ADVFN Logo ADVFN

We could not find any results for:
Make sure your spelling is correct or try broadening your search.

Trending Now

Toplists

It looks like you aren't logged in.
Click the button below to log in and view your recent history.

Hot Features

Registration Strip Icon for charts Register for streaming realtime charts, analysis tools, and prices.

PSBH (MM)

10.35
0.00 (0.00%)
24 May 2024 - Closed
Delayed by 15 minutes
Share Name Share Symbol Market Type
(MM) NASDAQ:PSBH NASDAQ Common Stock
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  0.00 0.00% 10.35 0 01:00:00

Quarterly Report (10-q)

13/05/2013 9:03pm

Edgar (US Regulatory)




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

FORM 10-Q
 
(Mark One)
   
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended March 31, 2013
   
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).
x 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, 2013, there were 6,541,561 shares of the registrant’s common stock outstanding.
 


 
 
 

 
 
PSB Holdings, Inc.
 
Table of Contents
 
     
Part I.
FINANCIAL INFORMATION
 
   
Page No.
Item 1.
Financial Statements (Unaudited)
 
     
 
Consolidated Balance Sheets at March 31, 2013 and June 30, 2012
1
     
 
Consolidated Statements of Net Income for the Three and Nine Months Ended March 31, 2013 and 2012
2
     
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 31, 2013 and 2012
3
     
 
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months March 31, 2013 and 2012
4
     
 
Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2013 and 2012
5
     
 
Notes to Consolidated Financial Statements
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
44
     
Item 4.
Controls and Procedures
44
     
Part II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
45
     
Item 1A.
Risk Factors
45
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
45
     
Item 3.
Defaults Upon Senior Securities
45
     
Item 4.
Mine Safety Disclosures
45
     
Item 5.
Other Information
45
     
Item 6.
Exhibits
45
     
     
SIGNATURES
46
     
     
     
     
 
 
 

 
 
Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited)

 
 

 
 
PSB Holdings, Inc.
 
Consolidated Balance Sheets
(Unaudited)
             
   
March 31,
   
June 30,
 
   
2013
   
2012
 
   
(in thousands except share data)
 
ASSETS
           
Cash and due from depository institutions
  $ 3,720     $ 5,228  
Interest-bearing demand deposits with other banks
    10,805       6,185  
     Total cash and cash equivalents
    14,525       11,413  
Securities available-for-sale, at fair value
    39,506       47,213  
Securities held-to-maturity (fair value of $131,350 as of
         
    March 31, 2013 and $108,336 as of June 30, 2012)
    128,251       105,195  
Federal Home Loan Bank stock, at cost
    6,953       7,536  
Loans held-for-sale
    1,447       776  
Loans
    240,719       251,485  
Less: Allowance for loan losses
    (2,930 )     (2,913 )
               Net loans
    237,789       248,572  
Premises and equipment
    4,317       4,526  
Accrued interest receivable
    1,119       1,158  
Other real estate owned
    1,451       1,683  
Goodwill
    6,912       6,912  
Other intangible assets
    133       202  
Bank-owned life insurance
    8,784       8,759  
Due from broker
    -       2,000  
Deferred tax asset
    2,840       3,890  
Other assets
    1,847       2,508  
                 
Total assets
  $ 455,874     $ 452,343  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
     Non-interest-bearing
  $ 42,798     $ 43,785  
     Interest-bearing
    298,142       298,553  
               Total deposits
    340,940       342,338  
Mortgagors' escrow accounts
    1,150       2,034  
Federal Home Loan Bank advances
    53,500       53,500  
    Securities sold under agreements to repurchase
    6,452       3,653  
Other liabilities
    2,614       2,683  
Total liabilities
    404,656       404,208  
                 
                 
                 
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, 6,541,561 shares outstanding
         
at March 31, 2013 and 6,528,863 at June 30, 2012
    694       694  
Additional paid-in capital
    30,602       30,602  
Retained earnings
    24,456       23,630  
Accumulated other comprehensive income (loss)
    1,026       (1,013 )
Unearned ESOP shares
    (1,469 )     (1,565 )
Treasury stock, at cost (401,564 shares at
               
March 31, 2013 and 414,262 at June 30, 2012)
    (4,091 )     (4,213 )
Total stockholders' equity
    51,218       48,135  
                 
Total liabilities and stockholders' equity
  $ 455,874     $ 452,343  
 
See notes to consolidated financial statements.
 
 
1

 
 
PSB Holdings, Inc.
 
Consolidated Statements of Net Income
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(in thousands, except per share data)
 
Interest and dividend income:
                       
   Interest and fees on loans
  $ 2,786     $ 3,181     $ 8,795     $ 9,797  
   Interest and dividends on investments
    901       1,161       2,877       3,680  
Total interest and dividend income
    3,687       4,342       11,672       13,477  
                                 
Interest expense:
                               
   Deposits and escrow
    741       911       2,364       3,008  
   Borrowed funds
    389       653       1,327       2,284  
Total interest expense
    1,130       1,564       3,691       5,292  
Net interest and dividend income
    2,557       2,778       7,981       8,185  
                                 
Provision for loan losses
    135       190       700       791  
Net interest and dividend income after provision for loan losses
    2,422       2,588       7,281       7,394  
                                 
Non-interest income:
                               
    Total other-than-temporary impairment losses on debt securities
    (238 )     (1,193 )     (767 )     (3,421 )
    Portion of losses recognized in other comprehensive income
    201       700       329       1,916  
    Net impairment losses recognized in earnings
    (37 )     (493 )     (438 )     (1,505 )
    Fees for services
    416       427       1,322       1,404  
    Mortgage banking activities
    59       40       193       71  
    Net commissions from brokerage service
    26       35       89       99  
    Income from bank-owned life insurance
    74       81       412       245  
    Gain on sales and calls of available-for-sale securities, net
    -       -       206       235  
    Income from legal settlement
    -       -       -       1,452  
    Other income
    45       30       108       102  
Total non-interest income
    583       120       1,892       2,103  
                                 
Non-interest expense:
                               
   Compensation and benefits
    1,433       1,441       4,347       4,475  
   Occupancy and equipment
    335       306       978       927  
   Data processing
    142       136       422       629  
   LAN/WAN network expense
    37       38       110       106  
   Advertising and marketing
    41       62       126       212  
   OCC assessment
    47       46       140       138  
   FDIC deposit insurance
    150       158       447       452  
   Other real estate owned
    35       14       99       80  
   Write-down of other real estate owned
    -       -       48       15  
   Other non-interest expense
    457       440       1,337       1,336  
Total non-interest expense
    2,677       2,641       8,054       8,370  
Income before income tax expense
    328       67       1,119       1,127  
                                 
Income tax expense
    68       31       175       275  
NET INCOME
  $ 260     $ 36     $ 944     $ 852  
                                 
Earnings per common share
                               
   Basic
  $ 0.04     $ 0.01     $ 0.15     $ 0.13  
   Diluted
  $ 0.04     $ 0.01     $ 0.15     $ 0.13  
 
See notes to consolidated financial statements.
 
 
2

 
 
PSB Holdings, Inc.
 
Consolidated Statements of Comprehensive Income
(Unaudited)
 
The components of comprehensive income and related tax effects are as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(in thousands)
 
Net Income
  $ 260     $ 36     $ 944     $ 852  
                                 
Other comprehensive income:
                               
Net unrealized holding gains on available-for-sale securities
    1,648       3,595       3,185       905  
Reclassification adjustment for losses realized in income on available-for-sale securities (1)
    37       493       232       1,270  
Non credit portion of other-than-temporary losses on  available-for-sale securities
    (201 )     (700 )     (329 )     (1,916 )
                                 
Other comprehensive income before tax
    1,484       3,388       3,088       259  
Income tax expense related to other comprehensive income
    (504 )     (1,152 )     (1,049 )     (88 )
Other comprehensive income net of tax
    980       2,236       2,039       171  
Total comprehensive income
  $ 1,240     $ 2,272     $ 2,983     $ 1,023  
 
(1) Amounts are included in net impairment losses recognized in earnings and gains on sales and calls of available-for-sale securities, net in non-interest income on the consolidated statements of net income.  Income tax expense associated with the reclassification adjustments was approximately $13,000 and $167,000 for the three months ended March 31, 2013 and 2012, respectively, and $79,000 and $432,000 for the nine months ended March 31, 2013 and 2012, respectively. 
        
See notes to consolidated financial statements.
 
 
3

 
 
PSB Holdings, Inc.
 
Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended March 31, 2013 and 2012
(Unaudited)
 
   
Common Stock
   
Additional
Paid-in
Capital
   
Retained Earnings
   
 
Accumulated
Other
Comprehensive
Income (Loss)
   
Unearned ESOP
Shares
   
Unearned
Stock
Awards
   
Treasury
Stock
   
Total Stockholders' Equity
 
(dollars in thousands)
 
                                                 
Balances at June 30, 2011
  $ 694     $ 30,594     $ 22,648     $ (1,267 )   $ (1,693 )   $ (16 )   $ (4,213 )   $ 46,747  
                                                                 
                                                                 
Comprehensive income
    -       -       852       171       -       -       -       1,023  
ESOP shares committed to be released  (9,585 shares)
    -       -       (51 )     -       96       -       -       45  
Stock-based compensation
    -       7       -       -       -       14       -       21  
                                                                 
Balances at March 31, 2012
  $ 694     $ 30,601     $ 23,449     $ (1,096 )   $ (1,597 )   $ (2 )   $ (4,213 )   $ 47,836  
                                                                 
                                                                 
Balances at June 30, 2012
  $ 694     $ 30,602     $ 23,630     $ (1,013 )   $ (1,565 )   $ -     $ (4,213 )   $ 48,135  
                                                                 
                                                                 
Comprehensive income
    -       -       944       2,039       -       -       -       2,983  
ESOP shares committed to be released  (9,585 shares)
    -       -       (49 )     -       96       -       -       47  
Shares issued in connection with Rabbi  Trust plan
    -       -       (69 )     -       -       -       122       53  
                                                                 
Balances at March 31, 2013
  $ 694     $ 30,602     $ 24,456     $ 1,026     $ (1,469 )   $ -     $ (4,091 )   $ 51,218  
 
See notes to consolidated financial statements.
 
 
4

 
 
PSB Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
   
For the Nine Months
 
   
Ended March 31,
 
   
2013
   
2012
 
   
(in thousands)
 
Cash flows from operating activities
           
Net income
  $ 944     $ 852  
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Amortization of securities, net
    987       1,019  
    Gain on sales and calls of securities, net
    (206 )     (235 )
    Impairment losses on securities
    438       1,505  
    Net (increase) decrease in loans held-for-sale
    (671 )     1,253  
    Accretion of deferred loan fees, net
    (48 )     (225 )
Provision for loan losses
    700       791  
Gain on sale of other real estate owned, net
    (10 )     (18 )
    Write-down of other real estate owned
    48       15  
    Loss on sale of premises and equipment
    1       -  
Depreciation and amortization
    343       308  
Amortization of core deposit intangible
    69       91  
Decrease in accrued interest receivable and other assets
    632       1,261  
Increase in cash surrender value of bank-owned life insurance
    (235 )     (245 )
Bank-owned life insurance death benefit income
    (176 )     -  
(Decrease) increase in other liabilities
    (69 )     131  
Amortization of ESOP expense
    47       45  
Stock-based compensation
    -       21  
Net cash provided by operating activities
    2,794       6,569  
Cash flows from investing activities
               
Purchase of available-for-sale securities
    (1,000 )     (5,457 )
Proceeds from sales, calls, pay downs and maturities of available-for-sale securities
    11,539       9,126  
Purchase of held-to-maturity securities
    (51,247 )     (16,189 )
Proceeds from calls, pay downs and maturities of held-to-maturity securities
    29,229       31,308  
Redemption of Federal Home Loan Bank Stock
    583       520  
Loan repayments net of originations
    9,675       918  
Purchase of bank-owned life insurance
    -       (2,000 )
Recoveries of loans previously charged off
    173       33  
Proceeds from the surrender of bank-owned life insurance policy
    386       -  
Proceeds from sale of other real estate owned
    477       626  
Capital expenditures - premises and equipment
    (67 )     (82 )
Net cash (used in) provided by investing activities
    (252 )     18,803  
Cash flows from financing activities
               
Net (decrease) increase in deposit accounts
    (1,398 )     5,831  
Net decrease in mortgagors' escrow accounts
    (884 )     (658 )
Proceeds from Federal Home Loan Bank advances
    87,030       2,000  
Repayments of Federal Home Loans Bank advances
    (87,030 )     (29,000 )
Net increase (decrease) in securities sold under agreements to repurchase
    2,799       (232 )
Shares issued in connection with Rabbi Trust plan
    53       -  
Net cash provided by (used in) financing activities
    570       (22,059 )
Increase in cash and cash equivalents
    3,112       3,313  
Cash and cash equivalents at beginning of year
    11,413       8,273  
Cash and cash equivalents at end of period
  $ 14,525     $ 11,586  
Supplemental disclosures
               
Cash paid during the period for:
               
   Interest
  $ 3,712     $ 5,389  
   Income taxes refunded
    (146 )     (433 )
Loans transferred to other real estate owned
    283       1,702  
Decrease in due from broker
    2,000       -  
 
See notes to consolidated financial statements.
 
5

 
 
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 (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 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 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.  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, 2013.  These financial statements should be read in conjunction with the 2012 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on September 28, 2012.

NOTE 3 – Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income .  This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  In December 2011, the FASB issued ASU 2011-12 to defer changes that relate to the presentation of reclassification adjustments but the other requirements of ASU 2011-05 remain in effect. This amendment became effective for the Company on July 1, 2012 and did not have a material impact on the Company’s consolidated financial results as the amendments relate only to changes in financial statement presentation.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment.   This ASU is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill.  Under the new guidance,  an entity will have the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount.  If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary.  The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. This amendment became effective for the Company on July 1, 2012 and did not have a material impact on the Company’s consolidated financial statements.
 
 
6

 
 
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income .  This Update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated comprehensive income by the respective line item of net income.  This ASU is effective for public entities for reporting periods beginning after December 31, 2012.  The Company adopted this ASU as of March 31, 2013 and there was no impact in the Company’s consolidated financial results as the amendments relate only to disclosures in the consolidated financial statements.
 
Note 4 - Critical Accounting Policies
 
Critical accounting policies are those that involve significant judgments and assumptions by management that have, or could have, a material impact on our income or the carrying value of our assets.  Our critical accounting policies are those related to our loans, allowance for loan losses, income taxes, goodwill and the impairment of securities.

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

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

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

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

General component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial and consumer/other. Residential real estate loans include classes for one-to four-family owner occupied, second mortgages and equity lines of credit.  Consumer/other loans include personal loans.  Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment.  This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; concentrations; changes in lending policies and procedures; experience/ability/depth of lending management and staff; loan rating migration; the effect of other external factors; changes in the value of underlying collateral; changes in the loan review system and national and local economic trends and conditions.
 
 
7

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

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

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

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

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

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

The specific component relates to loans that are classified as impaired.  Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent or foreclosure is probable.  An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are 90 days or more past due or subject to a troubled debt restructuring (“TDR”) agreement.

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

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

Unallocated component

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general reserves in the portfolio.
 
 
8

 
 
            Goodwill .  The Company’s goodwill was recorded as a result of business acquisitions and combinations.  The Company’s goodwill (the amount paid in excess of fair value of acquired net assets) is reviewed at least annually to ensure that there have been no events or circumstances resulting in an impairment of the recorded amount of excess purchase price.  Adverse changes in the economic environment, operations of acquired business units, or other factors could result in a decline in projected fair values.  If the estimated fair value is less than the carrying amount, a loss would be recognized to reduce the carrying amount to implied fair value.
 
Other-Than-Temporary Impairment of Securities.   Management periodically reviews all investment securities with significant declines in fair value for potential other-than-temporary impairment pursuant to the guidance provided by ASC 320-10 “Investments-Debt and Equity Securities”.  The guidance addresses the determination as to when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss.  It also includes accounting considerations subsequent to the recognition of other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.  Management evaluates the Company’s investment portfolio on an ongoing basis and recorded $438,000 and $1.5 million of other-than-temporary impairment charges through income during the nine months ended March 31, 2013 and 2012, respectively .

Income Taxes.   The Company recognizes income taxes under the asset and liability method.  Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company’s assets and liabilities at enacted rates expected to be in effect when the amounts related to such temporary differences are realized or settled.

Management has discussed the development and selection of these critical accounting policies with the Audit Committee.
 
 
9

 
NOTE 5 – Earnings Per Share (EPS)
 
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 Company. 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, 2013 and 2012:
 
                         
   
Three Months Ended
   
Three Months Ended
   
Nine Months Ended
   
Nine Months Ended
 
   
March 31, 2013
   
March 31, 2012
   
March 31, 2013
   
March 31, 2012
 
Net income
  $ 260,000     $ 36,000     $ 944,000     $ 852,000  
                                 
Average basic common shares
    6,391,438       6,365,960       6,381,417       6,362,753  
Dilutive effect of stock options (1)
    -       -       -       -  
Average diluted common shares
    6,391,438       6,365,960       6,381,417       6,362,753  
                                 
Basic EPS:
  $ 0.04     $ 0.01     $ 0.15     $ 0.13  
Diluted EPS:
  $ 0.04     $ 0.01     $ 0.15     $ 0.13  
 
(1)      For the three and nine months ended March 31, 2013 and 2012, options to purchase 222,921 shares of common stock were outstanding but not included in the computation of earnings per share because they were anti-dilutive.
 
 
10

 
 
NOTE 6 – Investment Securities
 
The carrying value and estimated market values of investment securities by maturity are as follows:
 
   
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost Basis
   
Gain
   
(Loss)
   
Value
 
   
(in thousands)
 
March 31, 2013
                       
Available-for-sale:
                       
Debt securities:
                       
U.S. government and government-sponsored securities:
                   
From five through ten years
  $ 1,000     $ -     $ (6 )   $ 994  
                                 
Corporate bonds and other securities:
                               
After ten years
    5,999       -       (1,094 )     4,905  
                                 
U.S. Government-sponsored and guaranteed
                               
        mortgage-backed securities:
                               
Due in one year or less
    53       2       -       55  
From one through five years
    905       56       -       961  
From five through ten years
    764       38       -       802  
After ten years
    11,166       666       (12 )     11,820  
      12,888       762       (12 )     13,638  
                                 
Non-agency mortgage-backed securities:
                               
After ten years
    8,065       292       (368 )     7,989  
                                 
Total debt securities
    27,952       1,054       (1,480 )     27,526  
                                 
Equity securities:
                               
Auction rate preferred stock
    10,000       1,980       -       11,980  
                                 
Total available-for-sale securities
  $ 37,952     $ 3,034     $ (1,480 )   $ 39,506  
                                 
Held-to-maturity:
                               
U.S. government and government-sponsored securities:
                         
From one through five years
  $ 4,259     $ 24     $ (6 )   $ 4,277  
From five through ten years
    937       157       -       1,094  
      5,196       181       (6 )     5,371  
                                 
U.S. Government-sponsored and guaranteed
                               
        mortgage-backed securities:
                               
From five through ten years
    5,145       209       -       5,354  
After ten years
    117,910       2,839       (124 )     120,625  
      123,055       3,048       (124 )     125,979  
Total held-to-maturity securities
  $ 128,251     $ 3,229     $ (130 )   $ 131,350  
 
 
11

 
 
   
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost Basis
   
Gain
   
(Loss)
   
Value
 
   
(in thousands)
 
June 30, 2012:
                       
Available-for-sale:
                       
Debt securities:
                       
U.S. government and government-sponsored securities:
                       
From one through five years
  $ 450     $ 9     $ -     $ 459  
                                 
Corporate bonds and other securities:
                               
After ten years
    5,998       -       (1,344 )     4,654  
                                 
U.S. Government-sponsored and guaranteed
                               
        mortgage-backed securities:
                               
Due in one year or less
    1       -       -       1  
From one through five years
    416       24       -       440  
From five through ten years
    2,564       140       -       2,704  
After ten years
    19,717       1,265       (14 )     20,968  
      22,698       1,429       (14 )     24,113  
                                 
Non-agency mortgage-backed securities:
                               
After ten years
    9,601       -       (1,250 )     8,351  
                                 
Total debt securities
    38,747       1,438       (2,608 )     37,577  
                                 
Equity securities:
                               
Auction rate preferred stock
    10,000       11       (375 )     9,636  
                                 
Total available-for-sale securities
  $ 48,747     $ 1,449     $ (2,983 )   $ 47,213  
                                 
Held-to-maturity:
                               
U.S. government and government-sponsored securities:
                               
From one through five years
  $ 5,996     $ 34     $ -     $ 6,030  
From five through ten years
    3,196       149       (7 )     3,338  
      9,192       183       (7 )     9,368  
                                 
U.S. Government-sponsored and guaranteed
                               
        mortgage-backed securities:
                               
From five through ten years
    6,767       192       -       6,959  
After ten years
    89,236       2,783       (10 )     92,009  
      96,003       2,975       (10 )     98,968  
Total held-to-maturity securities
  $ 105,195     $ 3,158     $ (17 )   $ 108,336  
 
There were no realized gains or losses on sales of available-for-sale securities for the three months ended March 31, 2013 or for the three months ended March 31, 2012.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.  There were other-than-temporary impairment charges on available-for-sale securities of $37,000 and $493,000 realized in income during the three months ended March 31, 2013 and 2012, respectively.  The write-downs of securities included total other-than-temporary impairment losses of $238,000 and $1.2 million, net of $201,000 and $700,000 recognized in other comprehensive income/loss for the three months ended March 31, 2013 and 2012, respectively, before taxes. There were $206,000 in realized gains and no losses on sales of available-for-sale securities for the nine months ended March 31, 2013.  There were gross gains of $235,000 and no losses realized on sales of available-for-sale securities for the nine months ended March 31, 2012. There were other-than-temporary impairment charges on available-for-sale securities of $438,000 and $1.5 million realized in income during the nine months ended March 31, 2013 and 2012, respectively.  The write-downs of securities included total other-than-temporary impairment losses of $767,000 and $3.4 million, net of $329,000 and $1.9 million recognized in other comprehensive income/loss for the nine months ended March 31, 2013 and 2012, respectively, before taxes.  See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview.”
 
 
12

 
 
The following is a summary of the estimated fair value and related unrealized losses segregated by category and length of time that individual securities have been in a continuous unrealized loss position at:
 
March 31, 2013:
 
Less than 12 months
   
12 months or more
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
Available-for-sale:
 
(in thousands)
 
Debt securities:
                                   
U.S. Government and government-sponsored
securities
  $ 994     $ 6     $ -     $ -     $ 994     $ 6  
Corporate bonds and other securities
    -       -       4,905       1,094       4,905       1,094  
U.S. Government-sponsored and guaranteed
                                               
mortgage-backed securities
    -       -       1,563       12       1,563       12  
Total temporarily impaired available-for-sale
    994       6       6,468       1,106       7,462       1,112  
                                                 
Held-to-maturity:
                                               
U.S. Government and government-sponsored
securities
    2,253       6       -       -       2,253       6  
U.S. Government-sponsored and guaranteed
                                               
mortgage-backed securities
    31,813       124       -       -       31,813       124  
Total temporarily impaired held-to-maturity
    34,066       130       -       -       34,066       130  
                                                 
Other-than-temporarily impaired debt
securities (1):
                                               
Non-agency mortgage-backed securities
    2,682       82       2,068       286       4,750       368  
                                                 
Total temporarily-impaired and other-
                                               
than-temporarily impaired securities
  $ 37,742     $ 218     $ 8,536     $ 1,392     $ 46,278     $ 1,610  
                                                 
June 30, 2012:
 
Less than 12 months
   
12 months or more
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
Available-for-sale:
 
(in thousands)
 
Debt securities:
                                               
Corporate bonds and other obligations
  $ -     $ -     $ 4,654     $ 1,344     $ 4,654     $ 1,344  
U.S. Government-sponsored and guaranteed
                                               
mortgage-backed securities
    1,826       14       -       -       1,826       14  
Equity securities
    7,625       375       -       -       7,625       375  
Total temporarily impaired available-for-sale
    9,451       389       4,654       1,344       14,105       1,733  
                                                 
Held-to-maturity:
                                               
U.S. Government and government-sponsored
securities
    2,257       7       -       -       2,257       7  
U.S. Government-sponsored and guaranteed
                                               
mortgage-backed securities
    10,141       10       -       -       10,141       10  
Total temporarily impaired held-to-maturity
    12,398       17       -       -       12,398       17  
                                                 
Other-than-temporarily impaired debt
securities (1):
                                               
Non-agency mortgage-backed securities
    1,767       21       6,512       1,229       8,279       1,250  
                                                 
Total temporarily-impaired and other-
                                               
than-temporarily impaired securities
  $ 23,616     $ 427     $ 11,166     $ 2,573     $ 34,782     $ 3,000  
 
(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 (loss).
 
 
13

 
 
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.
 
At March 31, 2013 and June 30, 2012, there were 29 and 27 individual investment securities, respectively, with declines in fair value below the amortized cost basis of the security.  Management has the intent and ability to hold these securities until cost recovery occurs and considers these declines to be temporary.
 
The unrealized losses on the Company’s investment in U.S. Government-sponsored agency bonds and U.S. government guaranteed and government-sponsored residential mortgage-backed securities were primarily caused by interest rate fluctuations.  These investments are guaranteed or sponsored by the U.S. government or an agency thereof.  Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment.  Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013.
 
The Company’s unrealized losses on investments in corporate bonds and other securities relate to investments in companies within the financial services sector.  The unrealized losses are primarily caused by (a) interest rate fluctuations, (b) recent decreases in profitability and near-term profit forecasts by industry analysts and (c) recent downgrades by industry analysts.  The contractual terms of these investments do not permit the companies to settle the security at a price less than the par value of investment.  While the companies’ credit ratings have decreased, the Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments.  Therefore, it is expected that the bonds would not be settled at a price less than the par value of the investment.  Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013.
 
For the quarter ended March 31, 2013, securities with other-than-temporary impairment losses recognized in earnings consisted of non-agency mortgage-backed securities.  For these debt securities, the Company estimated the portion of loss attributable to credit loss using a discounted cash flow model.  Significant inputs included the estimated cash flows of the underlying loans based on key assumptions, such as default rate, loss severity and prepayment rate.  Assumptions can vary widely from security to security, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type.  The present value of the expected cash flows was compared to the Company’s amortized cost basis to determine the credit-related impairment loss.  Based on the expected cash flows derived from the model, the Company expects to recover the remaining unrealized losses on these securities.
 
The following table represents a roll-forward of the amount of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income (in thousands):
 
Balance as of June 30, 2011
  $ 13,307  
Credit losses on securities for which other-than-temporary impairment
       
was not previously recorded
    -  
Additional credit losses on securities for which an other-than-temporary
       
impairment charge was previously recorded
    1,964  
Reductions for securities sold during the period
    -  
         
Balance as of June 30, 2012
    15,271  
         
Credit losses on securities for which other-than-temporary impairment
       
was not previously recorded
    -  
Additional credit losses on securities for which an other-than-temporary
       
impairment charge was previously recorded
    438  
Reductions for securities sold during the period
    -  
         
Balance as of March 31, 2013
  $ 15,709  
 
 
14

 
   
Auction-rate trust preferred securities. At March 31, 2013, our auction-rate trust preferred securities (ARP) portfolio totaled $12.0 million, 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, 2013, our investments in auction-rate trust preferred securities consisted of investments in three 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 made a market in these securities (Merrill Lynch, Citigroup, UBS, AIG 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.
 
Since that 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.
 
The turmoil in the financial markets caused the value of the underlying collateral preferred shares to decline. These declines in value are not considered other-than-temporary.
 
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 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 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.
 
 
15

 

 
The chart below includes information as of March 31, 2013 on the various issuers of Auction Rate Preferred securities owned by the Company:
 
Issuer
Goldman Sachs
 
Merrill Lynch
 
Bank of America
Par amount
 $3,000,000
 
 $5,000,000
 
 $2,000,000
Book Value
 $3,000,000
 
 $5,000,000
 
 $2,000,000
Purchase Date
12-12-07
 
09-04-07
 
11-20-07
Maturity Date
08-23-26
 
05-28-27
 
08-17-47
Next Reset Date
05-21-13
 
05-24-13
 
05-16-13
Reset Frequency
Quarterly
 
Quarterly
 
Quarterly
Failed Auction
Yes
 
Yes
 
Yes
Receiving Default Rates
Yes
 
Yes
 
Yes
Current Rate
4.54%
 
4.66%
 
4.79%
Dividends Current:
Yes
 
Yes
 
Yes
 
Trust preferred securities. As of March 31, 2013, the Company had five investments in corporate single-issuer trust preferred securities (TRUPs) with a total book value of $6.0 million and total fair value of $4.9 million, all of which were classified as available-for-sale.   The single-issuer trust preferred investments are evaluated for other-than-temporary impairment by performing a present value of cash flows each quarter.  None of the issuers have deferred interest payments or announced the intention to defer interest payments.  The Company believes the decline in fair value is related to the spread over three month LIBOR, on which the quarterly interest payments are based, as the spread over LIBOR being received is significantly lower than current market spreads.  Management concluded the impairment of these investments was considered temporary and asserts that the Company does not have the intent to sell these investments and that it is more likely than not it will not have to sell the investments before recovery of their cost basis which may be at maturity.
 
NOTE 7 – Loans
 
The following table sets forth the composition of our loan portfolio at March 31, 2013 and June 30, 2012:
 
   
March 31,
   
June 30,
 
   
2013
   
2012
 
   
(in thousands)
 
             
Mortgage Loans:
           
   Residential (1)
  $ 191,005     $ 200,148  
   Commercial real estate
    45,499       45,032  
   Residential construction
    1,987       3,044  
Commercial
    2,479       3,459  
Consumer and other
    735       898  
                 
Total loans
    241,705       252,581  
                 
Unadvanced construction loans
    (1,591 )     (1,559 )
      240,114       251,022  
Net deferred loan costs
    605       463  
Allowance for loan losses
    (2,930 )     (2,913 )
                 
Loans, net
  $ 237,789     $ 248,572  
 
(1) Residential mortgage loans include one- to four-family mortgage loans, second mortgage loans, and home equity lines of credit.
 
 
16

 
 
Credit Quality Information
 
The Company utilizes a nine grade internal loan rating system as follows:
 
Loans rated 1 -5:  Are considered “pass” rated loans with low to average risk.
 
Loans rated 6:  Are considered “special mention.”  These loans are starting to show signs of potential weakness and are being closely monitored by management.
 
Loans rated 7:  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:  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:  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 loan segments by internally assigned grades at March 31, 2013 and June 30, 2012:
 
   
Residential
   
Commercial
   
Residential
         
Consumer
       
March 31, 2013
 
Real Estate
   
Real Estate
   
Construction
   
Commercial
   
and other
   
Total
 
   
(in thousands)
 
Grade:
                                   
     Pass
  $ 186,868     $ 30,384     $ 1,452     $ 1,985     $ 735     $ 221,424  
     Special Mention
    331       4,763       -       494       -       5,588  
     Substandard
    3,123       7,478       -       -       -       10,601  
     Doubtful
    683       1,818       -       -       -       2,501  
     Loss
    -       -       -       -       -       -  
          Total
  $ 191,005     $ 44,443     $ 1,452     $ 2,479     $ 735     $ 240,114  
                                                 
   
Residential
   
Commercial
   
Residential
           
Consumer
         
June 30, 2012
 
Real Estate
   
Real Estate
   
Construction
   
Commercial
   
and other
   
Total
 
   
(in thousands)
 
Grade:
                                               
     Pass
  $ 195,825     $ 32,032     $ 1,875     $ 2,834     $ 898     $ 233,464  
     Special Mention
    338       1,719       -       625       -       2,682  
     Substandard
    3,605       9,998       424       -       -       14,027  
     Doubtful
    380       469       -       -       -       849  
     Loss
    -       -       -       -       -       -  
          Total
  $ 200,148     $ 44,218     $ 2,299     $ 3,459     $ 898     $ 251,022  
 
 
17

 
 
The following table represents modifications that were deemed to be troubled debt restructures for the nine months ended March 31, 2012.  There were no modifications deemed to be troubled debt restructures for the nine months ended March 31, 2013.
 
March 31, 2012
       
Pre-Modifcation
   
Post-Modification
 
         
Outstanding
   
Outstanding
 
   
Number of
   
Recorded
   
Recorded
 
   
Contracts
   
Investment
   
Investment
 
         
(Dollars in thousands)
 
Real Estate:
                 
     Residential
    6     $ 827     $ 828  
     Commercial
    13       1,602       1,605  
      19       2,429       2,433  
 
The modification on one commercial loan provided a reduced rate for five years and the capitalization of real estate taxes.  A tax escrow account has also been established.  The other commercial loan modifications provided for reduced rates from six months to five years.  Management performs a discounted cash flow calculation to determine the valuation allowance required for each troubled debt restructure.  Residential loan modifications included restructurings that provided a reduced rate for five years, an extended amortization period with no change in rate, six months of interest-only payments along with a reduction in rate, an interest-only period of one year and a reduction in rate, substitution of collateral on a second mortgage, and the conversion a line of credit to an amortizing fixed rate home equity loan.  Any reserve required is recorded through the provision for loan losses.
 
The following is a summary of troubled debt restructurings that have subsequently defaulted within one year of modification during the periods indicated.  There were no trouble debt restructurings that subsequently defaulted within one year of modification for the three months ended March 31, 2013 and March 31, 2012.
 
   
Nine months ended
   
Nine months ended
 
   
March 31, 2013
   
March 31, 2012
 
   
Number of
   
Recorded
   
Number of
   
Recorded
 
   
Contracts
   
Investment
   
Contracts
   
Investment
 
   
(Dollars in thousands)
 
Real Estate:
                       
     Residential
    1     $ 30       2     $ 209  
     Commercial
    -       -       1       223  
           Total
    1     $ 30       3     $ 432  
 
The defaults on the commercial and residential troubled debt restructures were the result of the borrower’s delinquent loan payments during the period.  The Company evaluates the levels/trends in delinquencies and non-accruals as part of the qualitative factors within the allowance for loan loss framework.
 
 
18

 
 
NOTE 8 – Non-performing Assets, Past Due and Impaired Loans
 
The table below sets forth the amounts and categories of non-performing assets at the dates indicated:
 
   
At March 31,
   
At June 30,
 
   
2013
   
2012
 
   
(Dollars in thousands)
 
Non-accrual loans:
           
Residential
  $ 3,806     $ 3,985  
Commercial real estate
    4,269       3,975  
Residential construction
    -       424  
Total non-accrual loans
    8,075       8,384  
                 
Accruing loans past due 90 days or more:
    -       -  
                 
Total non-performing loans
    8,075       8,384  
                 
Other real estate owned
    1,451       1,683  
Total non-performing assets
  $ 9,526     $ 10,067  
                 
Total non-performing loans to total loans
    3.35 %     3.33 %
Total non-performing assets to total assets
    2.09 %     2.23 %
 
The balance in non-performing loans is a direct correlation to the deterioration experienced in the real estate climate over the past several years.  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 carrying 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.
 
 
19

 
 
The following table sets forth information regarding past due loans at March 31, 2013 and June 30, 2012:
 
               
90 days
       
   
30–59 Days
   
60–89 Days
   
or greater
   
Total
 
At March 31, 2013
 
Past Due
   
Past Due
   
Past Due
   
Past Due
 
    (in thousands)  
Real Estate:
                       
Residential
  $ 1,077     $ 228     $ 1,168     $ 2,473  
Commercial
    -       395       3,246       3,641  
Total
  $ 1,077     $ 623     $ 4,414     $ 6,114  
                                 
At June 30, 2012
                               
                                 
Real Estate:
                               
Residential
  $ 363     $ 162     $ 940     $ 1,465  
Commercial
    159       -       1,573       1,732  
Residential Construction
    -       -       424       424  
Total
  $ 522     $ 162     $ 2,937     $ 3,621  

 
20

 
 
The following is a summary of information pertaining to impaired loans at March 31, 2013 and June 30, 2012:
 
      At March 31, 2013     At June 30, 2012  
         
Unpaid
               
Unpaid
       
   
Recorded
   
Principal
   
Related
   
Recorded
   
Principal
   
Related
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Balance
   
Allowance
 
Impaired loans without a valuation allowance:
  (in thousands)
Real Estate:
                                   
Residential
  $ 3,142     $ 3,386     $ -     $ 1,415     $ 1,415     $ -  
Commercial
    3,959       4,457       -       6,668       6,754       -  
Residential construction
    -       -       -       424       424       -  
Consumer and other
    21       21       -       27       27       -  
Total impaired with no specific reserves
    7,122       7,864       -       8,534       8,620       -  
                                                 
Impaired loans with a valuation allowance:
                                               
Real Estate:
                                               
Residential
    1,694       1,697       115       3,431       3,527       185  
Commercial
    -       -       -       3,402       3,768       190  
Total impaired with a specific reserve
    1,694       1,697       115       6,833       7,295       375  
                                                 
Total Impaired Loans:
                                               
Real Estate:
                                               
Residential
    4,836       5,083       115       4,846       4,942       185  
Commercial
    3,959       4,457       -       10,070       10,522       190  
Residential construction
    -       -       -       424       424       -  
Consumer and other
    21       21       -       27       27       -  
Total impaired loans
  $ 8,816     $ 9,561     $ 115     $ 15,367     $ 15,915     $ 375  

 
21

 
 
The following is a summary of additional information pertaining to impaired loans:
                                     
      Three months ended
March 31, 2013
   
Three months ended
March 31, 2012
 
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Interest Income
Recognized
on Cash Basis
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Interest Income
Recognized
on Cash Basis
 
    (in thousands)  
Real Estate:
                                   
Residential
  $ 4,576     $ 29     $ 16     $ 3,551     $ 20     $ 7  
Commercial
    4,661       32       5       7,473       51       22  
Residential Construction
    214       -       -       65       -       -  
Consumer and other
    21       -       -       38       1       -  
Total impaired loans
  $ 9,472     $ 61     $ 21     $ 11,127     $ 72     $ 29  
 
                                     
   
Nine months ended
March 31, 2013
   
Nine months ended
March 31, 2012
 
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Interest Income
Recognized
on Cash Basis
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Interest Income
Recognized
on Cash Basis
 
   
(in thousands)
 
Real Estate:
                                   
Residential
  $ 4,701     $ 77     $ 36     $ 3,258     $ 47     $ 25  
Commercial
    5,983       123       22       7,044       145       57  
Residential Construction
    320       -       -       33       4       5  
Consumer and other
    23       1       -       44       3       -  
Total impaired loans
  $ 11,027     $ 201     $ 58     $ 10,379     $ 199     $ 87  

 
22

 
 
NOTE 9 – Allowance for Loan Losses
An analysis of the allowance for loan losses for the three months ended March 31, 2013 and 2012 is as follows:
 
Three months ended
                                         
March 31, 2013
 
Residential
Real Estate
   
Commercial
Real Estate
   
Residential
Construction
   
Commercial
   
Consumer
and other
   
Unallocated
   
Total
 
Allowance for loan losses:
  (in thousands)  
Beginning balance
  $ 1,402     $ 1,320     $ 16     $ 21     $ 37     $ 139     $ 2,935  
Charge-offs
    (65 )     (148 )     (9 )     -       (12 )     -       (234 )
Recoveries
    21       65       2       2       4       -       94  
Provision (credit)
    (75 )     170       17       -       -       23       135  
Ending Balance
  $ 1,283     $ 1,407     $ 26     $ 23     $ 29     $ 162     $ 2,930  
 
Three months ended                                          
March 31, 2012
 
Residential
Real Estate
   
Commercial
Real Estate
   
Residential
Construction
   
Commercial
   
Consumer
and other
   
Unallocated
   
Total
 
Allowance for loan losses:
  (in thousands)  
Beginning balance
  $ 1,633     $ 1,253     $ 17     $ 82     $ 8     $ 88     $ 3,081  
Charge-offs
    (195 )     (33 )     -       -       (14 )     -       (242 )
Recoveries
    2       -       -       3       8       -       13  
Provision (credit)
    109       66       23       (66 )     8       50       190  
Ending Balance
  $ 1,549     $ 1,286     $ 40     $ 19     $ 10     $ 138     $ 3,042  
 
An analysis of the allowance for loan losses for the nine months ended March 31, 2013 and 2012 is as follows:

                                           
Nine months ended
                                         
March 31, 2013
 
Residential
Real Estate
   
Commercial
Real Estate
   
Residential
Construction
   
Commercial
   
Consumer
and other
   
Unallocated
   
Total
 
Allowance for loan losses:
  (in thousands)  
Beginning balance
  $ 1,485     $ 1,347     $ 20     $ 17     $ 37     $ 7     $ 2,913  
Charge-offs
    (238 )     (564 )     (9 )     -       (45 )     -       (856 )
Recoveries
    71       84       2       3       13       -       173  
Provision (credit)
    (35 )     540       13       3       24       155       700  
Ending Balance
  $ 1,283     $ 1,407     $ 26     $ 23     $ 29     $ 162     $ 2,930  

                                           
Nine months ended
                                         
March 31, 2012
 
Residential
Real Estate
   
Commercial
Real Estate
   
Residential
Construction
   
Commercial
   
Consumer
and other
   
Unallocated
   
Total
 
Allowance for loan losses:
  (in thousands)  
Beginning balance
  $ 1,520     $ 1,286     $ 28     $ 140     $ 11     $ 87     $ 3,072  
Charge-offs
    (301 )     (509 )     -       -       (44 )     -       (854 )
Recoveries
    5       -       -       9       19       -       33  
Provision (credit)
    325       509       12       (130 )     24       51       791  
Ending Balance
  $ 1,549     $ 1,286     $ 40     $ 19     $ 10     $ 138     $ 3,042  

 
23

 
 
Further information pertaining to the allowance for loan losses at March 31, 2013 and June 30, 2012 is as follows:
                                           
At March 31, 2013
 
Residential
   
Commercial
   
Residential
                         
   
Real Estate
   
Real Estate
   
Construction
   
Commercial
   
Consumer
   
Unallocated
   
Total
 
(in thousands)
                                         
Ending balance: Amount of allowance for loan losses for impaired loans
  $ 115     $ -     $ -     $ -     $ -     $ -     $ 115  
                                                         
Ending balance: Amount of allowance for loan losses for non-impaired loans
  $ 1,168     $ 1,407     $ 26     $ 23     $ 29     $ 162     $ 2,815  
                                                         
Ending balance: Impaired loans
  $ 4,836     $ 3,959     $ -     $ -     $ 21     $ -     $ 8,816  
                                                         
Ending balance: Non-impaired loans
  $ 186,165     $ 40,484     $ 1,452     $ 2,479     $ 714     $ -     $ 231,294  
                                                         
                                                         
At June 30, 2012
 
Residential
   
Commercial
   
Residential
                                 
   
Real Estate
   
Real Estate
   
Construction
   
Commercial
   
Consumer
   
Unallocated
   
Total
 
(in thousands)
                                                       
Ending balance: Amount of allowance for loan losses for impaired loans
  $ 185     $ 190     $ -     $ -     $ -     $ -     $ 375  
                                                         
Ending balance: Amount of allowance for loan  losses for non-impaired loans
  $ 1,300     $ 1,157     $ 20     $ 17     $ 37     $ 7     $ 2,538  
                                                         
Ending balance: Impaired loans
  $ 4,846     $ 10,070     $ 424     $ -     $ 27     $ -     $ 15,367  
                                                         
Ending balance: Non-impaired loans
  $ 195,302     $ 34,148     $ 1,875     $ 3,459     $ 871     $ -     $ 235,655  
 
 
24

 
 
NOTE 10 – Accumulated Other Comprehensive Income (Loss)
 
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Although certain changes in assets and liabilities are reported as a separate component of the equity section of the statement of condition, such items are components of accumulated other comprehensive income (loss).
 
The components of accumulated other comprehensive income (loss) and related tax effects are as follows:
 
   
March 31,
   
June 30,
 
   
2013
   
2012
 
   
(in thousands)
 
Net unrealized gain on securities available-for-sale
  $ 1,554     $ (1,534 )
Tax effect
    528       (521 )
Accumulated other comprehensive income (loss)
  $ 1,026     $ (1,013 )
 
NOTE 11 – FAIR VALUE MEASUREMENTS
 
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:
 
Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
 
Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.
 
Level 3 – Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions.  Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.
 
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company’s assets and liabilities carried at fair value for March 31, 2013.
 
The Company’s investment and mortgage-backed securities and other debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy.  For these securities, we obtain fair value measurements from independent pricing services.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.
 
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence.  In the absence of such evidence, management’s best estimate is used.  Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.
 
 
25

 
 
The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using Level 3 inputs based upon appraisals of similar properties obtained from a third party.
 
The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the nine months ended March 31, 2013.
 
 
26

 
 
The following summarizes assets measured at fair value on a recurring basis at March 31, 2013 and June 30, 2012:
 
         
Quoted Prices in
   
Significant
   
Significant
 
         
Active Markets for
   
Other Observable
   
Unobservable
 
At March 31, 2013
 
Total Fair
   
Identical Assets
   
Inputs
   
Inputs
 
(in thousands)
 
Value
   
Level 1
   
Level 2
   
Level 3
 
Securities available-for-sale:
                       
U.S. government and government-sponsored securities
  $ 994     $ -     $ 994     $ -  
Corporate bonds and other securities
    4,905       -       4,905       -  
U.S. Government-sponsored and guaranteed  mortgage-backed securities
    13,638       -       13,638       -  
Non-agency mortgage-backed securities
    7,989       -       7,989       -  
Equity securities
    11,980       -       -       11,980  
   Total
  $ 39,506     $ -     $ 27,526     $ 11,980  
                                 
                                 
           
Quoted Prices in
   
Significant
   
Significant
 
           
Active Markets for
   
Other Observable
   
Unobservable
 
At June 30, 2012
 
Total Fair
   
Identical Assets
   
Inputs
   
Inputs
 
(in thousands)
 
Value
   
Level 1
   
Level 2
   
Level 3
 
Securities available-for-sale:
                               
U.S. government and government-sponsored securities
  $ 459     $ -     $ 459     $ -  
Corporate bonds and other securities
    4,654       -       4,654       -  
U.S. Government-sponsored and guaranteed  mortgage-backed securities
    24,113       -       24,113       -  
Non-agency mortgage-backed securities
    8,351       -       8,351       -  
Equity securities
    9,636       -       -       9,636  
   Total
  $ 47,213     $ -     $ 37,577     $ 9,636  
 
The table below represents the changes in level 3 assets measured at fair value for the three months ended March 31, 2013.
 
(in thousands)
     
Beginning balance, June 30, 2012
  $ 9,636  
     Unrealized gains included in other comprehensive income
    2,344  
Ending balance, March 31, 2013
  $ 11,980  
 
 
 
27

 
 
The following summarizes assets measured at fair value on a non-recurring basis and the adjustments to the carrying value at and for the three and nine months ended March 31, 2013 and 2012.
 
         
Quoted Prices in
               
Total Losses
   
Total Losses
 
         
Active Markets for
   
Significant Other
   
Significant
   
for the three
   
for the nine
 
At March 31, 2013
 
Total Fair
   
Identical Assets
   
Observable Inputs
   
Unobservable Inputs
   
months ended
   
months ended
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
March 31, 2013
   
March 31, 2013
 
   
(in thousands)
 
                                     
Other real estate owned
  $ 290     $ -     $ -     $ 290     $ -     $ (48 )
                                                 
                       
           
Quoted Prices in
               
Total Losses
   
Total Losses
 
           
Active Markets for
   
Significant Other
   
Significant
   
for the three
   
for the nine
 
At March 31, 2012
 
Total Fair
   
Identical Assets
   
Observable Inputs
   
Unobservable Inputs
   
months ended
   
months ended
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
March 31, 2012
   
March 31, 2012
 
   
(in thousands)
 
                                                 
Other real estate owned
  $ 363     $ -     $ -     $ 363     $ (44 )   $ (98 )
 
The other real estate owned amount represents the carrying value for which adjustments are based on the estimated fair value of the property.
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a market may not readily exist for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 
There were no liabilities measured at fair value on a recurring or non-recurring basis at March 31, 2013 and 2012 or June 30, 2012.
 
 
28

 

The following methods and assumptions were used by the Company in estimating fair values of its financial instruments:
 
Cash and Cash Equivalents.   The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets.
 
Investment Securities and FHLBB Stock.   The fair value of securities held-to-maturity and available-for-sale is estimated based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.  Ownership of Federal Home Loan Bank of Boston (“FHLBB”) stock is restricted to member banks; therefore, the stock is not traded.  The estimated fair value of FHLBB stock is equal to its carrying value, which represents the price at which the FHLBB is obligated to redeem its stock.
 
Loans.   For valuation purposes, the loan portfolio was segregated into its significant categories, which are residential, commercial real estate, residential construction, commercial and consumer and other loans. These categories were further segregated, where appropriate, into components based on significant financial characteristics such as type of interest rate (fixed or adjustable). Fair values were estimated for each component using assumptions developed by management and a valuation model provided by a third party specialist.
 
The fair values of residential, commercial real estate, residential construction, commercial and consumer and other loans were estimated by discounting the anticipated cash flows from the respective portfolios. Estimates of the timing and amount of these cash flows considered factors such as future loan prepayments. The discount rates reflected current market rates for loans with similar terms to borrowers of similar credit quality. The fair value of home equity lines of credit was based on the outstanding loan balances.  Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
 
            Loans held for sale: Loans held for sale are accounted for at the lower of cost or market and the fair value of loans held for sale based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted as required for changes in loan characteristics.
 
Deposits and Mortgagors’ Escrow.   The fair value of deposits with no stated maturity and mortgagors’  escrow account, such as demand deposits, NOW, regular savings, and money market deposit accounts, is equal to the amount payable on demand.  The fair value estimates do not include the benefit that results from the generally lower cost of funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.  The fair value estimate of time deposits is based on the discounted value of contractual cash flows.  The discount rate is estimated using the rates currently offered for deposits having similar remaining maturities.
 
Federal Home Loan Bank Advances.   The fair values of the Company’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.
 
Securities Sold Under Agreements to Repurchase.   The Company enters into overnight repurchase agreements with its customers. Since these agreements are short-term instruments, the fair value of these agreements approximates their recorded balance. The Company also secures term repurchase agreements through other financial institutions. The fair value of these agreements are determined by discounting the anticipated future cash payments using rates currently available to the Bank for debt with similar terms and remaining maturities.
 
Accrued Interest.   The carrying amounts of accrued interest approximate fair value.
 
Off-Balance Sheet Instruments.   The fair value of off-balance-sheet mortgage lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  In the case of the commitments discussed in Note 13, the fair value equals the carrying amounts which are not significant.
 
Summary of Fair Values of Financial Instruments.   The estimated fair values, and related carrying  amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company.
 
 
29

 
 
The following table presents the carrying amount and estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, as of March 31, 2013 and June 30, 2012:
 
   
March 31,
2013
 
   
Carrying
   
Fair Value Hierarchy
   
Fair
 
   
Amount
   
Level 1
   
Level 2
   
Level 3
   
Value
 
   
(in thousands)
 
Financial assets:
                             
Cash and cash equivalents
  $ 14,525     $ 14,525     $ -     $ -     $ 14,525  
Securities available-for-sale
    39,506       -       27,526       11,980       39,506  
Securities held-to-maturity
    128,251       -       131,350       -       131,350  
Federal Home Loan Bank stock
    6,953       -       -       6,953       6,953  
Loans held-for-sale
    1,447       -       -       1,447       1,447  
Loans, net
    237,789       -       -       243,716       243,716  
Accrued interest receivable
    1,119       -       -       1,119       1,119  
                                         
Financial liabilities:
                                       
Deposits
    340,940       -       -       343,593       343,593  
Mortgagors’ escrow accounts
    1,150       -       -       1,150       1,150  
Federal Home Loan Bank advances
    53,500       -       56,491       -       56,491  
Securities sold under agreements to repurchase
    6,452       -       6,452       -       6,452  
Accrued interest payable
    145       -       -       145       145  
 
   
June 30,
2012
 
   
Carrying
   
Fair Value Hierarchy
   
Fair
 
   
Amount
   
Level 1
   
Level 2
   
Level 3
   
Value
 
   
(in thousands)
 
Financial assets:
                             
Cash and cash equivalents
  $ 11,413     $ 11,413     $ -     $ -     $ 11,413  
Securities available-for-sale
    47,213       -       37,577       9,636       47,213  
Securities held-to-maturity
    105,195       -       108,336       -       108,336  
Federal Home Loan Bank stock
    7,536       -       -       7,536       7,536  
Loans held-for-sale
    776       -       -       794       794  
Loans, net
    248,572       -       -       255,075       255,075  
Accrued interest receivable
    1,158       -       -       1,158       1,158  
                                         
Financial liabilities:
                                       
Deposits
    342,338       -       -       344,675       344,675  
Mortgagors’ escrow accounts
    2,034       -       -       2,034       2,034  
Federal Home Loan Bank advances
    53,500       -       55,340       -       55,340  
Securities sold under agreements to repurchase
    3,653       -       3,653       -       3,653  
Accrued interest payable
    166       -       -       166       166  
 
 
30

 
 
NOTE 12 – Stock-Based Incentive Plan
 
At the annual meeting of stockholders on October 21, 2005, stockholders of the Company approved the PSB Holdings, Inc. 2005 Stock-Based Incentive Plan (the “Incentive Plan”).  Under the Incentive Plan, the Company may grant up to 340,213 stock options and 136,085 shares of restricted stock to its employees, officers and directors for an aggregate amount of up to 476,298 shares of the Company’s common stock for issuance upon the grant or exercise of awards.  Both incentive stock options and non-statutory stock options may be granted under the Incentive Plan.
 
On November 7, 2005, the Company awarded 319,800 options to purchase the Company’s common stock and 129,281 shares of restricted stock.  Stock option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of grant ($10.60) with a maximum term of ten years.
 
On June 7, 2006, the Company awarded 18,000 options to purchase the Company’s common stock and 6,000 shares of restricted stock.  Stock option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of grant ($10.78) with a maximum term of ten years.
 
On May 25, 2007, the Company awarded 29,000 options to purchase the Company’s common stock and 9,500 shares of restricted stock.  Stock option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of grant ($10.70) with a maximum term of ten years.
 
Both stock option and restricted stock awards granted to date vest at 20% per year beginning on the first anniversary of the date of the grant.
 
Stock options and restricted stock awards are considered common stock equivalents for the purpose of computing earnings per share on a diluted basis.
 
The Company has recorded share-based compensation expense related to outstanding stock option and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis.  The fair value of each restricted stock allocation, based on the market price at the date of grant, is recorded in Unearned stock awards.  Compensation expense related to unearned restricted shares is amortized to compensation and benefits expense over the vesting period of the restricted stock awards.   The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing method which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award.  There were no unvested stock awards outstanding at or during the nine months ended March 31, 2013.
 
NOTE 13 – Dividends
 
The Company did not declare a dividend during the nine months ended March 31, 2013 and 2012.
 
 
31

 
 
NOTE 14 – Commitments to Extend Credit
 
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets.
 
The contractual amounts of outstanding commitments were as follows:
 
   
March 31,
   
June 30,
 
   
2013
   
2012
 
   
(in thousands)
 
Commitments to extend credit:
           
     Loan commitments
  $ 3,512     $ 3,646  
     Unadvanced construction loans
    1,591       1,559  
     Unadvanced lines of credit
    11,963       12,690  
     Standby letters of credit
    842       842  
          Outstanding commitments
  $ 17,908     $ 18,737  
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following analysis discusses changes in the financial condition at March 31, 2013 and June 30, 2012 and results of operations for the three and nine months ended March 31, 2013 and 2012, and should be read in conjunction with the Company’s 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 2012 Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on September 28, 2012.
 
Forward-Looking Statements
 
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions.  Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions.  The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in: interest rates, general economic conditions, legislation and regulations, real estate values, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles and guidelines.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  Further information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.
 
Except as required by applicable law and regulation, the Company does not undertake – and specifically disclaims any obligation – to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
 
 
32

 
 
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 non-interest income, primarily from fees and service charges.  Gains on sales of loans and securities and bank-owned life insurance income are added sources of non-interest income.  The Company’s non-interest expense primarily consists of employee compensation and benefits, occupancy and equipment expense, advertising, data processing, professional fees and other operating expenses.
 
Net income amounted to $260,000 or $0.04 per basic and diluted share for the quarter ended March 31, 2013 compared to net income of $36,000 or $0.01 per basic and diluted share for the quarter ended March 31, 2012.  During the quarters ended March 31, 2013 and 2012, the Company recorded non-cash OTTI charges of $37,000 and $493,000, respectively, on non-agency mortgage-backed securities.  The net interest margin decreased from 2.62% for the quarter ended March 31, 2012 to 2.45% for the quarter ended March 31, 2013.  In addition, non-interest expense increased $36,000 during the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012.  The provision for loan losses decreased $55,000 during the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012.
 
Net income amounted to $944,000 or $0.15 per basic and diluted share for the nine months ended March 31, 2013 compared to net income of $852,000 or $0.13 per basic and diluted share for the nine months ended March 31, 2012. During the nine months ended March 31, 2013 and 2012, the Company recorded non-cash OTTI charges of $438,000 and $1.5 million, respectively, on non-agency mortgage-backed securities.  The net interest margin increased from 2.51% for the nine months ended March 31, 2012 to 2.53% for the nine months ended March 31, 2013, primarily due to an increase in net earning assets.  In addition, non-interest expense decreased $316,000 during the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012.  The provision for loan losses decreased $91,000 during the nine months ended March 31, 2013 as compared to the nine months ended March 31, 2012.
 
 
33

 
 
Comparison of Financial Condition at March 31, 2013 and June 30, 2012
 
Assets
 
Total assets increased to $455.9 million at March 31, 2013 from $452.3 million at June 30, 2012.  Cash and cash equivalents increased $3.1 million and totaled $14.5 million or 3.2% of total assets at March 31, 2013.  Investments in available-for-sale securities decreased $7.7 million and totaled $39.5 million or 8.7% of total assets at March 31, 2013.  Investments in held-to-maturity securities increased $23.1 million and totaled $128.3 million or 28.1% of total assets at March 31, 2013.  Net loans decreased $10.8 million and totaled $237.8 million or 52.2% of total assets at March 31, 2013.
 
Allowance for Loan Losses
 
The table below indicates the relationships between the allowance for loan losses, total loans outstanding and non-performing loans at March 31, 2013 and June 30, 2012.  For additional information, see “Comparison of Operating Results for the three and nine months ended March 31, 2013 and 2012 – Provision for loan losses.”
 
   
March 31,
   
June 30,
 
   
2013
   
2012
 
   
(Dollars in thousands)
 
       
Allowance for loan losses
  $ 2,930     $ 2,913  
Gross loans outstanding
    240,719       251,485  
Non-performing loans
    8,075       8,384  
                 
Allowance/gross loans outstanding
    1.22 %     1.16 %
Allowance/non-performing loans
    36.3 %     34.7 %
 
Liabilities
 
Total liabilities increased to $404.7 million at March 31, 2013 from $404.2 million at June 30, 2012.  Total deposits decreased to $340.9 million at March 31, 2013 from $342.3 million at June 30, 2012, a decrease of $1.4 million or 0.4%.  Federal Home Loan Bank advances remained unchanged at $53.5 million.   Securities sold under agreements to repurchase increased to $6.5 million at March 31, 2013 from $3.7 million at June 30, 2012, an increase of $2.8 million or 76.6%.
 
Stockholders’ Equity
 
Stockholders’ equity increased to $51.2 million at March 31, 2013 from $48.1 million at June 30, 2012, primarily due to a $2.0 million change in unrealized gains/losses on available-for-sale securities net of tax recorded in accumulated other comprehensive income and net income of $944,000 for the nine months ended March 31, 2013.
 
Comparison of Operating Results for the Three and Nine Months ended March 31, 2013 and 2012
 
Net Income
 
Net income amounted to $260,000 or $0.04 per basic and diluted share for the quarter ended March 31, 2013 compared to net income of $36,000 or $0.01 per basic and diluted share for the quarter ended March 31, 2012.  Other-than-temporarily impaired investment write-downs decreased $456,000 to $37,000 for the quarter ended March 31, 2013 compared to $493,000 for the quarter ended March 31, 2012.  The provision for loan loss decreased by $55,000 to $135,000 for the quarter ended March 31, 2013 compared to $190,000 for the quarter ended March 31, 2012.  Total non-interest expense increased by $36,000 to $2.7 million for the quarter ended March 31, 2013 compared to $2.6 million for the quarter ended March 31, 2012.  Net interest income decreased $221,000 to $2.6 million for the quarter ended March 31, 2013 compared to $2.8 million for the quarter ended March 31, 2012.  Income tax expense was $68,000 for the quarter ended March 31, 2013 compared to $31,000 for the quarter ended March 31, 2012.  This was primarily the result of an increase in pre-tax income and tax preference items.
 
 
34

 
 
Net income amounted to $944,000 or $0.15 per basic and diluted share for the nine months ended March 31, 2013 compared to net income of $852,000 or $0.13 per basic and diluted share for the nine months ended March 31, 2012. Other-than-temporarily impaired investment write-downs decreased $1.1 million to $438,000 for the nine months ended March 31, 2013 compared to $1.5 million for the nine months ended March 31, 2012.  This was partially offset by a legal settlement on previously written-down securities of $1.5 million during the nine months ended March 31, 2012.  Income from bank-owned life insurance increased $167,000 to $412,000 for the nine months ended March 31, 2013 compared to $245,000 for the nine months ended March 31, 2012.  This increase included a $176,000 non-taxable death benefit realized during the nine months ended March 31, 2013.  The provision for loan loss decreased by $91,000 to $700,000 for the nine months ended March 31, 2013 compared to $791,000 for the nine months ended March 31, 2012.  Total non-interest expense decreased by $316,000 to $8.1 million for the nine months ended March 31, 2013 compared to $8.4 million for the nine months ended March 31, 2012.  Net interest income decreased $204,000 to $8.0 million for the nine months ended March 31, 2013 compared to $8.2 million for the nine months ended March 31, 2012.  Income tax expense was $175,000 for the nine months ended March 31, 2013 compared to $275,000 for the nine months ended March 31, 2012.  This was the result of a decrease in pre-tax income, tax preference items and an increase in non-taxable income from bank-owned life insurance.
 
These changes are described in more detail below.
 
Interest and Dividend Income
 
Interest and dividend income amounted to $3.7 million for the quarter ended March 31, 2013 compared to $4.3 million for the quarter ended March 31, 2012, a decrease of $655,000 or 15.1%.  This was primarily due to a decrease in yield on earning assets of 56 basis points to 3.54% for the quarter ended March 31, 2013 compared to 4.10% for the quarter ended March 31, 2012 as well as a decrease in average interest earning assets.  Average investment securities increased $8.0 million to $170.1 million for the quarter ended March 31, 2013 compared to $162.1 million for the quarter ended March 31, 2012.  The yield on investment securities decreased 73 basis points to 2.14% for the quarter ended March 31, 2013 compared to 2.87% for the quarter ended March 31, 2012.  Average loans decreased by $12.0 million to $243.7 million for the quarter ended March 31, 2013 compared to $255.7 million for the quarter ended March 31, 2012.  The yield on loans decreased 36 basis points to 4.64% for the quarter ended March 31, 2013 compared to 5.00% for the quarter ended March 31, 2012.
 
Interest and dividend income amounted to $11.7 million for the nine months ended March 31, 2013 compared to $13.5 million for the nine months ended March 31, 2012, a decrease of $1.8 million or 13.4%.  This was primarily due to a decrease in yield on earning assets of 44 basis points to 3.69% for the nine months ended March 31, 2013 compared to 4.13% for the nine months ended March 31, 2012 as well as a decrease in average interest earning assets.  Average investment securities decreased $4.4 million to $166.7 million for the nine months ended March 31, 2013 compared to $171.1 million for the nine months ended March 31, 2012.  The yield on investment securities decreased 57 basis points to 2.29% for the nine months ended March 31, 2013 compared to 2.86% for the nine months ended March 31, 2012.  Average loans decreased by $8.5 million to $247.7 million for the nine months ended March 31, 2013 compared to $256.2 million for the nine months ended March 31, 2012.  The yield on loans decreased 36 basis points to 4.73% for the nine months ended March 31, 2013 compared to 5.09% for the nine months ended March 31, 2012.
 
 
35

 
 
Interest Expense
 
Interest expense amounted to $1.1 million for the quarter ended March 31, 2013 compared to $1.6 million for the quarter ended March 31, 2012, a decrease of $434,000 or 27.7%.  The decrease was primarily due to changes in rates of interest-bearing liabilities.  The cost of average interest-bearing liabilities decreased 42 basis points to 1.28% for the quarter ended March 31, 2013 from 1.70% for the quarter ended March 31, 2012.  The average rate on interest-bearing deposits decreased by 22 basis points to 1.02% for the quarter ended March 31, 2013 compared to 1.24% for the quarter ended March 31, 2012.  The average rate on borrowed money decreased by 100 basis points to 2.47% for the quarter ended March 31, 2013 compared to 3.47% for the quarter ended March 31, 2012.
 
Interest expense amounted to $3.7 million for the nine months ended March 31, 2013 compared to $5.3 million for the nine months ended March 31, 2012, a decrease of $1.6 million or 30.3%.  The decrease was primarily due to changes in rates of interest-bearing liabilities.  The cost of average interest-bearing liabilities decreased 47 basis points to 1.38% for the nine months ended March 31, 2013 from 1.85% for the nine months ended March 31, 2012.  The average rate on interest-bearing deposits decreased by 29 basis points to 1.07% for the nine months ended March 31, 2013 compared to 1.36% for the nine months ended March 31, 2012.  The average rate on borrowed money decreased by 67 basis points to 2.89% for the nine months ended March 31, 2013 compared to 3.56% for the nine months ended March 31, 2012.
 
Net Interest and Dividend Income
 
Net interest and dividend income amounted to $2.6 million for the quarter ended March 31, 2013 compared to $2.8 million for the quarter ended March 31, 2012, a decrease of $221,000 or 8.0%.  Net interest rate spread decreased by 14 basis points to 2.26% for the quarter ended March 31, 2013 from 2.40% for the quarter ended March 31, 2012.  Net interest margin decreased 17 basis points to 2.45% from 2.62% when comparing the quarters ended March 31, 2013 and 2012, respectively.  Net interest-earning assets increased $8.3 million to $64.5 million for the quarter ended March 31, 2013 compared to $56.2 million for the quarter ended March 31, 2012.
 
Net interest and dividend income amounted to $8.0 million for the nine months ended March 31, 2013 compared to $8.2 million for the nine months ended March 31, 2012, a decrease of $204,000 or 2.5%.  Net interest rate spread increased by three basis points to 2.31% for the nine months ended March 31, 2013 from 2.28% for the nine months ended March 31, 2012.  Net interest margin increased two basis points to 2.53% from 2.51% when comparing the nine months ended March 31, 2013 and 2012, respectively.  Net interest-earning assets increased $10.3 million to $64.9 million for the nine months ended March 31, 2013 compared to $54.6 million for the nine months ended March 31, 2012.
 
Due to the large portion of fixed rate loans and securities in the Company’s asset portfolio, interest rate risk is a concern and the Company continues to monitor and adjust the asset and liability mix as much as possible to take advantage of the benefits and reduce the risks or potential negative effects of a rising rate environment.  Management attempts to mitigate the interest rate risk through balance sheet composition.  See “Market Risk, Liquidity and Capital Resources – Market Risk.”
 
Provision for Loan Losses
 
The provision for loan losses amounted to $135,000 for the quarter ended March 31, 2013 compared to $190,000 for the quarter ended March 31, 2012, a decrease of $55,000 or 28.9%.  The allowance for loan losses is based on management’s estimate of the probable losses inherent in the portfolio, considering the impact of certain internal and external factors.  Among the factors management considers are prior loss experience, current economic conditions and their effects on borrowers, the character and size of the portfolio, trends in non-performing loans and delinquency rates and the performance of individual loans in relation to contractual terms.  The provision for loan losses reflects adjustments to the allowance based on management’s review of the portfolio in light of these factors.  The ratio of the allowance to gross loans outstanding was 1.22% as of March 31, 2013 and 1.16% as of June 30, 2012.  Net charge-offs were $140,000 for the quarter ended March 31, 2013 compared to net charge-offs of $229,000 for the quarter ended March 31, 2012.
 
 
36

 
 
The provision for loan losses amounted to $700,000 for the nine months ended March 31, 2013 compared to $791,000 for the nine months ended March 31, 2012, a decrease of $91,000 or 11.5%.  Net charge-offs were $683,000 for the nine months ended March 31, 2013 compared to net charge-offs of $821,000 for the nine months ended March 31, 2012.
 
Non-interest Income
 
Non-interest income totaled $583,000 for the quarter ended March 31, 2013 compared to $120,000 for the quarter ended March 31, 2012, an increase of $463,000 or 385.8%.  This was primarily due to a decrease in other-than-temporary impairment charges on available-for-sale securities of $456,000 to $37,000 for the quarter ended March 31, 2013 compared to $493,000 for the quarter ended March 31, 2012.  The impairment charges for the three months ended March 31, 2013 and March 31, 2012 were the result of credit losses on non-agency mortgage-backed securities.
 
Non-interest income totaled $1.9 million for the nine months ended March 31, 2013 compared to $2.1 million for the nine months ended March 31, 2012, a decrease of $211,000 or 10.0%.  The decrease was primarily due to a legal settlement on previously written-down securities of $1.5 million during the nine months ended March 31, 2012.  This was partially offset by a decrease in other-than-temporary impairment charges on available-for-sale securities of $1.1 million to $438,000 for the nine months ended March 31, 2013 compared to $1.5 million for the nine months ended March 31, 2012.  The impairment charges for the nine months ended March 31, 2013 and March 31, 2012 were the result of credit losses on non-agency mortgage-backed securities.  Income from bank-owned life insurance increased $167,000 to $412,000 for the nine months ended March 31, 2013 compared to $245,000 for the nine months ended March 31, 2012.  This increase included a $176,000 non-taxable death benefit realized during the nine months ended March 31, 2013.  Mortgage banking activities increased by $122,000 or 171.8% to $193,000 for the nine months ended March 31, 2013 compared to $71,000 for the nine months ended March 31, 2012.  This was primarily due to increased loan sales during the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012.
 
Non-interest Expense
 
Non-interest expense amounted to $2.7 million for the quarter ended March 31, 2013 compared to $2.6 million for the quarter ended March 31, 2012, an increase of $36,000 or 1.4%.  Compensation and benefits expense decreased $8,000 or 0.6%.  Occupancy and equipment expense increased $29,000 or 9.5%.  All other non-interest expenses increased $15,000 or 1.7% to $909,000 for the quarter ended March 31, 2013 compared to $894,000 for the quarter ended March 31, 2012.
 
Non-interest expense amounted to $8.1 million for the nine months ended March 31, 2013 compared to $8.4 million for the nine months ended March 31, 2012, a decrease of $316,000 or 3.8%.  Compensation and benefits expense decreased $128,000 or 2.9%.  Occupancy and equipment expense increased $51,000 or 5.5%.  All other non-interest expenses decreased $239,000 or 8.1% to $2.7 million for the nine months ended March 31, 2013 compared to $3.0 million for the nine months ended March 31, 2012.
 
Provision for Income Taxes
 
Income tax expense amounted to $68,000 for the quarter ended March 31, 2013 compared to $31,000 for the quarter ended March 31, 2012. The effective tax rate was 20.7% for the quarter ended March 31, 2013 and 46.3% for the quarter ended March 31, 2012. The effective tax rates 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.
 
Income tax expense amounted to $175,000 for the nine months ended March 31, 2013 compared to $275,000 for the nine months ended March 31, 2012. The effective tax rates were 15.6% and 24.4%, respectively. The decrease was mainly due to a decrease in pre-tax income, tax preference items and an increase in non-taxable income from bank-owned life insurance. The effective tax rates 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.
 
 
37

 
 
Average Balances and Yields
 
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated.  No tax-equivalent yield adjustments were made, as the effect thereof was not material.  All average balances are daily average balances.  Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.  The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.  Yields and costs are annualized.
 
   
For the Three Months Ended March 31,
 
         
2013
               
2012
       
   
(Dollars in thousands)
 
                                     
   
Average
   
Interest
   
Yield/
   
Average
   
Interest
   
Yield/
 
 Interest-earning assets:
 
Balance
   
Income/Expense
   
Cost
   
Balance
   
Income/Expense
   
Cost
 
 Investment securities
  $ 170,094     $ 896       2.14 %   $ 162,048     $ 1,157       2.87 %
 Loans
    243,705       2,786       4.64 %     255,689       3,181       5.00 %
 Other earning assets
    9,184       5       0.22 %     8,357       4       0.19 %
 Total interest-earning assets
    422,983       3,687       3.54 %     426,094       4,342       4.10 %
 Non-interest-earning assets
    30,126                       31,653                  
 Total assets
  $ 453,109                     $ 457,747                  
                                                 
 Interest-bearing liabilities:
                                               
 NOW accounts
  $ 92,709       118       0.52 %   $ 92,263       154       0.67 %
 Savings accounts
    56,950       27       0.19 %     51,500       44       0.34 %
 Money market accounts
    13,713       13       0.38 %     15,094       21       0.56 %
 Time deposits
    131,321       583       1.80 %     135,454       692       2.05 %
 Borrowed money
    63,767       389       2.47 %     75,604       653       3.47 %
 Total interest-bearing liabilities
    358,460       1,130       1.28 %     369,915       1,564       1.70 %
 Non-interest-bearing demand deposits
    40,035                       38,963                  
 Other non-interest-bearing liabilities
    4,093                       2,389                  
 Capital accounts
    50,521                       46,480                  
 Total liabilities and capital accounts
  $ 453,109                     $ 457,747                  
                                                 
 Net interest income
          $ 2,557                     $ 2,778          
 Interest rate spread
                    2.26 %                     2.40 %
 Net interest-earning assets
  $ 64,523                     $ 56,179                  
 Net interest margin
                    2.45 %                     2.62 %
 Average earning assets to
                                               
    average interest-bearing liabilities
                    118.00 %                     115.19 %
 
 
38

 

   
For the Nine Months Ended March 31,
 
         
2013
               
2012
       
   
(Dollars in thousands)
 
                                     
   
Average
   
Interest/
   
Yield/
   
Average
   
Interest/
   
Yield/
 
 Interest-earning assets:
 
Balance
   
Dividends
   
Cost
   
Balance
   
Dividends
   
Cost
 
 Investment securities
  $ 166,686     $ 2,867       2.29 %   $ 171,143     $ 3,672       2.86 %
 Loans
    247,705       8,795       4.73 %     256,151       9,797       5.09 %
 Other earning assets
    6,620       10       0.20 %     7,293       8       0.15 %
 Total interest-earning assets
    421,011       11,672       3.69 %     434,587       13,477       4.13 %
 Non-interest-earning assets
    29,454                       31,923                  
 Total assets
  $ 450,465                     $ 466,510                  
                                                 
 Interest-bearing liabilities:
                                               
 NOW accounts
  $ 92,868       396       0.57 %   $ 91,406       545       0.79 %
 Savings accounts
    55,378       80       0.19 %     50,131       130       0.35 %
 Money market accounts
    14,286       43       0.40 %     14,869       73       0.65 %
 Time deposits
    132,427       1,845       1.86 %     138,123       2,260       2.18 %
 Borrowed money
    61,175       1,327       2.89 %     85,453       2,284       3.56 %
 Total interest-bearing liabilities
    356,134       3,691       1.38 %     379,982       5,292       1.85 %
 Non-interest-bearing demand deposits
    42,054                       37,967                  
 Other non-interest-bearing liabilities
    2,506                       2,308                  
 Capital accounts
    49,771                       46,253                  
 Total liabilities and capital accounts
  $ 450,465                     $ 466,510                  
                                                 
 Net interest income
          $ 7,981                     $ 8,185          
 Interest rate spread
                    2.31 %                     2.28 %
 Net interest-earning assets
  $ 64,877                     $ 54,605                  
 Net interest margin
                    2.53 %                     2.51 %
 Average earning assets to
                                               
    average interest-bearing liabilities
                    118.22 %                     114.37 %
 
 
39

 
 
The following tables set forth the effects of changing rates and volumes on our net interest income for the periods indicated.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  The net column represents the sum of the prior columns.  For purposes of these tables, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
 
   
For the Three Months Ended March 31, 2013
 
   
Compared to the Three Months Ended March 31, 2012
 
   
Increase (Decrease) Due to
 
 INTEREST INCOME
 
Rate
   
Volume
   
Net
 
   
(In thousands)
 
                   
 Investment securities
  $ (606 )   $ 345     $ (261 )
 Loans
    (241 )     (154 )     (395 )
 Other interest-earning assets
    1       -       1  
 TOTAL INTEREST INCOME
    (846 )     191       (655 )
                         
 INTEREST EXPENSE
                       
                         
 NOW accounts
    (41 )     5       (36 )
 Savings accounts
    (44 )     27       (17 )
 Money Market accounts
    (6 )     (2 )     (8 )
 Time deposits
    (87 )     (22 )     (109 )
 Borrowed money
    (171 )     (93 )     (264 )
 TOTAL INTEREST EXPENSE
    (349 )     (85 )     (434 )
 CHANGE IN NET INTEREST INCOME
  $ (497 )   $ 276     $ (221 )
 
 
40

 
 
   
For the Nine Months Ended March 31, 2013
 
   
Compared to the Nine Months Ended March 31, 2012
 
   
Increase (Decrease) Due to
 
                   
INTEREST INCOME
 
Rate
   
Volume
   
Net
 
   
(In thousands)
 
                   
Investment securities
  $ (711 )   $ (94 )   $ (805 )
Loans
    (684 )     (318 )     (1,002 )
Other interest-earning assets
    3       (1 )     2  
TOTAL INTEREST INCOME
    (1,392 )     (413 )     (1,805 )
                         
INTEREST EXPENSE
                       
                         
NOW accounts
    (163 )     14       (149 )
Savings accounts
    (70 )     20       (50 )
Money Market accounts
    (27 )     (3 )     (30 )
Time deposits
    (324 )     (91 )     (415 )
Borrowed money
    (381 )     (576 )     (957 )
TOTAL INTEREST EXPENSE
    (965 )     (636 )     (1,601 )
CHANGE IN NET INTEREST INCOME
  $ (427 )   $ 223     $ (204 )
 
Market Risk, Liquidity and Capital Resources
 
Market Risk
 
The majority of our assets and liabilities are monetary in nature.  Consequently, our most significant form of market risk is interest rate risk (“IRR”).  Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and other borrowings.  As a result, a principal part of our business strategy is to manage IRR and reduce the exposure of our net interest income (“NII”) to changes in market interest rates.  Accordingly, our Board of Directors has established an Asset/Liability Management Committee which is responsible for evaluating the IRR inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.  With the assistance of an IRR management consultant, the committee monitors the level of IRR on a regular basis and generally meets at least on a quarterly basis to review our asset/liability policies and IRR position.
 
We have sought to manage our IRR in order to minimize the exposure of our earnings and capital to changes in interest rates.  As part of our ongoing asset/liability management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances from the Federal Home Loan Bank of Boston, to “match fund” certain investments and/or loans; (ii) continued emphasis on increasing core deposits; (iii) offering adjustable rate and shorter-term home equity loans, commercial real estate loans, construction loans and commercial and industrial loans; (iv) offering a variety of consumer loans, which typically have shorter-terms; (v) investing in mortgage-backed securities with variable rates or fixed rates with shorter durations.  Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our NII to changes in market interest rates.
 
 
41

 
 
Net interest income at-risk measures the risk of a decline in earnings due to potential short-term and long- term changes in interest rates.  The table below represents an analysis of our IRR as measured by the estimated changes in NII, resulting from an instantaneous and sustained parallel shift in the yield curve (+100 and +200 basis points) at March 31, 2013 and June 30, 2012.
 
Net Interest Income At-Risk
         
   
Estimated Increase (Decrease)
 
Estimated Increase (Decrease)
Change in Interest Rates
 
in NII
 
in NII
(Basis Points)
 
March 31, 2013
 
June 30, 2012
         
Stable
       
+ 100
 
-1.67%
 
-0.56%
+ 200
 
-7.34%
 
-4.81%
 
The preceding income simulation analysis does not represent a forecast of NII and should not be relied upon as being indicative of expected operating results.  These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others.  Also, as market conditions vary prepayment/refinancing levels will likely deviate from those assumed, the varying impact of interest rate changes on caps and floors embedded in adjustable rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables.
 
Net Portfolio Value Simulation Analysis.   We compute the amounts by which the net present value of our cash flow from assets, liabilities and off-balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates.  Given the current low level of market interest rates, we do not prepare a net portfolio value calculation for an interest rate decrease of greater than 100 basis points.  A basis point equals one-hundredth of one percent, and 200 basis points equals two percent, an increase in interest rates from 3% to 5% would mean, for example, a 200 basis point increase in the “Change in Interest Rates” column below.
 
 
42

 
 
The tables below set forth, at March 31, 2013, the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve based on information produced by an external consultant.  Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.  This data is for Putnam Bank only and does not include any yield curve changes in the assets of PSB Holdings, Inc.
 
                     
NPV as a Percentage of Present
 
                     
Value of Assets (3)
 
         
Estimated Increase (Decrease) in
             
Change in
       
NPV
         
Increase
 
Interest Rates
 
Estimated
                     
(Decrease)
 
(basis points) (1)
 
NPV (2)
   
Amount
   
Percent
   
NPV Ratio (4)
   
(basis points)
 
(Dollars in thousands)
 
                               
+300
  $ 32,646     $ (18,178 )     -35.77 %     7.77 %     -332  
+200
  $ 41,713     $ (9,111 )     -17.93 %     9.61 %     -149  
+100
  $ 48,138     $ (2,686 )     -5.29 %     10.77 %     -33  
0
  $ 50,824     $ -       0.00 %     11.10 %     0  
-100
  $ 52,957     $ 2,133       4.20 %     11.35 %     26  

 
(1)
Assumes an instantaneous uniform change in interest rates at all maturities.
 
(2)
NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
 
(3)
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
 
(4)
NPV ratio represents NPV divided by the present value of assets.
 
Liquidity
 
The term liquidity refers to the ability of the Company and the Bank to meet current and future short-term financial obligations.  The Company and the Bank further define liquidity as the ability to generate adequate amounts of cash to fund loan originations, deposit withdrawals and operating expenses.  Liquidity management is both a daily and long-term function of business management. The Bank’s primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-related securities, and Federal Home Loan Bank of Boston borrowings.  The Bank can borrow funds from the Federal Home Loan Bank of Boston based on eligible collateral of loans and securities.  The Bank had Federal Home Loan Bank of Boston borrowings as of March 31, 2013 of $53.5 million with unused borrowing capacity of $53.0 million.  The Bank has an internal limit of wholesale borrowings to total assets ratio of 30.0%.  As of March 31, 2013, the ratio of wholesale borrowings to total assets was 11.8%.
 
The Bank’s primary investing activities are the origination of loans and the purchase of investment securities.  During the nine months ended March 31, 2013 and 2012, the Bank’s principal collections net of loan originations were $9.7 million and $918,000, respectively. Purchases of securities totaled $52.2 million and $21.6 million, for the nine months ended March 31, 2013 and 2012, respectively.
 
Loan repayments and maturing investment securities are a relatively predictable source of funds.  However, deposit flows, calls of investment securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and economic conditions and competition in the marketplace.  These factors reduce the predictability of the timing of these sources of funds.  Deposit flows are affected by the level of interest rates, by the interest rates and products offered by competitors and by other factors.  The Bank monitors its liquidity position frequently and anticipates that it will have sufficient funds to meet its current funding commitments.
 
 
43

 
 
Certificates of deposits totaled $131.2 million at March 31, 2013. The Bank relies on competitive rates, customer service and long-standing relationships with customers to retain deposits.  Based on the Bank’s experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict with certainty future terms and conditions upon renewal, a significant portion of such deposits will remain with the Bank.
 
The Bank was well capitalized at March 31, 2013 and exceeded each of the applicable regulatory capital requirements at such date.
 
   
Required
 
Actual
         
Ratio of Tier 1 Capital to total assets
 
4%
 
8.48%
Ratio of Total Risk Based Capital to risk-weighted assets
8%
 
17.76%
Ratio of Tier 1 Risk Based Capital to risk-weighted assets
4%
 
16.57%
         
 
Management is not aware of any known trends, events or uncertainties that will have or are reasonably likely to have a material effect on the Company’s or the Bank’s liquidity, capital or operations, nor is management aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on the Company’s or the Bank’s liquidity, capital or operations.
 
Off-Balance Sheet Arrangements
 
In addition to the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements.  These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk.  Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit, and letters of credit.
 
For the nine months ended March 31, 2013, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
           See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Item 4.  Controls and Procedures
 
Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
 
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.
 
 
44

 
 
Part II. – OTHER INFORMATION
 
Item 1.        Legal Proceedings – Not applicable
 
Item 1A.     Risk Factors – Not applicable
 
Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
 
a) Not applicable
 
b) Not applicable
 
c) Not applicable
 
Item 3.        Defaults Upon Senior Securities – Not applicable
 
Item 4.        Mine Safety Disclosures – Not Applicable.
 
Item 5.        Other Information
 
 a.
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.
 
101
The following materials from the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Net Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the  Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.
 
 
45

 
 
SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  PSB HOLDINGS, INC.  
  (Registrant)  
       
Date  May 13, 2013
/s/  Thomas A. Borner   
  Thomas A. Borner  
  President and Chief Executive Officer  
       
Date  May 13, 2013
/s/  Robert J. Halloran, Jr.  
  Robert J. Halloran, Jr.  
  Executive Vice-President, Chief Financial Officer and Treasurer  
 
 
46
 

1 Year (MM) Chart

1 Year (MM) Chart

1 Month (MM) Chart

1 Month (MM) Chart

Your Recent History

Delayed Upgrade Clock