PSB Holdings, Inc. - FORM 10-Q

PSB Holdings, Inc. - FORM 10-Q - May 16, 2011

Attached files

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - PSB Holdings, Inc.	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - PSB Holdings, Inc.	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - PSB Holdings, Inc.	ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - PSB Holdings, Inc.	ex32-2.htm

(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		-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549