1)
Mortgage-backed securities		852			419		14,349			3,107		15,201			3,526

Total temporarily-impaired and other-than-temporarily impaired securities	$	15,903		$	776	$	25,409		$	6,265	$	41,312		$	7,041

(1) Includes other-than-temporary impaired available-for-sale debt securities in which a portion of the other-than-temporary impairment loss remains in accumulated other comprehensive income.

The Company had at March 31, 2011 and June 30, 2010, 51 and 25 individual investment securities, respectively, in which the fair value of the security was 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 March 31, 2011, our auction-rate trust preferred securities (“ARP”) portfolio totaled $10.3 million, or 5.8% 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 March 31, 2011, 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. Five 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 March 31, 2011 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 has recognized an improvement in the fair value as of March 31, 2011 compared to June 30, 2010, primarily due to the increased 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.

The chart below includes information as of March 31, 2011 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		05-20-11		05-27-11		05-16-11		04-08-11		04-01-11
Reset Frequency	Quarterly		Quarterly		Quarterly		Quarterly		Quarterly
Failed Auction	Yes		Yes		Yes		Yes		Yes
Receiving Default Rates	Yes		Yes		Yes		No		No
Current Rate		4.539%		4.496%		4.677%		0.000%		0.000%
Dividends Current:	Yes		Yes		Yes		No		No

Federal Home Loan Bank Stock. At March 31, 2011, 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 March 31, 2011, 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 had 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. Fitch rated the Federal Home Loan Bank of Boston (“FHLBB”) as AAA on March 9, 2011. On February 22, 2011, the FHLBB announced that after five consecutive quarters of profitability, they have reintroduced a modest dividend payment that was paid on March 2, 2011. The FHLBB’s Board of Directors anticipates that it will continue to declare modest cash dividends through 2011, but cautioned that adverse events such as a negative trend in credit losses, a meaningful decline in income, or regulatory disapproval could lead to reconsideration of this plan. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment, the liquidity position of the FHLBB, the actions taken by the FHLBB 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.

NOTE 6 – Loans

The following table sets forth the composition of our loan portfolio at March 31, 2011 and June 30, 2010:

	March 31,						June 30,
	2011						2010
	Amount			Percent			Amount			Percent
	(Dollars in thousands)

Mortgage Loans:
Residential (1)	$	194,733			75.68	%	$	194,960			75.37	%
Commercial real estate		52,405			20.37			54,398			21.03
Residential construction		1,856			0.72			1,338			0.52
Commercial		7,224			2.81			6,786			2.62
Consumer and other		1,080			0.42			1,177			0.46

Total loans		257,298			100.00	%		258,659			100.00	%

Unadvanced construction loans		(2,007	)					(1,521	)
		255,291						257,138
Net deferred loan costs		186						285
Allowance for loan losses		(2,819	)					(2,651	)

Loans, net	$	252,658					$	254,772

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

Credit Quality Information

The Company utilizes a nine grade internal loan rating system as follows:

Loans rated 1 -5: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 6: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following table presents the Company’s loans by risk rating at March 31, 2011.


	Residential		Commercial		Residential			Commercial
	Real Estate		Real Estate		Construction			and Industrial			Consumer		Other		Total
	(Dollars in thousands)
March 31, 2011
Grade:
Pass	$	192,979	$	37,175		$	870		$	6,473	$	1,080	$	-	$	238,577
Special Mention		24		3,322			-			751		-		-		4,097
Substandard		1,730		10,887			-			-		-		-		12,617
Doubtful		-		-			-			-		-		-		-
Loss		-		-			-			-		-		-		-
Total	$	194,733	$	51,384		$	870		$	7,224	$	1,080	$	-	$	255,291

NOTE 7 – Non-performing Assets

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

	At March 31,			At June 30,
	2011			2010
	(Dollars in thousands)
Non-accrual loans:
Residential mortgage loans (1)	$	1,731		$	1,425
Commercial real estate		2,893			4,164
Residential construction		-			-
Commercial		-			213
Consumer and other		-			-
Total non-accrual loans		4,624			5,802

Accruing loans past due 90 days or more:
Residential mortgage loans (1)		-			491
Commercial real estate		-			-
Residential construction		-			-
Commercial		-			-
Consumer and other		-			-
Total		-			491

Total non-performing loans		4,624			6,293

Other real estate owned		2,038			1,561
Other non-performing assets		46			46
Total non-performing assets		6,708			7,900

Troubled debt restructurings in compliance with restructured terms		3,255			930
	$	9,963		$	8,830

Total non-performing loans to total loans		1.81	%		2.45	%
Total non-performing assets to total assets		1.41			1.61
Total non-performing assets and troubled debt restructurings to total assets		2.09			1.80

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

Total non-performing assets decreased $1.2 million to $6.7 million at March 31, 2011 from $7.9 million at June 30, 2010. Non-performing assets as of March 31, 2011 consisted of $2.0 million in Other Real Estate Owned which reflects the repossession of a six-lot residential development project at a carrying value of $303,000, a partially completed single family home within the same subdivision with a carrying value of $160,000 and 34 acres of land carried at $110,000, a single family home at a carrying value of $201,000, a single family home at a carrying value of $126,000, a single family home at a carrying value of $133,000, one single unit condominium at a carrying value of $112,000, a single family home at a carrying value of $142,000, one residential/commercial office space at a carrying value of $213,000, a single family home at a carrying value of $105,000, a single family home with a carrying value of $144,000 and an in-substance foreclosure of a condominium project at a carrying value of $289,000. Also included in non-performing assets is $46,000 in Freddie Mac auction-rate trust preferred securities and $4.6 million in non-performing loans. These loans consisted of seven residential loans totaling $1.7 million and eight commercial real estate loans totaling $2.9 million. Non-performing assets as of June 30, 2010 consisted of $1.6 million in Other Real Estate Owned, $46,000 in Freddie Mac auction-rate trust preferred securities and $6.3 million in non-performing loans. These loans consisted of nine residential loans totaling $1.9 million, three commercial and industrial loans totaling $213,000 and 11 commercial real estate loans totaling $4.1 million.

The balance 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. This plan has been implemented. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following table sets forth information regarding past due loans at March 31, 2011:

	30–59 Days		60–89 Days		90 days		Total
	Past Due		Past Due		or greater		Past Due
	(Dollars in thousands)
2011
Real Estate:
Residential	$	2,662	$	123	$	1,095	$	3,880
Commercial		1,883		-		1,987		3,870
Residential Construction		-		-		-		-
Commercial and Industrial		8		-		-		8
Consumer		-		6		-		6
Other		-		-		-		-
Total	$	4,553	$	129	$	3,082	$	7,764

The following is a summary of information pertaining to impaired loans at March 31, 2011 (in thousands)

			Unpaid				Average		Interest		Amount
	Recorded		Principal		Related		Recorded		Income		Recognized
	Investment		Balance		Allowance		Investment		Recognized		on Cash Basis
	Dollars in thousands
March 31, 2011
Impaired loans without a valuation allowance:
Real Estate:
Residential	$	562	$	562	$	-	$	1,241	$	9	$	10
Commercial		2,396		2,396		-		2,743		9		8
Residential Construction		-		-		-		-		-		-
Commercial and Industrial		-		-		-		-		-		-
Consumer		31		31		-		8		2		2
Total impaired with no related allowance		2,989		2,989		0		3,992		20		20

Impaired loans with a valuation allowance:
Real Estate:
Residential		2,039		2,194		155		1,220		35		43
Commercial		4,784		5,285		501		3,366		53		36
Residential Construction		-		-		-		-		-		-
Commercial and Industrial		-		-		-		53		-		-
Consumer		-		-		-		25		-		-
Total impaired with an allowance recorded		6,823		7,479		656		4,664		88		79

Total Impaired Loans:
Real Estate:
Residential		2,601		2,756		155		2,461		44		53
Commercial		7,180		7,681		501		6,109		62		44
Residential Construction		-		-		-		-		-		-
Commercial and Industrial		-		-		-		53		-		-
Consumer		31		31		-		33		2		2
Total impaired loans	$	9,812	$	10,468	$	656	$	8,656	$	108	$	99

June 30, 2010
Impaired loans	$	5,718	$	6,164	$	446	$	6,173	$	107	$	57

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

NOTE 8 – Allowance for Loan Losses

The following summarizes the changes in the allowance for loan losses for the three and nine months ended March 31, 2011, as compared to the prior year periods:

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
	(In thousands)						(In thousands)
Balance, beginning of period	$	2,587		$	2,207		$	2,651		$	2,200
Provision for loan losses		218			257			660			764
Charge offs		(14	)		(93	)		(541	)		(618	)
Recoveries		28			36			49			61
Balance, end of period	$	2,819		$	2,407		$	2,819		$	2,407

At March 31, 2011, the Company had 18 loans with balances of $4.6 million on nonaccrual status and no loans past due 90 days or more and still accruing. At March 31, 2010, the Company had 19 loans with balances of $5.4 million on nonaccrual status and 24 loans with a balance of $6.2 million past due 90 days or more and still accruing. The Company had 27 loan relationships that are considered impaired with a balance of $10.5 million as of March 31, 2011 and there were 19 impaired loan relationships with a balance of $6.0 million as of March 31, 2010.

An analysis of the allowance for loan losses is as follows:

	Residential		Commercial		Residential		Commercial
	Real Estate		Real Estate		Construction		and Industrial			Consumer			Other		Unallocated		Total
	(Dollars in thousands)
March 31, 2011
Allowance for credit losses:
Beginning balance	$	1,332	$	901	$	10	$	297		$	37		$	6	$	68	$	2,651
Charge-offs		207		63		-		212			2			57		-		541
Recoveries		4		-		-		15			1			29		-		49
Provision		331		307		9		(10	)		(33	)		25		31		660
Ending Balance	$	1,460	$	1,145	$	19	$	90		$	3		$	3	$	99	$	2,819

Ending balance:Individually evaluated for impairment	$	155	$	500	$	-	$	-		$	-		$	-	$	-	$	655

Ending balance:collectively evaluated for impairment	$	1,305	$	645	$	19	$	90		$	3		$	3	$	99	$	2,164

Ending balance:loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-		$	-		$	-	$	-	$	-

Loans:
Ending Balance	$	194,733	$	51,384	$	870	$	7,224		$	1,021		$	59	$	-	$	255,291

Ending balance:Individually evaluated for impairment	$	2,752	$	7,678	$	-	$	-		$	32		$	-	$	-	$	10,462	(1)

Ending balance:collectively evaluated for impairment	$	191,981	$	43,706	$	870	$	7,224		$	989		$	59	$	-	$	244,829

Ending balance:loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-		$	-		$	-	$	-	$	-

(1) Does not include deferred fees or costs.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. For each portfolio segment, management assigns a reserve based on delinquency trends, charge-off experience, economic conditions, portfolio trends, concentrations and management adjustments.

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 March 31, 2011 was $6.9 million and $361,000, respectively. The amortization expense related to the core deposit intangible for the three months ended March 31, 2011 and 2010 was $37,000 and $44,000, respectively. The amortization expense related to the core deposit intangible for the nine months ended March 31, 2011 and 2010 was $112,000 and $133,000, respectively.

	March 31,		June 30,
	2011		2010
	(in thousands)
Balances not subject to amortization:
Goodwill	$	6,912	$	6,912
Balances subject to amortization:
Core Deposit Intangible		361		473
Total intangible assets	$	7,273	$	7,385

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

	(in thousands)

For the three months ending June 30, 2011		37
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	$	361

NOTE 10 – Comprehensive Income

Comprehensive income 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 is the net unrealized gain (loss) on securities.


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
	(in thousands)						(in thousands)

Net Income	$	530		$	251		$	1,199		$	1,182

Other comprehensive income
Net unrealized holding gains (losses) on available-for-sale securities		806			(469	)		2,143			4,194
Reclassification adjustment for loss recognized in net income		84			368			357			459
Other comprehensive income (loss) before tax		890			(101	)		2,500			4,653
Income tax (expense) benefit related to items of other comprehensive income		(303	)		36			(850	)		(1,581	)
		587			(65	)		1,650			3,072
Total comprehensive income	$	1,117		$	186		$	2,849		$	4,254

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 March 31, 2011.

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 Company did not have any significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the nine months ended March 31, 2011.

The following summarizes assets measured at fair value for the period ending March 31, 2011 (in thousands):

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable Inputs		Unobservable Inputs
			Identical Assets
(In thousands)	March 31, 2011		Level 1		Level 2		Level 3

Securities available for sale
U. S. Government agency securities	$	716	$	-	$	716	$	-
Corporate securities		4,844		-		4,844		-
Mortgage backed securities insured or guaranteed by U.S. Government enterprises		32,564		-		32,564		-
Non-agency mortgage-backed securities		13,454		-		13,454		-
Equity securities		10,273		-		-		10,273
Total	$	61,851	$	-	$	51,578	$	10,273

	Fair Value Measurements
	Using Significant Unobservable Inputs
	Level 3
	Available-for-sale
(In thousands)	Securities		Total
Beginning balance, July 1, 2010	$	8,457	$	8,457
Total gains or losses
Included in earnings		-		-
Included in other comprehensive income		1,816		1,816
Principal payments on securities		-		-
Amortization of securities, net		-		-
Transfers in and/or out of Level 3		-		-
Ending balance, March 31, 2011	$	10,273	$	10,273

The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date for trading securities	$	-	$	-

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable Inputs		Unobservable Inputs
			Identical Assets
(In thousands)	March 31, 2011		Level 1		Level 2		Level 3

Impaired loans (1)	$	6,819	$	-	$	-	$	6,819
Other real estate owned		1,180		-		-		1,180
Totals	$	7,999	$	-	$	-	$	7,999

(1) Does not include deferred fees or costs.

	Fair Value Measurements
	Using Significant Unobservable Inputs
	Level 3
	Impaired			Other Real
(In thousands)	Loans			Estate Owned			Total
Beginning balance, July 1, 2010	$	1,784		$	1,170		$	2,954
Total gains or losses		-			-			-
Principal payments on impaired loans		(453	)		-			(453	)
Amount charged to allowance for loan loss		(96	)					(96	)
Writedown of other real estate owned		-			(95	)		(95	)
Transfers from loans to other real estate owned		-			105			105
Transfers into Level 3		5,584			-			5,584
Ending balance March 31, 2011	$	6,819		$	1,180		$	7,999

	Fair Value Measurements at June 30, 2010 Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
	June 30, 2010		Level 1		Level 2		Level 3

Securities available-for-sale
U. S. Government agency securities	$	6,101	$	-	$	6,101	$	-
Corporate securities		4,368		-		4,368		-
Mortgage-backed securities insured or guaranteed by U. S. Government enterprises		50,734		-		50,734		-
Non-agency mortgage-backed securities		16,233		-		16,233		-
Equity securities		8,457		-		0		8,457
Total	$	85,893	$	-	$	77,436	$	8,457

	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 (realized/unrealized)
Included in earnings		-		-
Included in other comprehensive income		991		991
Principal payments on securities		-		-
Accretion of securities, net		-		-
Transfers out of Level 3		-		-
Ending balance, June 30, 2010	$	8,457	$	8,457

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	-	$	-

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable Inputs		Unobservable Inputs
			Identical Assets
(In thousands)	June 30, 2010		Level 1		Level 2		Level 3

Impaired loans	$	1,784	$	-	$	-	$	1,784
Other real estate owned		1,561		-		391		1,170
Totals	$	3,345	$	-	$	391	$	2,954

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 March 31, 2011 and March 31, 2010 of $8,000 and $71,000, respectively. The Company recorded share-based compensation expense in connection with the stock option and restricted stock awards for the nine months ended March 31, 2011 and March 31, 2010 of $113,000 and $214,000, respectively.

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 third quarter of fiscal 2011.

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:


	March 31,		June 30,
	2011		2010
	(in thousands)
Commitments to extend credit:
Loan commitments	$	1,835	$	1,305
Unadvanced construction loans		2,007		1,521
Unadvanced lines of credit		13,500		15,213
Standby letters of credit		757		857
Outstanding commitments	$	18,099	$	18,896

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 nine months ended March 31, 2011 and 2010, 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 2010 Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on September 24, 2010.

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 March 31, 2011, the Company recorded a non-cash OTTI charge of $84,000 and during the quarter ended March 31, 2010, the Company recorded a non-cash OTTI charge of $938,000. Both of these OTTI charges were taken on Non-Agency CMO securities. The net interest margin decreased from 2.73% for the quarter ended March 31, 2010 to 2.56% for the quarter ended March 31, 2011, as we experienced a $209,000 decrease in net interest and dividend income over the periods. In addition, noninterest expense increased $39,000 during the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010. The provision for loan losses decreased $39,000 during the quarter ended March 31, 2011 as compared to the quarter ended March 31, 2010.

During the nine months ended March 31, 2011, the Company recorded a non-cash OTTI charge of $611,000 and during the nine months ended March 31, 2010, the Company recorded a non-cash OTTI charge of $1.9 million. Both of these OTTI charges were taken on Non-Agency CMO securities. The net interest margin decreased from 2.79% for the nine months ended March 31, 2010 to 2.53% for the nine months ended March 31, 2011, as we experienced a $835,000 decrease in net interest and dividend income over the periods. In addition, noninterest expense decreased $427,000 during the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010. The provision for loan losses decreased $104,000 during the nine months ended March 31, 2011 as compared to the nine months ended March 31, 2010.

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.

Loans. The Company’s loan portfolio includes residential real estate, commercial real estate, construction, commercial and consumer segments. Residential real estate loans include classes for one-to four-family owner occupied, second mortgages and equity lines of credit. Consumer loans include personal loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on all loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below.

General component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There have been no material changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during 2011.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate - The Company generally does not originate loans with a loan-to-value ratio greater than 80% and does not originate subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate - Loans in this segment are primarily income-producing properties throughout New England. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls annually and continually monitors the cash flows of these loans.

Construction loans – Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Commercial loans – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer loans - Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

Allocated component

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.

Unallocated component

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

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 $611,000 of write-downs were recognized through the income statement during the nine months ended March 31, 2011 on other-than-temporarily impaired securities and $1.9 million of write-downs were recognized through the income statement during the nine months ended March 31, 2010 on other-than-temporarily impaired securities. The loss on write-downs of securities reflected total other-than-temporary impairment losses of $2.2 million and $5.3 million, net of $1.6 million and $3.4 million recognized in other comprehensive income for the nine months ended March 31, 2011 and 2010, respectively, before taxes.

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 March 31, 2011 and June 30, 2010

Assets

Total assets decreased to $476.6 million at March 31, 2011 from $489.4 million at June 30, 2010. Investments in available-for-sale securities decreased $24.0 million during the nine months ended March 31, 2011, and represented $61.9 million or 13.0% of total assets at March 31, 2011. This decrease was primarily due to $6.6 million in sales and $19.5 million in pay downs, calls and maturities during the nine months ended March 31, 2011. Investments in held-to-maturity securities increased $32.9 million during the nine months ended March 31, 2011, and represented $116.2 million or 24.4% of total assets at March 31, 2011. This increase was due to new security purchases being classified as held-to-maturity due to the Company’s intent and ability to hold these securities to maturity. Net loans decreased $2.1 million during the nine months ended March 31, 2011 and represented $252.7 million or 53.0% of total assets at March 31, 2011. Included in other assets as of March 31, 2011 was $1.7 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 March 31, 2011 and June 30, 2010. For additional information, see “Comparison of Operating Results for the Three and Nine Months Ended March 31, 2011 and 2010 – Provision for loan losses.”


	March 31,			June 30,
	2011			2010
	(Dollars in thousands)

Allowance for loan losses	$	2,819		$	2,651
Gross loans outstanding		255,477			257,423
Nonperforming loans		4,624			6,293
Allowance/gross loans outstanding		1.10	%		1.03	%
Allowance/nonperforming loans		61.0	%		42.1	%

Liabilities

Total liabilities decreased to $429.7 million at March 31, 2011 from $445.5 million at June 30, 2010. Total deposits decreased to $331.1 million at March 31, 2011 from $335.1 million at June 30, 2010, a decrease of $4.0 million or 1.2%. Federal Home Loan Bank advances decreased to $88.5 million at March 31, 2011 from $100.5 million at June 30, 2010, a decrease of $12.0 million or 11.9%. Securities sold under agreements to repurchase increased to $7.0 million at March 31, 2011 from $5.9 million at June 30, 2010, an increase of $1.1 million or 18.8%.

Stockholders’ Equity

Stockholders’ equity increased to $46.9 million at March 31, 2011 from $43.9 million at June 30, 2010, primarily due to net income of $1.2 million and a reduction in other comprehensive loss of $1.7 million.

Comparison of Operating Results for the Three and Nine Months Ended March 31, 2011 and 2010

Net Income

Net income amounted to $530,000 or $.08 per basic and diluted share for the quarter ended March 31, 2011 compared to net income of $251,000 or $.04 per basic and diluted share for the quarter ended March 31, 2010 . The increase in net income was primarily due to $420,000 received in a partial legal settlement regarding prior security losses this quarter. Other-than-temporarily impaired investment write-downs decreased by $854,000 to $84,000 during the quarter ended March 31, 2011 compared to $938,000 for the quarter ended March 31, 2010. Loan loss provision decreased by $39,000 to $218,000 during the quarter ended March 31, 2011 compared to $257,000 during the quarter ended March 31, 2010. This was partially offset by decreases in net interest income of $209,000 and net gains on sale of securities of $570,000. Income tax expense increased by $138,000 to $190,000 for the quarter ended March 31, 2011 compared to $52,000 during the quarter ended March 31, 2010.

Net income amounted to $1.20 million or $.19 per basic and diluted share for the nine months ended March 31, 2011 compared to net income of $1.18 million or $.19 per basic and diluted share for the nine months ended March 31, 2010. The increase in net income was primarily due to the $420,000 in the partial legal settlement mentioned above along with a decrease in other-than-temporarily impaired investment write-downs of $1.3 million to $611,000 during the nine months ended March 31, 2011 compared to $1.9 million for the nine months ended March 31, 2010. Noninterest expense decreased by $427,000 to $8.5 million for the nine months ended March 31, 2011 compared to $8.9 million for the nine months ended March 31, 2010. This was partially offset by decreases in net interest income of $835,000 and net gains on sale of securities of $1.2 million. The provision for loan loss decreased by $104,000 to $660,000 for the nine months ended March 31, 2011 compared to $764,000 for the nine months ended March 31, 2010. Income tax expense increased by $22,000 to $370,000 for the quarter ended March 31, 2011 compared to $348,000 during the quarter ended March 31, 2010.

Interest and Dividend Income

Interest and dividend income amounted to $4.9 million for the quarter ended March 31, 2011 as compared to $5.4 million for the quarter ended March 31, 2010, a decrease of $560,000 or 10.3%. This was primarily due to a decrease in yield on earning assets of 46 basis points to 4.41% for the quarter ended March 31, 2011 compared to 4.87% for the quarter ended March 31, 2010. Average investment securities increased $21.8 million to $186.0 million for the quarter ended March 31, 2011 compared to $164.2 million for the quarter ended March 31, 2010. The yield on investment securities decreased 140 basis points to 3.08% for the quarter ended March 31, 2011 compared to 4.48% for the quarter ended March 31, 2010. Average loans decreased by $6.1 million to $257.3 million for the quarter ended March 31, 2011 compared to $263.4 million for the quarter ended March 31, 2010. The yield on loans decreased 12 basis points to 5.43% for the quarter ended March 31, 2011 compared to 5.55% for the quarter ended March 31, 2010.

Interest and dividend income amounted to $15.0 million for the nine months ended March 31, 2011 as compared to $17.2 million for the nine months ended March 31, 2010, a decrease of $2.2 million or 13.1%. This was primarily due to a decrease in yield on earning assets of 69 basis points to 4.43% for the nine months ended March 31, 2011 compared to 5.12% for the nine months ended March 31, 2010. Average investment securities increased $20.4 million to $186.4 million for the nine months ended March 31, 2011 compared to $166.0 million for the nine months ended March 31, 2010. The yield on investment securities decreased 163 basis points to 3.27% for the nine months ended March 31, 2011 compared to 4.90% for the nine months ended March 31, 2010. Average loans decreased by $9.47 million to $256.87 million for the nine months ended March 31, 2011 compared to $266.34 million for the nine months ended March 31, 2010. The yield on loans decreased 17 basis points to 5.38% for the nine months ended March 31, 2011 compared to 5.55% for the nine months ended March 31, 2010.

Interest Expense

Interest expense amounted to $2.0 million for the quarter ended March 31, 2011 as compared to $2.4 million for the quarter ended March 31, 2010, a decrease of $351,000 or 14.7%. The decrease was primarily due to a change in rates of interest-bearing liabilities. The cost of average interest-bearing liabilities decreased 32 basis points to 2.08% for the quarter ended March 31, 2011 from 2.40% for the quarter ended March 31, 2010. The average rate on interest-bearing deposits decreased by 34 basis points to 1.59% for the quarter ended March 31, 2011 compared to 1.93% for the quarter ended March 31, 2010. The average rate on borrowed money decreased by three basis points to 3.55% for the quarter ended March 31, 2011 compared to 3.58% for the quarter ended March 31, 2010.

Interest expense amounted to $6.4 million for the nine months ended March 31, 2011 as compared to $7.8 million for the nine months ended March 31, 2010, a decrease of $1.4 million or 18.1%. The decrease was primarily due to a change in rates of interest-bearing liabilities. The cost of average interest-bearing liabilities decreased 47 basis points to 2.14% for the nine months ended March 31, 2011 from 2.61% for the nine months ended March 31, 2010. The average rate on interest-bearing deposits decreased by 49 basis points to 1.64% for the nine months ended March 31, 2011 compared to 2.13% for the nine months ended March 31, 2010. The average rate on borrowed money decreased by 21 basis points to 3.55% for the nine months ended March 31, 2011 compared to 3.76% for the nine months ended March 31, 2010.

Net Interest and Dividend Income

Net interest and dividend income amounted to $2.8 million for the quarter ended March 31, 2011 as compared to $3.0 million for the quarter ended March 31, 2010, a decrease of $209,000 or 6.9%. Net interest spread decreased by 14 basis points to 2.33% for the quarter ended March 31, 2011 from 2.47% for the quarter ended March 31, 2010. Net interest margin decreased 17 basis points to 2.56% as compared to 2.73% when comparing the quarters ended March 31, 2011 and 2010. Net interest-earning assets increased $3.0 million to $50.4 million for the quarter ended March 31, 2011 compared to $47.4 million for the quarter ended March 31, 2010.

Net interest and dividend income amounted to $8.5 million for the nine months ended March 31, 2011 as compared to $9.4 million for the nine months ended March 31, 2010, a decrease of $835,000 or 8.9%. Net interest spread decreased by 22 basis points to 2.29% for the nine months ended March 31, 2011 from 2.51% for the nine months ended March 31, 2010. Net interest margin decreased 26 basis points to 2.53% as compared to 2.79% when comparing the nine months ended March 31, 2011 and 2010. Net interest-earning assets increased $2.7 million to $50.4 million for the nine months ended March 31, 2011 compared to $47.7 million for the nine months ended March 31, 2010.

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. See “Market Risk, Liquidity and Capital Resources – Market Risk.”

Provision for Loan Losses

The provision for loan losses amounted to $218,000 for the quarter ended March 31, 2011 as compared to $257,000 for the quarter ended March 31, 2010, a decrease of $39,000 or 15.2%. The provision for loan losses amounted to $660,000 for the nine months ended March 31, 2011 as compared to $764,000 for the nine months ended March 31, 2010, a decrease of $104,000 or 13.6%. 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 1.10% as of March 31, 2011 compared to 1.03% as of June 30, 2010. Net recoveries were $14,000 for the quarter ended March 31, 2011 compared to net charge-offs of $57,000 for the quarter ended March 31, 2010. Net charge-offs were $492,000 for the nine months ended March 31, 2011 compared to $557,000 for the nine months ended March 31, 2010. The ratio of the allowance to nonperforming loans was 61.0% as of March 31, 2011 compared to 42.1% as of June 30, 2010. Management believes that the nonperforming loans will not have a material effect on the adequacy of the allowance for loan losses.

Noninterest Income

Noninterest income totaled $976,000 for the quarter ended March 31, 2011 compared to $350,000 for the quarter ended March 31, 2010, an increase of $626,000 or 178.9%. The increase was primarily due to a $420,000 legal settlement, a decrease in write-downs of investments of $854,000 or 91.0% to $84,000 for the quarter ended March 31, 2011 compared to $938,000 for the quarter ended March 31, 2010. The impairment charges for the quarters ended March 31, 2011 and March 31, 2010 consisted of private label CMOs. This was partially offset by a decrease in net gains on securities sales of $570,000 for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010.

Noninterest income totaled $2.2 million for the nine months ended March 31, 2011 compared to $1.8 million for the nine months ended March 31, 2010, an increase of $343,000 or 18.7%. The increase was primarily due to a $420,000 legal settlement mentioned above, a decrease in write-downs of investments of $1.3 million or 67.3% to $611,000 for the nine months ended March 31, 2011 compared to $1.9 million for the nine months ended March 31, 2010. The impairment charges for the nine months ended March 31, 2011 and March 31, 2010 consisted of private label CMOs. This was partially offset by a decrease in net gains on securities sales of $1.2 million for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010. Service fee income decreased $165,000 or 9.6% to $1.56 million for the nine months ended March 31, 2011 compared to $1.72 million for the nine months ended March 31, 2010.

Noninterest Expense

Noninterest expense amounted to $2.86 million for the quarter ended March 31, 2011 as compared to $2.82 million for the quarter ended March 31, 2010, an increase of $39,000 or 1.4%. Compensation and benefits expense decreased $27,000 or 1.8%. Occupancy and equipment expense increased $55,000 or 17.6%. Other noninterest expenses increased $11,000 or 1.1% to $1.03 million for the quarter ended March 31, 2011 compared to $1.02 million for the quarter ended March 31, 2010.

Noninterest expense amounted to $8.5 million for the nine months ended March 31, 2011 as compared to $8.9 million for the nine months ended March 31, 2010, a decrease of $427,000 or 4.8%. Compensation and benefits expense decreased $113,000 or 2.5%. This was due to decreases in medical insurance expense of $32,000, employee stock award expense of $60,000 and salary expense of $25,000. Occupancy expense increased $57,000 or 6.2%. Other noninterest expenses decreased $371,000 or 10.6% to $3.1 million for the nine months ended March 31, 2011 compared to $3.5 million for the nine months ended March 31, 2010. This decrease was primarily due to decreases in other real estate owned write-downs of $226,000 and prepayment penalties on borrowings of $146,000 during the nine months ended March 31, 2011.

Provision for Income Taxes

Income tax expense amounted to $190,000 for the quarter ended March 31, 2011 compared to $52,000 for the quarter ended March 31, 2010. Income tax expense amounted to $370,000 for the nine months ended March 31, 2011 compared to $348,000 for the nine months ended March 31, 2010.

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 March 31,
			2011							2010
	(Dollars in thousands)

	Average		Interest		Yield/			Average		Interest		Yield/
Interest-earning assets:	Balance		Income/Expense		Cost			Balance		Income/Expense		Cost
Investment securities	$	186,035	$	1,414		3.08	%	$	164,176	$	1,812		4.48	%
Loans		257,284		3,442		5.43	%		263,402		3,602		5.55	%
Other earning assets		3,234		1		0.13	%		23,112		3		0.05	%
Total interest-earnings assets		446,553		4,857		4.41	%		450,690		5,417		4.87	%
Non-interest-earning assets		32,414							33,015
Total assets	$	478,967						$	483,705

Interest-bearing liabilities:
NOW accounts	$	90,349		223		1.00	%	$	87,083		342		1.59	%
Savings accounts		47,766		41		0.35	%		46,300		45		0.39	%
Money market accounts		14,066		27		0.78	%		11,248		27		0.97	%
Time deposits		143,003		863		2.45	%		144,200		963		2.71	%
Borrowed money		101,012		883		3.55	%		114,501		1,011		3.58	%
Total interest-bearing liabilities		396,196		2,037		2.08	%		403,332		2,388		2.40	%
Non-interest-bearing demand deposits		34,327							34,243
Other non-interest-bearing liabilities		1,932							1,974
Capital accounts		46,512							44,156
Total liabilities and capital accounts	$	478,967						$	483,705

Net interest income			$	2,820						$	3,029
Interest rate spread						2.33	%						2.47	%
Net interest-earning assets	$	50,357						$	47,358
Net interest margin						2.56	%						2.73	%
Average earning assets to average interest-bearing liabilities						112.71	%						111.74	%

	For the Nine Months Ended March 31,
			2011							2010
	(Dollars in thousands)

	Average		Interest/		Yield/			Average		Interest/		Yield/
Interest-earning assets:	Balance		Dividends		Cost			Balance		Dividends		Cost
Investment securities	$	186,358	$	4,577		3.27	%	$	165,984	$	6,111		4.90	%
Loans		256,867		10,378		5.38	%		266,342		11,096		5.55	%
Other earning assets		6,195		4		0.09	%		15,388		6		0.05	%
Total interest-earnings assets		449,420		14,959		4.43	%		447,714		17,213		5.12	%
Non-interest-earning assets		32,781							32,182
Total assets	$	482,201						$	479,896

Interest-bearing liabilities:
NOW accounts	$	89,410		728		1.08	%	$	76,873		1,029		1.78	%
Savings accounts		47,390		125		0.35	%		46,003		153		0.44	%
Money market accounts		13,509		88		0.87	%		11,069		87		1.05	%
Time deposits		144,243		2,696		2.49	%		149,001		3,264		2.92	%
Borrowed money		104,444		2,785		3.55	%		117,098		3,308		3.76	%
Total interest-bearing liabilities		398,996		6,422		2.14	%		400,044		7,841		2.61	%
Non-interest-bearing demand deposits		35,547							34,979
Other non-interest-bearing liabilities		1,979							2,289
Capital accounts		45,679							42,584
Total liabilities and capital accounts	$	482,201						$	479,896

Net interest income			$	8,537						$	9,372
Interest rate spread						2.29	%						2.51	%
Net interest-earning assets	$	50,424						$	47,670
Net interest margin						2.53	%						2.79	%
Average earning assets to average interest-bearing liabilities						112.64	%						111.92	%

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 March 31, 2011
	Compared to the Three Months Ended March 31, 2010
	Increase(Decrease) Due to
	Rate			Volume			Net
INTEREST INCOME

Investment securities	$	(1,649	)	$	1,251		$	(398	)
Loans		(77	)		(83	)		(160	)
Other interest-earning assets		12			(14	)		(2	)
TOTAL INTEREST INCOME		(1,714	)		1,154			(560	)

INTEREST EXPENSE:

NOW accounts		(203	)		84			(119	)
Savings accounts		(12	)		8			(4	)
Money Market accounts		(24	)		24			-
Time deposits		(92	)		(8	)		(100	)
Other borrowed money		(10	)		(118	)		(128	)
TOTAL INTEREST INCOME		(341	)		(10	)		(351	)

CHANGE IN NET INTEREST INCOME	$	(1,373	)	$	1,164		$	(209	)

	For the Nine Months Ended March 31, 2011
	Compared to the Nine Months Ended March 31, 2010
	Increase(Decrease) Due to
	Rate			Volume			Net
INTEREST INCOME

Investment securities	$	(2,581	)	$	1,047		$	(1,534	)
Loans		(330	)		(388	)		(718	)
Other interest-earning assets		4			(6	)		(2	)
TOTAL INTEREST INCOME		(2,907	)		653			(2,254	)

INTEREST EXPENSE:

NOW accounts		(528	)		227			(301	)
Savings accounts		(35	)		7			(28	)
Money Market accounts		(22	)		23			1
Time deposits		(467	)		(101	)		(568	)
Other borrowed money		(179	)		(344	)		(523	)
TOTAL INTEREST INCOME		(1,231	)		(188	)		(1,419	)

CHANGE IN NET INTEREST INCOME	$	(1,676	)	$	841		$	(835	)

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 December 31, 2010 and June 30, 2010.

Net Interest Income At-Risk

		Estimated Increase (Decrease)			Estimated Increase (Decrease)
Change in Interest Rates		in NII			in NII
(Basis Points)		December 31, 2010			June 30, 2010

	+ 100		-2.50	%		-1.25	%
	+ 200		-6.30	%		-4.59	%

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 December 31, 2010 and March 31, 2011.

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 December 31, 2010, 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 December 31, 2010 and March 31, 2011.

										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	$	26,781	$	(14,139	)		-35	%		5.78	%		-258
	+200	$	33,428	$	(7,492	)		-18	%		7.06	%		-131
	+100	$	38,569	$	(2,351	)		-6	%		7.99	%		-37
	0	$	40,920	$	-			0	%		8.37	%		0
	-100	$	42,142	$	1,222			3	%		8.53	%		16

(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 March 31, 2011 of $88.5 million with unused borrowing capacity of $55.5 million. The Bank has an internal limit of wholesale borrowings to total assets ratio of 40.0%. As of March 31, 2011, the ratio of wholesale borrowings to total assets was 18.6%.

The Bank’s primary investing activities are the origination of loans and the purchase of investment securities. During the nine months ended March 31, 2011 and 2010, the Bank’s loan originations net of principal collections were $597,000 and $4.3 million, respectively. Purchases of securities totaled $81.7 million and $63.5 million, for the nine months ended March 31, 2011 and 2010, 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 $142.4 million at March 31, 2011. 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 with certainty future terms and conditions upon renewal, a significant portion of such deposits will remain with the Bank.

The Bank was well capitalized at March 31, 2011 and exceeded each of the applicable regulatory capital requirements at such date.

	Required			Actual

Ratio of Tier 1 Capital to total assets		4	%		7.48	%

Ratio of Total Risk Based Capital to risk-weighted assets		8	%		15.17	%

Ratio of Tier 1 Risk Based Capital to risk-weighted assets		4	%		13.98	%

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 nine months ended March 31, 2011, 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

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.	[Reserved]

Item 5.	Other Information

Not applicable.

Item 6.

Exhibits

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

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	May 13, 2011			/s/ Thomas A. Borner
				Thomas A. Borner
				Chief Executive Officer

Date	May 13, 2011		/s/ Robert J. Halloran, Jr.
			Robert J. Halloran, Jr.
			President, Chief Financial Officer and Treasurer

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549