Psb Holdings, Inc. - Quarterly Report of Financial Condition (10QSB)

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

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FORM 10-QSB

 

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(Mark One)

 

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

For the quarterly period ended September 30, 2007

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-50970

 

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PSB Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

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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)

[phone]

(Issuer’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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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     ¨   NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     ¨   YES     x   NO

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.     ¨   YES     x   NO

As of September 30, 2007, there were 6,667,177 shares of the registrant’s common stock outstanding.

Transitional Small Business Disclosure Format.    Yes   ¨     No   x

 

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Table of Contents

PSB Holdings, Inc.

Table of Contents

 

				Page No.
Part I.		FINANCIAL INFORMATION		3
Item 1.		Financial Statements		3
		Consolidated Statements of Financial Condition at September 30, 2007 (Unaudited) and June 30, 2007 (Unaudited)		3
		Consolidated Statements of Income for the Three Months Ended September 30, 2007 and 2006 (Unaudited)		4
		Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2007 and 2006 (Unaudited)		5
		Notes to Consolidated Financial Statements (Unaudited)		6
Item 2.		Management’s Discussion and Analysis or Plan of Operation		13
Item 3.		Controls and Procedures		20
Part II.		OTHER INFORMATION		21
Item 1.		Legal Proceedings		21
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 3.		Defaults Upon Senior Securities		21
Item 4.		Submission of Matters to a Vote of Security Holders		21
Item 5.		Other Information		21
Item 6.		Exhibits		21
SIGNATURES				22

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Table of Contents

Part I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

PSB Holdings, Inc.

Consolidated Statements of Financial Condition

(Unaudited)

 

		September 30, 2007				June 30, 2007
		(in thousands, except share data)
ASSETS
Cash and due from depository institutions		$	6,632			$	8,718
Federal funds sold			1,450				4,480
Investment securities, at fair value			222,528				222,502
Loans receivable, gross			238,296				234,160
Allowance for loan losses			(1,780	)			(1,780	)
Loans receivable, net			236,516				232,380
Premises and equipment, net			4,147				4,218
Intangible assets			7,944				8,003
Other assets			10,493				10,897
TOTAL ASSETS		$	489,710			$	491,198
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits		$	285,174			$	293,473
Borrowed funds			149,703				141,857
Mortgagors’ escrow accounts			688				1,280
Other liabilities			3,220				3,337
Total Liabilities			438,785				439,947
Commitments and contingencies
Stockholders’ Equity
Preferred stock, $.10 par value, 1,000,000 shares authorized, no shares issued and outstanding			—				—
Common stock, ($.10 par value, 12,000,000 shares authorized, 6,943,125 shares issued, 6,667,177 shares outstanding at September 30, 2007 and 6,778,303 shares outstanding at June 30, 2007)			694				694
Additional paid-in capital			30,465				30,465
Unearned ESOP shares			(2,222	)			(2,222	)
Unearned stock awards			(978	)			(978	)
Retained earnings			26,787				26,441
Treasury stock, at cost (275,948 shares at September 30, 2007 and 164,822 shares at June 30, 2007)			(2,888	)			(1,767	)
Accumulated other comprehensive loss			(933	)			(1,382	)
Total stockholders’ equity			50,925				51,251
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	489,710			$	491,198

 

See notes to consolidated financial statements.

 

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PSB Holdings, Inc.

Consolidated Statements of Income

(Unaudited)

 

		Three Months Ended September 30,
		2007			2006
		(in thousands, except share data)
Interest income:
Interest on loans		$	3,838		$	3,310
Interest and dividends on investments			2,917			2,985
Total interest income			6,755			6,295
Interest expense:
Deposits and escrow			2,145			1,943
Borrowed funds			1,860			1,687
Total interest expense			4,005			3,630
Net interest income			2,750			2,665
Provision for loan losses			12			85
Net interest income after provision for loan losses			2,738			2,580
Noninterest income:
Fees for services			613			578
Mortgage banking activities			19			24
Net commissions from brokerage service			26			41
Other income			101			60
Total noninterest income			759			703
Noninterest expense:
Compensation and benefits			1,504			1,461
Occupancy and equipment			324			340
Data processing			231			196
Advertising and marketing			108			100
Other noninterest expense			619			601
Total noninterest expense			2,786			2,698
Income before income tax expense			711			585
Income tax expense			172			78
NET INCOME		$	539		$	507
Earnings per common share
Basic		$	0.08		$	0.08
Diluted		$	0.08		$	0.07

 

See notes to consolidated financial statements.

 

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PSB Holdings, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Three Months Ended September 30,
		2007				2006
		(in thousands)
Cash flows from operating activities
Net income		$	539			$	507
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses			12				85
Stock-based compensation expense			137				90
Amortization of core deposit intangible			59				66
Depreciation			139				149
Net amortization on available-for-sale securities			(43	)			(29	)
Amortization of premium on purchased loans			5				12
Originations of loans for resale			(2,379	)			(2,884	)
Proceeds from sale of loans			3,475				2,908
Gain on sale of loans			(19	)			(24	)
Increase in cash surrender value of Bank owned life insurance			(66	)			(23	)
Net change in:
Deferred loan fees			(58	)			(108	)
Other assets			75				(134	)
Other liabilities			(277	)			(360	)
Net cash provided(used) by operating activities			1,599				255
Cash flows from investing activities
Proceeds from maturities of available-for-sale securities			11,507				27,894
Purchase of available-for-sale securities			(10,646	)			(9,494	)
Loan originations net of principal payments			(5,172	)			(9,398	)
Purchase of premises and equipment			(68	)			(69	)
Net cash provided(used) by investing activities			(4,379	)			8,933
Cash flows from financing activities
Change in savings and demand deposit accounts			(8,919	)			(14,066	)
Change in time deposit accounts			620				18,220
Proceeds from long term borrowings			31,000				37,425
Repayments of long term borrowings			(13,074	)			(22,906	)
Net change in short term borrowings			(10,080	)			(24,478	)
Change in mortgagors’ escrow account			(592	)			(495	)
Acquisition of treasury shares			(1,121	)			(58	)
Dividends paid			(170	)			(168	)
Net cash provided(used) by financing activities			(2,336	)			(6,526	)
Increase(decrease) in cash and cash equivalents			(5,116	)			2,662
Cash and cash equivalents at beginning of year			13,198				8,195
Cash and cash equivalents at end of period		$	8,082			$	10,857
Supplemental disclosures
Cash paid during the year for:
Interest		$	4,017			$	3,765
Income taxes		$	160			$	163
Noncash activities
Declared dividends		$	193			$	170

 

See notes to consolidated financial statements.

 

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PSB Holdings, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1—Organization

PSB Holdings, Inc. (Company) is a federally chartered holding company formed on May 27, 2003 for the purpose of acquiring all of the common stock of Putnam Bank (formerly known as Putnam Savings Bank until its name change effective November 2, 2007) (Bank) concurrent with the Bank’s reorganization from a mutual savings institution to the mutual holding company form of organization. No shares were offered to the public as part of this reorganization.

On October 4, 2004, the Company issued 6,943,125 shares of common stock, 3,729,846 shares (53.7%) of which were issued to Putnam Bancorp, MHC (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 Putnam Savings 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-QSB, 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 financial statements reflect all adjustments necessary, consisting of only normal recurring accruals, 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, 2008. These financial statements should be read in conjunction with the 2007 consolidated financial statements and notes thereto included in the Company’s Form 10-KSB filed with the SEC on September 21, 2007.

NOTE 3—Recent Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 156, “Accounting for Servicing of Financial Assets—an amendment of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to simplify the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect SFAS No. 156 to have a material impact on the Company’s financial position or results of operation.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to define fair value, establish a framework for measuring fair value and expand disclosures about fair values. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect SFAS No. 157 to have a material impact on the Company’s financial position or results of operation.

 

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In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires an entity to recognize the overfunded or underfunded status of a defined benefit pension and other postretirement plan (other than a multiemployer plan) as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur though comprehensive income. SFAS No. 158 also requires an entity to measure the funded status of a plan as of the balance sheet date, with limited exceptions. SFAS No. 158 amends SFAS No. 87, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” SFAS No. 106, and SFAS No. 132 (revised 2003), “Employers Disclosures about Pensions and Other Postretirement Benefits,” and other accounting literature. An entity will continue to apply SFAS No. 87, 88 and 106 for measurement of plan assets and benefit obligations as of the balance sheet date and determination of net periodic benefit cost. Public entities are required to initially recognize the funded status of a defined benefit plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The Company does not expect SFAS No. 158 to have a material impact on the Company’s financial position or results of operation.

During the first quarter of 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which permits entities to choose and measure many financial instruments and certain other items at fair value. The Company will be required to adopt SFAS No. 159 in the first quarter of 2008, and is currently evaluating the impact of the adoption of SFAS No. 159 on its financial position and results of operations. Early adoption is permitted.

In September 2006, the Emerging Issues Task Force issued EITF Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF Issue 06-4”). EITF Issue 06-4 requires that for endorsement split-dollar insurance arrangements that provide a benefit to an employee that extends to postretirement periods, an employer should recognize a liability for future benefits in accordance with SFAS No. 106 or APB No. 12 based on the substantive agreement of the employee. If the employee has effectively agreed to maintain a life insurance policy during postretirement periods, the costs of the life insurance policy during the postretirement periods should be accrued in accordance with either FASB Statement No. 106 or APB No. 12. If the employer has agreed to provide a death benefit, the employer should recognize a liability for the future death benefit in accordance with either SFAS No. 106 or APB No. 12. EITF Issue 06-4 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of EITF Issue 06-4 on its financial statements.

NOTE 4—Earnings Per Share

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

 

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The following information was used in the computation of EPS on both a basic and diluted basis for the three months ended September 30, 2007 and September 30, 2006:

 

		Three Months Ended September 30, 2007			Three Months Ended September 30, 2006
Basic EPS computation:
Net income		$	539,000		$	507,000
Weighted average shares outstanding			6,615,070			6,690,657
Basic EPS		$	0.08		$	0.08
Diluted EPS computation:
Net income		$	539,000		$	507,000
Weighted average shares outstanding			6,615,070			6,690,657
Dilutive potential shares			92,168			119,438
			6,707,238			6,810,095
Diluted EPS		$	0.08		$	0.07

NOTE 5—Investment Securities

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

 

		September 30, 2007
		Amortized Cost Basis			Gross Unrealized							Fair Value
					Gains			(Losses)
		(in thousands)
Debt securities:
U.S. government and agency obligations:
Due within one year		$	17,949		$	1		$	(26	)		$	17,924
From one through five years			9,766			7			(18	)			9,755
From five through ten years			3,735			—			(11	)			3,724
After 10 years			9,484			58			(7	)			9,535
			40,934			66			(62	)			40,938
State agency and municipal obligations:
From five through ten years			1,362			68			—				1,430
After ten years			6,766			251			—				7,017
			8,128			319			—				8,447
Corporate bonds and other obligations:
Due within one year			3,929			—			(6	)			3,923
From one through five years			7,945			35			(111	)			7,869
After ten years			8,044			190			(594	)			7,640
			19,918			225			(711	)			19,432
Mortgage-backed securities			137,186			153			(1,409	)			135,930
Total debt securities			206,166			763			(2,182	)			204,747
Marketable equity securities:
Preferred stock			10,000			—			—				10,000
FHLB restricted stock			7,781			—			—				7,781
Total equity securities			17,781			—			—				17,781
Total available-for-sale securities		$	223,947		$	763		$	(2,182	)		$	222,528

 

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		June 30, 2007
		Amortized Cost Basis			Gross Unrealized							Fair Value
					Gains			(Losses)
		(in thousands)
Debt securities:
U.S. government and agency obligations:
Due within one year		$	17,446		$	—		$	(101	)		$	17,345
From one through five years			14,313			—			(120	)			14,193
From five through ten years			3,785			11			(22	)			3,774
After ten years			9,482			—			(115	)			9,367
			45,026			11			(358	)			44,679
State agency and municipal obligations:
From five through ten years			1,363			46			—				1,409
After ten years			7,765			208			—				7,973
			9,128			254			—				9,382
Corporate bonds and other obligations:
Due within one year			2,978			—			(5	)			2,973
From one through five years			9,880			9			(58	)			9,831
After ten years			8,044			226			(137	)			8,133
			20,902			235			(200	)			20,937
Mortgage-backed securities			137,529			159			(2,365	)			135,323
Total debt securities			212,585			659			(2,923	)			210,321
Marketable equity securities:
Preferred stock			5,000			—			—				5,000
FHLB restricted stock			7,181			—			—				7,181
Total equity securities			12,181			—			—				12,181
Total available-for-sale securities		$	224,766		$	659		$	(2,923	)		$	222,502

There were no gross gains or gross losses realized on available-for-sale securities for the three months ended September 30, 2007 and September 30, 2006.

NOTE 6—Allowance for Loan Losses

The following summarizes the changes in the allowance for loan losses for the three months ended September 30, 2007, as compared to the year-ago period:

 

		Three Months Ended September 30,
		2007				2006
		(in thousands)
Balance, beginning of period		$	1,780			$	1,582
Provision for loan losses			12				85
Charge offs			(15	)			(24	)
Recoveries			3				4
Balance, end of period		$	1,780			$	1,647

At September 30, 2007 and 2006, the Company had loans with balances of $1,529,815 (representing 10 loans) and $1,447,397 (representing 5 loans), respectively, on nonaccrual status. There were no impaired loans as of September 30, 2007 and September 30, 2006.

 

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NOTE 7—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 is 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 September 30, 2007 was $6.9 million and $1.0 million, respectively. The amortization expense related to the core deposit intangible for the three months ended September 30, 2007 and 2006 was $58,514 and $65,570, respectively.

 

		September 30, 2007			June 30, 2007
		(in thousands)
Balances not subject to amortization:
Goodwill		$	6,912		$	6,912
Balances subject to amortization:
Core Deposit Intangible		$	1,032		$	1,091
Total intangible assets		$	7,944		$	8,003

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

 

		For the years ended June 30,
		(in thousands)
2008			176
2009			206
2010			178
2011			149
2012			121
Thereafter			202
Total		$	1,032

NOTE 8—Comprehensive Income

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

 

		Three Months Ended September 30,
		2007				2006
		(in thousands)
Net Income		$	539			$	507
Other comprehensive income(loss):
Net unrealized holding gains(losses) on available-for-sale securities			845				2,473
Reclassification adjustment for (gain) loss recognized in net income			—				—
Other comprehensive gains(loss) before tax expense			845				2,473
Income tax expense (benefit) related to items of other comprehensive income (loss)			(396	)			963
Other comprehensive income (loss) net of tax			449				1,510
Total comprehensive income(loss)		$	988			$	2,017

 

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NOTE 9—Stock-Based Incentive Plan

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

On November 7, 2005, the Company awarded 319,800 options to purchase the Company’s common stock and 129,281 shares of restricted stock. Stock option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of grant ($10.60) with a maximum term of ten years.

On June 7, 2006, the Company awarded 18,000 options to purchase the Company’s common stock and 6,000 shares of restricted stock. Stock option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of grant ($10.78) with a maximum term of ten years.

On May 25, 2007, the Company awarded 29,000 options to purchase the Company’s common stock and 9,500 shares of restricted stock. Stock option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of grant ($10.70) with a maximum term of ten years.

Both stock option and restricted stock awards granted to date vest at 20% per year beginning on the first anniversary of the date of the grant.

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

In accordance with Statement No.123 (R), 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 expenses related to unearned restricted shares are 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 September 30, 2007 and September 30, 2006 of $137,005 and $89,611, 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 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 Grant				June 7, 2006 Grant				May 25, 2007 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

 

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NOTE 10—Dividends

On September 5, 2007, the Board of Directors of the Company declared a cash dividend of $0.07 a share for stockholders of record as of October 5, 2007 and payable on October 19, 2007. The dividends declared totaling $206,000 were accrued and are included in other liabilities in the September 30, 2007 Consolidated Statements of Financial Condition. Putnam Bancorp, MHC, the mutual holding company, waived the receipt of the dividend declared by the Company.

NOTE 11—Commitment 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 statement of financial condition.

The contractual amounts of outstanding commitments were as follows:

 

		September 30, 2007			June 30, 2007
		(in thousands)
Commitments to extend credit:
Loan commitments		$	4,490		$	6,345
Unadvanced construction loans			7,800			8,264
Unadvanced lines of credit			14,223			15,133
Standby letters of credit			1,822			3,209
Outstanding commitments		$	28,335		$	32,951

 

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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 months ended September 30, 2007 and 2006, 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 2007 consolidated financial statements and notes thereto included in the Company’s Form 10-KSB filed with the SEC on September 21, 2007.

The year-end condensed balance sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in: interest rates, general economic conditions, legislation and regulations, 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 result 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 operations 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 three months ended September 30, 2007, the yield on our interest-earning assets increased more rapidly than the cost of our interest-bearing liabilities, reflecting a steepening of the yield curve. This has increased the Company’s net interest margin from 2.35% for the three months ended September 30, 2006 to 2.38% for the three months ended September 30, 2007. In addition, noninterest expense increased 3.3% during the three months ended September 30, 2007 compared to the three months ended September 30, 2006. This was offset by a 8.0% increase in non-interest income and a 85.9% decrease in the provision for loan loss during the three months ended September 30, 2007 as compared to the three months ended September 30, 2006.

 

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Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions by management and 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 and goodwill.

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

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

The analysis has two components: specific and general allocations. Specific allocations are made for loans for which collection is questionable and the loan is downgraded. Additionally, the size of the allocation is measured by determining an expected collection or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allowance for loan losses. Actual loan losses may be significantly more than the allowances we have established which could have a material negative effect on our financial results.

Goodwill . The Company’s goodwill (the amount paid in excess of fair value of acquired net assets) is reviewed at least annually to ensure that there have been no events or circumstances resulting in an impairment of the recorded amount of excess purchase price. Adverse changes in the economic environment, operations of acquired business units, or other factors could result in a decline in projected fair values. If the estimated fair value is less than the carrying amount, a loss would be recognized to reduce the carrying amount to implied fair value.

Other-Than-Temporary Impairment of Securities. Management periodically reviews all investment securities with significant declines in fair value for potential other-than-temporary impairment pursuant to the guidance provided by SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In November 2006, the Financial Accounting Standards Board issued Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The FSP addressed the determination as to when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss. It also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amended SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities, No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, and APB Opinion 18, The Equity Method of Accounting for Investments in Common Stock. Effective March 31, 2007 and 2006, management evaluated the Company’s investment portfolio and determined that all unrealized losses were the direct result of temporary changes in interest rates and that such losses may be recovered in the foreseeable future. As a result, management did not consider any unrealized losses as “other-than-temporary” at September 30, 2007 and 2006.

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

 

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Comparison of Financial Condition at September 30, 2007 and June 30, 2007

Assets

Total assets of the Company were $489.7 million at September 30, 2007, a decrease of $1.5 million, or 0.3%, from $491.2 million at June 30, 2007. Investments in available-for-sale securities remained at $222.5 million at both September 30, 2007 and June 30, 2007. Total loans outstanding increased $4.1 million, or 1.8%, to $238.3 million at September 30, 2007 from $234.2 million at June 30, 2007.

Allowance for Loan Losses

The Company determines the adequacy of the allowance for loan losses on a quarterly basis. The table below indicates the relationships between the allowance for loan losses, total loans outstanding and nonperforming loans at September 30, 2007 and June 30, 2007.

 

		September 30, 2007				June 30, 2007
		(Dollars in thousands)
Allowance for loan losses		$	1,780			$	1,780
Gross loans outstanding			238,296				234,160
Nonperforming loans			1,529				1,538
Allowance/gross loans outstanding			0.75	%			0.76	%
Allowance/nonperforming loans			116	%			116	%

Past due and Nonperforming loans

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

 

		September 30, 2007			June 30, 2007
		(in thousands)
Past due 30 days through 89 days and accruing		$	3,050		$	1,364
Past due 90 days or more and accruing		$	—		$	—
Past due 90 days or more and nonaccruing		$	1,529		$	1,538

Liabilities

Total liabilities decreased $1.1 million, or 0.3%, to $438.8 million at September 30, 2007 from $439.9 million at June 30, 2007, primarily due to a decrease in total deposits of $8.3 million, or 2.8% which was partially offset by an increase in borrowed funds of $7.8 million. Of this $8.3 million reduction in deposits, $4.7 million was due to a reduction in brokered certificates of deposits.

Stockholders’ Equity

Total stockholders’ equity decreased $326,000, or 0.6%, to $50.9 million at September 30, 2007 from $51.2 million at June 30, 2007. This was primarily due to the repurchase of 111,126 shares of the Company’s common stock at a total cost of $1.1 million during the three months ended September 30, 2007. This was partially offset by net income $539,000 and accumulated other comprehensive income of $449,000. The unrealized loss in the available-for-sale securities as of September 30, 2007 was attributable solely to interest rate movements. Management does not consider the loss to be other than temporary.

 

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Comparison of Operating Results for the Three Months Ended September 30, 2007 and 2006

Net Income

Net income increased $32,000, or 6.3%, to $539,000 for the three months ended September 30, 2007 from net income of $507,000 for the three months ended September 30, 2006. The increase in net income reflected an improvement in the net interest margin. The increase in net income also resulted from an increase in noninterest income of $56,000 realized during the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. In addition, there was a decrease in the loan loss provision of $73,000 for the three months ended September 30, 2007, which was partially offset by an increase in noninterest expense of $88,000 for the three months ended September 30, 2007.

Interest and Dividend Income

Interest and dividend income increased by $460,000, or 7.3%, to $6.8 million for the three months ended September 30, 2007 from $6.3 million for the three months ended September 30, 2006. The increase in interest and dividend income resulted primarily from an increase of $8.9 million, or 2.0%, in average interest-earning assets and an increase of 29 basis points in the average yield on our interest-earning assets between the periods. This increase was primarily due to funds being deployed into loans from the investment portfolio. The yield on total interest-earning assets increased to 5.84% for the three months ended September 30, 2007 from 5.55% for the three months ended September 30, 2006. Interest income on loans increased by $528,000, or 16.0%, to $3.8 million from $3.3 million. Interest and dividends on investments and deposits decreased $68,000, or 2.3%, to $2.92 million for the three months ended September 30, 2007 from $2.98 million for the three months ended September 30, 2006.

Interest Expense

Interest expense increased by $375,000, or 10.3%, to $4.0 million for three months ended September 30, 2007 from $3.6 million for the three months ended September 30, 2006. The increase in interest expense resulted primarily from an increase in average interest-bearing liabilities of $11.6 million, or 3.0%, from period to period and an increase of 27 basis points in the average cost of our interest-bearing liabilities to 4.04% for the three months ended September 30, 2007 from 3.77% for the three months ended September 30, 2006. The increase in average interest-bearing liabilities reflected a decrease of $9.6 million in average interest-bearing deposits and an increase of $21.2 million in average other borrowed money from September 30, 2006 to September 30, 2007.

Net Interest Income

Net interest income for the three months ended September 30, 2007 was $2.8 million, an increase of $85,000 or 3.2% over the three months ended September 30, 2006. This increase was primarily due to an increase in the net interest margin from 2.35% for the three months ended September 30, 2006 to 2.38% for the three months ended September 30, 2007. During the three months ended September 30, 2007, the yield on our interest-earning assets increased more rapidly than the cost on our interest-bearing liabilities.

Provision for Loan Losses

The provision for loan losses decreased by $73,000, or 85.9%, to $12,000 for the three months ended September 30, 2007 from $85,000 for the three months ended September 30, 2006.

Noninterest Income

Noninterest income increased $56,000, or 8.0%, to $759,000 for the three months ended September 30, 2007 from $703,000 for the three months ended September 30, 2006. This resulted primarily from an increase in service fee income of $35,000.

 

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Noninterest Expense

Noninterest expense increased by $88,000, or 3.3%, to $2.8 million for the three months ended September 30, 2007 from $2.7 million for the three months ended September 30, 2006. The increase in noninterest expense was primarily due to increases in salaries and benefits and other noninterest expenses. Occupancy expense decreased $16,000, or 4.7% to $324,000 for the three months ended September 30, 2007 from $340,000 for the three months ended September 30, 2006. This was primarily due to decreases in depreciation expense of $8,000, and utilities expense of $4,000. Other noninterest expense, consisting primarily of marketing, office supplies, and professional expenses increased $61,000, or 6.8% to $958,000 for the three months ended September 30, 2007 from $897,000 for the three months ended September 30, 2006. This was primarily due to increases in service bureau expense of $35,000, stock award expense of $43,000. Compensation and benefits expense increased by $43,000, or 2.9%, to $1.50 million for the three months ended September 30, 2007 from $1.46 million for the three months ended September 30, 2006. The primary reasons for the increase were higher staffing costs and higher medical insurance premiums.

Provision for Income Taxes

The income tax expense increased by $94,000, or 120.5%, to $172,000 for the three months ended September 30, 2007 as compared to a $78,000 expense for the three months ended September 30, 2006. Our effective tax rate was 24.2% for the three months ended September 30, 2007, compared to 13.3% for the three months ended September 30, 2006. The effective tax rate differed from the statutory tax rate of 34% primarily due to the dividends-received deduction applicable to certain securities in our investment portfolio, tax-exempt municipal income and non-taxable bank-owned life insurance income.

 

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Average Balance Sheet

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

 

		For the three months ended September 30,
		2007									2006
		(Dollars in thousands)
		Average Balance			Interest/ Dividends			Yield/ Cost			Average Balance				Interest/ Dividends			Yield/ Cost
Interest-earning assets:
Investment securities		$	220,087		$	2,899		5.23	%		$	240,686			$	2,953		4.87	%
Loans			237,549			3,838		6.41	%			207,176				3,310		6.34	%
Other earning assets			1,493			18		4.78	%			2,385				32		5.32	%
Total interest-earnings assets			459,129			6,755		5.84	%			450,247				6,295		5.55	%
Non-interest-earning assets			27,648									21,973
Total assets		$	486,777								$	472,220
Interest-bearing liabilities:
NOW accounts		$	26,709			169		2.51	%		$	25,383				99		1.55	%
Savings accounts			48,867			92		0.75	%			52,880				98		0.74	%
Money market accounts			17,133			85		1.97	%			22,595				93		1.63	%
Time deposits			152,520			1,800		4.68	%			154,014				1,653		4.26	%
Borrowed money			148,511			1,859		4.97	%			127,245				1,687		5.26	%
Total interest-bearing liabilities			393,740			4,005		4.04	%			382,117				3,630		3.77	%
Non-interest-bearing demand deposits			40,350									40,661
Other non-interest-bearing liabilities			1,386									(443	)
Capital accounts			51,300									49,885
Total liabilities and capital accounts		$	486,776								$	472,220
Net interest income					$	2,750									$	2,665
Interest rate spread								1.80	%									1.78	%
Net interest-earning assets		$	65,389								$	68,130
Net interest margin								2.38	%									2.35	%
Average earning assets to average interest-bearing liabilities								116.61	%									117.83	%

 

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The following table sets 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 September 30, 2007 compared to the three months ended September 30, 2006
		Increase(Decrease) Due to
		Rate				Volume				Net
INTEREST INCOME
Investment securities		$	902			$	(956	)		$	(54	)
Loans			38				490				528
Other interest-earning assets			(3	)			(11	)			(14	)
TOTAL INTEREST INCOME			937				(477	)			460
INTEREST EXPENSE:
NOW accounts			65				5				70
Savings accounts			9				(15	)			(6	)
Money Market accounts			78				(86	)			(8	)
Time deposits			250				(103	)			147
Other borrowed money			(517	)			689				172
TOTAL INTEREST INCOME			(115	)			490				375
CHANGE IN NET INTEREST INCOME		$	1,052			$	(967	)		$	85

Liquidity and Capital Resources

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 borrowings. The Bank can borrow funds from the Federal Home Loan Bank based on eligible collateral of loans and securities. The Bank had Federal Home Loan Bank borrowings as of September 30, 2007 of $145.8 million with unused borrowing capacity of $35.3 million. The Bank also had brokered CDs as of September 30, 2007 of $6.6 million, a decrease of $4.8 million since June 30, 2007, and the ability to originate additional brokered CDs, up to our policy limit of 10% of total assets.

The Bank’s primary investing activities are the origination of loans and the purchase of investment securities. During the three months ended September 30, 2007 and 2006, the Bank originated loans net of principal payments of approximately $5.2 million and $9.4 million, respectively. Purchases of securities totaled $10.6 million and $9.5 million, for the three months ended September 30, 2007 and 2006, respectively.

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

 

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Certificates of deposits totaled $155.2 million at September 30, 2007. The Bank relies on competitive rates, customer service and long-standing relationships with customers to retain deposits. Based on the Bank’s experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Bank.

The Bank was well capitalized at September 30, 2007 and exceeded each of the applicable regulatory capital requirements at such date. The table below presents the capital required and maintained at September 30, 2007.

 

		Required			Actual
Ratio of Tier 1 Capital to total assets		4	%		8.36	%
Ratio of Total Risk Based Capital to risk-weighted assets		8	%		16.59	%
Ratio of Tier 1 Risk Based Capital to risk-weighted assets		4	%		15.90	%

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 three months ended September 30, 2007, 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.

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.

 

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Part II. – OTHER INFORMATION

 

Item 1.

Legal Proceedings—Not applicable

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

a) Not applicable

b) Not applicable

c) The following table presents a summary of the Company’s share repurchases during the quarter ended September 30, 2007.

 

Period		Total Number of Shares Purchased		Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Program (1)		Maximum Number of Shares that May Yet be Purchased Under the Program (1)
July 1 through July 31, 2007		80,865		$	10.01		368,055		145,945
August 1 through August 31, 2007		25,870		$	9.93		393,925		120,075
September 1 through September 30, 2007		4,391		$	9.70		398,316		115,684

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(1)

On December 12, 2005 the Company announced that its Board of Directors had authorized a stock repurchase program pursuant to which the Company intends to purchase up to 5% of its issued and outstanding shares, or up to 347,000 shares. This program was completed on August 2, 2007, and the Company then announced a new stock repurchase program pursuant to which the Company intends to purchase up to 2.5% of the then outstanding shares, or an additional 167,000 shares.

 

Item 3.

Defaults Upon Senior Securities—Not applicable

 

Item 4.

Submission of Matters to a Vote of Security Holders—Not applicable

 

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.

 

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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  November 14, 2007		/s/    T HOMAS A. B ORNER
		Thomas A. Borner
		Chief Executive Officer
Date  November 14, 2007		/s/    R OBERT J. H ALLORAN , J R .
		Robert J. Halloran, Jr.
		President and Treasurer

 

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