PSB Holdings, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - PSB Holdings, Inc.	Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - PSB Holdings, Inc.	t82320_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - PSB Holdings, Inc.	t82320_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - PSB Holdings, Inc.	t82320_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - PSB Holdings, Inc.	t82320_ex32-1.htm

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, 2015

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, 2015, 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, 2015 and June 30, 2014	1

	Consolidated Statements of Operations for the three and nine months ended March 31, 2015 and 2014	2

	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended March 31, 2015 and 2014	3

	Consolidated Statements of Changes in Stockholders’ Equity for the nine months March 31, 2015 and 2014	4

	Consolidated Statements of Cash Flows for the nine months ended March 31, 2015 and 2014	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	42

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	42

SIGNATURES		43

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

PSB Holdings, Inc.

Consolidated Balance Sheets

(Unaudited)


	March 31,			June 30,
	2015			2014
	(in thousands except share data)
ASSETS
Cash and due from depository institutions	$	3,968		$	4,573
Interest-bearing demand deposits with other banks		18,494			2,762
Total cash and cash equivalents		22,462			7,335
Securities available-for-sale, at fair value		47,365			48,081
Securities held-to-maturity (fair value of $154,983 as of
March 31, 2015 and $143,257 as of June 30, 2014)		152,488			142,176
Federal Home Loan Bank stock, at cost		5,371			5,927
Loans held-for-sale		-			100
Loans		227,894			232,506
Less: Allowance for loan losses		(2,244	)		(2,380	)
Net loans		225,650			230,126
Premises and equipment		3,835			4,037
Accrued interest receivable		1,101			1,018
Other real estate owned		3,197			1,549
Goodwill		6,912			6,912
Bank-owned life insurance		9,359			9,150
Deferred tax asset		2,575			2,661
Other assets		1,677			1,967

Total assets	$	481,992		$	461,039

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Non-interest-bearing	$	58,903		$	53,021
Interest-bearing		298,078			294,235
Total deposits		356,981			347,256
Mortgagors’ escrow accounts		1,278			2,267
Federal Home Loan Bank advances		52,573			53,500
Securities sold under agreements to repurchase		17,279			4,181
Other liabilities		2,352			2,384
Total liabilities		430,463			409,588



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, 2015 and June 30, 2014		694			694
Additional paid-in capital		30,602			30,602
Retained earnings		25,686			25,793
Accumulated other comprehensive loss		(148	)		(237	)
Unearned ESOP shares		(1,214	)		(1,310	)
Treasury stock, at cost (401,564 shares at
March 31, 2015 and June 30, 2014)		(4,091	)		(4,091	)
Total stockholders’ equity		51,529			51,451

Total liabilities and stockholders’ equity	$	481,992		$	461,039

See accompanying notes to consolidated financial statements.

PSB Holdings, Inc.

Consolidated Statements of Operations

(Unaudited)


	Three months ended					Nine months ended
	March 31,					March 31,
	2015			2014		2015			2014
	(in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans	$	2,324		$	2,475	$	7,208		$	7,670
Interest and dividends on investments		1,007			999		3,051			2,752
Total interest and dividend income		3,331			3,474		10,259			10,422

Interest expense:
Deposits and escrow		538			581		1,669			1,859
Borrowed funds		351			386		1,100			1,172
Total interest expense		889			967		2,769			3,031
Net interest and dividend income		2,442			2,507		7,490			7,391

Provision for loan losses		580			15		650			55
Net interest and dividend income after provision
for loan losses		1,862			2,492		6,840			7,336

Non-interest income:
Total other-than-temporary impairment losses on debt securities		-			-		(414	)		(46	)
Portion of losses recognized in other comprehensive loss		-			-		259			39
Net impairment losses recognized in earnings		-			-		(155	)		(7	)
Fees for services		406			430		1,284			1,321
Mortgage banking activities		21			18		75			57
Net commissions from brokerage service		15			12		66			93
Income from bank-owned life insurance		68			69		209			221
Other income		23			42		119			122
Total non-interest income		533			571		1,598			1,807

Non-interest expense:
Compensation and benefits		1,542			1,463		4,647			4,420
Occupancy and equipment		347			310		946			900
Data processing		192			207		646			610
LAN/WAN network		37			36		112			110
Advertising and marketing		52			40		143			121
OCC assessment		6			48		71			143
FDIC deposit insurance		108			151		271			455
Other real estate owned		148			71		307			134
Write-down of other real estate owned		-			132		33			228
Other		412			411		1,245			1,283
Total non-interest expense		2,844			2,869		8,421			8,404
(Loss) income before income tax (benefit) expense		(449	)		194		17			739

Income tax (benefit) expense		(140	)		7		(98	)		69
NET (LOSS) INCOME	$	(309	)	$	187	$	115		$	670

(Loss) earnings per common share:
Basic	$	(0.05	)	$	0.03	$	0.02		$	0.10
Diluted	$	(0.05	)	$	0.03	$	0.02		$	0.10

See accompanying notes to consolidated financial statements.

PSB Holdings, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2015			2014			2015			2014
	(in thousands)
Net (loss) income	$	(309	)	$	187		$	115		$	670

Other comprehensive income:
Net unrealized holding gains on
available-for-sale securities		286			626			240			64
Reclassification adjustment for losses
realized in income on available-for-sale securities (1)		-			-			155			7
Non-credit portion of other-than-temporary losses on
available-for-sale securities		-			-			(259	)		(39	)

Other comprehensive income before tax		286			626			136			32
Income tax expense related to other
comprehensive income		(98	)		(214	)		(47	)		(11	)
Other comprehensive income net of tax		188			412			89			21
Total comprehensive (loss) income	$	(121	)	$	599		$	204		$	691

(1)	Reported in net impairment losses recognized in earnings included in non-interest income on the consolidated statements of operations. Income tax benefit associated with the reclassification adjustments were $53,000 and $2,000 for the nine months ended March 31, 2015 and 2014, respectively.

See accompanying notes to consolidated financial statements.

PSB Holdings, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

For the nine months ended March 31, 2015 and 2014

(Unaudited)

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

Balances at June 30, 2013	$	694	$	30,602	$	24,836		$	(523	)	$	(1,437	)	$	(4,091	)	$	50,081

Comprehensive income		-		-		670			21			-			-			691
ESOP shares committed to be released (9,585 shares)		-		-		(35	)		-			95			-			60

Balances at March 31, 2014	$	694	$	30,602	$	25,471		$	(502	)	$	(1,342	)	$	(4,091	)	$	50,832

Balances at June 30, 2014	$	694	$	30,602	$	25,793		$	(237	)	$	(1,310	)	$	(4,091	)	$	51,451

Comprehensive income		-		-		115			89			-			-			204
Cash dividends declared ($0.03 per share)		-		-		(197	)		-			-			-			(197	)
ESOP shares committed to be released (9,585 shares)		-		-		(25	)		-			96			-			71

Balances at March 31, 2015	$	694	$	30,602	$	25,686		$	(148	)	$	(1,214	)	$	(4,091	)	$	51,529

See accompanying notes to consolidated financial statements.

PSB Holdings, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	For the Nine Months
	Ended March 31,
	2015			2014
	(in thousands)
Cash flows from operating activities
Net income	$	115		$	670
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of securities, net		866			969
Impairment losses on securities		155			7
Net decrease in loans held-for-sale		100			893
Amortization of deferred loan costs, net		97			54
Provision for loan losses		650			55
Gain on sale of other real estate owned, net		(48	)		(50	)
Write-down of other real estate owned		33			228
Loss on sale of premises and equipment		-			1
Depreciation and amortization - premises and equipment		258			326
Amortization - software		91			80
Decrease (increase) in accrued interest receivable and other assets		149			(333	)
Increase in cash surrender value of bank-owned life insurance		(209	)		(221	)
Decrease in other liabilities		(32	)		(10	)
Deferred tax expense		39			92
Amortization of ESOP expense		71			60
Net cash provided by operating activities		2,335			2,821
Cash flows from investing activities
Purchase of available-for-sale securities		(3,067	)		(15,986	)
Proceeds from sales, calls, pay downs and maturities of available-for-sale securities		3,678			5,513
Purchase of held-to-maturity securities		(30,668	)		(23,410	)
Proceeds from calls, pay downs and maturities of held-to-maturity securities		19,576			20,800
Redemption of Federal Home Loan Bank Stock		556			-
Loan principal repayments, net of originations		1,337			2,304
Recoveries of loans previously charged off		228			66
Proceeds from sale of other real estate owned		531			1,023
Capital expenditures - premises and equipment		(56	)		(154	)
Capital expenditures - software		(33	)		(29	)
Net cash used in investing activities		(7,918	)		(9,873	)
Cash flows from financing activities
Net increase in deposit accounts		9,725			396
Net decrease in mortgagors’ escrow accounts		(989	)		(891	)
Proceeds from long-term Federal Home Loan Bank advances		10,000			15
Repayment of long-term Federal Home Loan Bank advances		(11,000	)		-
Change in short term FHLB advances, net		73			-
Net increase in securities sold under agreements to repurchase		13,098			3,093
Cash dividends paid on common stock		(197	)		-
Net cash provided by financing activities		20,710			2,613
Net increase (decrease) in cash and cash equivalents		15,127			(4,439	)
Cash and cash equivalents at beginning of year		7,335			12,793
Cash and cash equivalents at end of period	$	22,462		$	8,354
Supplemental disclosures
Cash paid during the period for:
Interest	$	2,776		$	3,042
Income taxes (refunded) paid, net		(554	)		1
Loans transferred to other real estate owned		2,164			1,057

See accompanying notes to consolidated financial statements.

PSB Holdings, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – Organization

PSB Holdings, Inc. (the “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 (the “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.

On December 30, 2014, the Bank converted from a federally-chartered savings bank to a Connecticut-chartered bank that is a member of the Federal Reserve System. PSB Holdings, Inc. and Putnam Bancorp, MHC remain savings and loan holding companies.

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, 2015. These financial statements should be read in conjunction with the 2014 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on September 24, 2014.

NOTE 3 – Recent Accounting Pronouncements

Capital. In July 2013, federal banking regulators approved an interim rule to set minimum requirements for both the quantity and quality of capital held by banks. The interim final rule includes a new minimum ratio of common equity Tier 1 capital to risk weighted assets of 4.5%, raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. Additionally, banks must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The Company began complying with the final rule on January 1, 2015. See ”Market Risk, Liquidity and Capital Resources.”

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 one-to four-family owner occupied loans, second mortgage loans 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. 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.

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 does not originate loans with a loan-to-value ratio greater than 100% and does not originate subprime loans. Loans originated with a loan-to-value ratio greater than 80% generally require private mortgage insurance. 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/other 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 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.

Goodwill. The Company’s goodwill was recorded as a result of business acquisitions and combinations. The Company’s goodwill (consideration 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 the Company 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.

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. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.

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

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. If rights to dividends on unvested options/awards are non-forfeitable, these unvested awards/options are considered outstanding in the computation of basic earnings per share. 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 months and nine months ended March 31, 2015 and 2014:

	Three Months Ended			Three Months Ended		Nine Months Ended		Nine Months Ended
	March 31, 2015			March 31, 2014		March 31, 2015		March 31, 2014
Net (loss) income	$	(309,000	)	$	187,000	$	115,000	$	670,000

Weighted average common shares applicable to basic EPS		6,416,996			6,404,217		6,413,777		6,400,998
Effect of dilutive potential common shares (1)		-			-		-		-
Weighted average common shares applicable to diluted EPS		6,416,996			6,404,217		6,413,777		6,400,998
(Loss) earnings per share:
Basic	$	(0.05	)	$	0.03	$	0.02	$	0.10
Diluted	$	(0.05	)	$	0.03	$	0.02	$	0.10

(1) For the three and nine months ended March 31, 2015 and 2014, options to purchase 199,106 shares were outstanding but not included in the computation of (loss) earnings per share because they were anti-dilutive.

NOTE 6 – Investment Securities

The carrying value and estimated fair values of investment securities by maturity are as follows:

	Amortized		Gross Unrealized					Fair
	Cost Basis		Gain		(Loss)			Value
	(in thousands)
March 31, 2015
Available-for-sale:
Debt securities:
U.S. government and government-sponsored securities:
Due from one through five years	$	1,000	$	-	$	(7	)	$	993
Corporate bonds and other securities:
Due after ten years		5,999		-		(954	)		5,045
U.S. Government-sponsored and guaranteed mortgage-backed securities:
Due from one through five years		458		20		-			478
From five through ten years		9,897		223		-			10,120
After ten years		14,114		520		-			14,634
		24,469		763		-			25,232

Non-agency mortgage-backed securities:
Due after ten years		6,123		325		(353	)		6,095
Total debt securities		37,591		1,088		(1,314	)		37,365

Equity securities:
Auction rate preferred		10,000		-		-			10,000
Total available-for-sale securities	$	47,591	$	1,088	$	(1,314	)	$	47,365

Held-to-maturity:
U.S. government and government-sponsored securities:
Due from one through five years	$	9,244	$	107	$	(2	)	$	9,349
From five through ten years		953		113		-			1,066
		10,197		220		(2	)		10,415

U.S. Government-sponsored and guaranteed mortgage-backed securities:
Due from five through ten years		3,628		175		-			3,803
After ten years		138,663		2,356		(254	)		140,765
		142,291		2,531		(254	)		144,568
Total held-to-maturity securities	$	152,488	$	2,751	$	(256	)	$	154,983

	Amortized		Gross Unrealized					Fair
	Cost Basis		Gain		(Loss)			Value
	(in thousands)
June 30, 2014:
Available-for-sale:
Debt securities:
U.S. government and government-sponsored securities:
Due from five through ten years	$	1,000	$	-	$	(24	)	$	976
Corporate bonds and other securities:
Due after ten years		5,999		-		(836	)		5,163
U.S. Government-sponsored and guaranteed
mortgage-backed securities:
Due from one through five years		684		37		-			721
From five through ten years		11,593		189		-			11,782
After ten years		12,426		377		(44	)		12,759
		24,703		603		(44	)		25,262

Non-agency mortgage-backed securities:
Due after ten years		6,741		321		(382	)		6,680
Total debt securities		38,443		924		(1,286	)		38,081

Equity securities:
Auction rate preferred		10,000		-		-			10,000
Total available-for-sale securities	$	48,443	$	924	$	(1,286	)	$	48,081

Held-to-maturity:
U.S. government and government-sponsored securities:
Due from one through five years	$	5,262	$	4	$	(28	)	$	5,238
From five through ten years		4,929		122		-			5,051
		10,191		126		(28	)		10,289

U.S. Government-sponsored and guaranteed
mortgage-backed securities:
Due from five through ten years		4,445		190		-			4,635
After ten years		127,540		1,831		(1,038	)		128,333
		131,985		2,021		(1,038	)		132,968
Total held-to-maturity securities	$	142,176	$	2,147	$	(1,066	)	$	143,257

There were no sales of available-for-sale securities for the three months ended March 31, 2015 or 2014. Gains and losses on the sales of securities are recorded on the trade date and are determined using the specific identification method. There were no other-than-temporary impairment charges on available-for-sale securities realized in income during the three months ended March 31, 2015 and 2014.

There were no sales of available-for-sale securities for the nine months ended March 31, 2015 or 2014. There were other-than-temporary impairment charges on available-for-sale securities of $155,000 and $7,000 realized in income during the nine months ended March 31, 2015 and 2014, respectively. The write-downs of securities included total other-than-temporary impairment losses of $414,000 and $46,000, net of $259,000 and $39,000 recognized in other comprehensive income/loss for the nine months ended March 31, 2015 and 2014, respectively, before taxes. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview.”

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


March 31, 2015:	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	$	-	$	-	$	993	$	7	$	993	$	7
Corporate bonds and other securities		-		-		5,045		954		5,045		954
Total temporarily impaired available-for-sale		-		-		6,038		961		6,038		961

Held-to-maturity:
U.S. Government and government-sponsored securities		2,253		2		-		-		2,253		2
U.S. Government-sponsored and guaranteed mortgage-backed securities		11,467		22		13,501		232		24,968		254
Total temporarily impaired held-to-maturity		13,720		24		13,501		232		27,221		256

Other-than-temporarily impaired debt securities (1):
Non-agency mortgage-backed securities		551		1		3,096		352		3,647		353

Total temporarily-impaired and other- than-temporarily impaired securities	$	14,271	$	25	$	22,635	$	1,545	$	36,906	$	1,570

June 30, 2014:	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 guaranteed securities	$	-	$	-	$	976	$	24	$	976	$	24
Corporate bonds and other obligations		-		-		5,163		836		5,163		836
U.S. Government-sponsored and guaranteed mortgage-backed securities		2,370		1		3,931		43		6,301		44
Total temporarily impaired available-for-sale		2,370		1		10,070		903		12,440		904

Held-to-maturity:
U.S. Government and government-sponsored securities		1,004		1		3,229		27		4,233		28
U.S. Government-sponsored and guaranteed mortgage-backed securities		31,059		103		46,612		935		77,671		1,038
Total temporarily impaired held-to-maturity		32,063		104		49,841		962		81,904		1,066

Other-than-temporarily impaired debt securities (1):
Non-agency mortgage-backed securities		-		-		3,301		382		3,301		382

Total temporarily-impaired and other- than-temporarily impaired securities	$	34,433	$	105	$	63,212	$	2,247	$	97,645	$	2,352

(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).

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, 2015 and June 30, 2014, there were 24 and 57 individual investment securities, respectively, with aggregate depreciation of 4.1% and 1.3%, respectively, from the Company’s amortized cost basis. 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, 2015.

The Company’s unrealized losses on investments in corporate bonds and other securities relate to investments in companies within the financial services sector. As of March 31, 2015, 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 $5.0 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 bases which may be at maturity.

For the nine months ended March 31, 2015, 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 (loss) (in thousands):


Balance as of June 30, 2013	$	15,733
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		10
Reductions for securities sold during the period		-

Balance as of June 30, 2014		15,743

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		155
Reductions for securities sold during the period		-

Balance as of March 31, 2015	$	15,898

NOTE 7 – Loans

The following table sets forth the composition of our loan portfolio at March 31, 2015 and June 30, 2014:


	March 31,			June 30,
	2015			2014
	(in thousands)

Real Estate:
Residential (1)	$	180,268		$	184,380
Commercial		43,174			43,887
Residential construction		1,099			2,661
Commercial		2,020			1,904
Consumer and other		646			627

Total loans		227,207			233,459

Unadvanced construction loans		(118	)		(1,658	)
		227,089			231,801
Net deferred loan costs		805			705
Allowance for loan losses		(2,244	)		(2,380	)

Loans, net	$	225,650		$	230,126

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

Credit Quality Information

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

Loans rated 1 - 5 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. Credit quality for residential real estate and consumer/other loans is determined by monitoring loan payment history and ongoing communications with the borrower.

The following table presents the Company’s loan classes by internally assigned grades at March 31, 2015 and June 30, 2014:


	Residential			Commercial			Residential					Consumer
March 31, 2015		Real Estate			Real Estate			Construction		Commercial			and other		Total
		(in thousands)
Grade:
Pass		$	176,891		$	35,500		$	1,074	$	1,597		$	645	$	215,707
Special Mention			169			2,163			-		-			-		2,332
Substandard			3,208			3,724			-		423			1		7,356
Doubtful			-			1,694			-		-			-		1,694
Loss			-			-			-		-			-		-
Total		$	180,268		$	43,081		$	1,074	$	2,020		$	646	$	227,089


	Residential			Commercial			Residential					Consumer
June 30, 2014		Real Estate			Real Estate			Construction		Commercial			and other		Total
		(in thousands)
Grade:
Pass		$	180,080		$	33,034		$	1,575	$	1,459		$	627	$	216,775
Special Mention			175			2,065			-		-			-		2,240
Substandard			4,125			6,553			-		445			-		11,123
Doubtful			-			1,663			-		-			-		1,663
Loss			-			-			-		-			-		-
Total		$	184,380		$	43,315		$	1,575	$	1,904		$	627	$	231,801

There were no modifications deemed to be troubled debt restructures for the nine months ended March 31, 2015. The following table represents modifications that were deemed to be troubled debt restructures for the nine months ended March 31, 2014.


March 31, 2014

	Number of Contracts		Pre-Modifcation Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(Dollars in thousands)
Real Estate:
Commercial		3	$	369	$	410

The modifications on the commercial real estate loans provided additional funding to complete the infrastructure on a two-lot subdivision and provided additional funding to a borrower that had a prior modified loan. Management performs a discounted cash flow calculation to determine the amount of impaired reserve required on troubled debt restructures. Any reserve required is recorded through the provision for loan losses.

The following is a summary of troubled debt restructurings that have subsequently defaulted (defined as 30 or more days past due subsequent to restructuring) within one year of modification during the nine months ended March 31, 2015. There were no troubled debt restructurings that subsequently defaulted within one year of modification during the three months ended March 31, 2015 or the three and nine months ended March 31, 2014.


	Nine months ended
	March 31, 2015
	Number of		Recorded
	Contracts		Investment
	(Dollars in thousands)
Real Estate:
Residential		1	$	200

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,
	2015			2014
	(Dollars in thousands)
Non-accrual loans:
Real Estate:
Residential	$	3,068		$	3,977
Commercial		2,876			3,051
Commercial		24			28
Consumer		1			-
Total non-accrual loans		5,969			7,056

Accruing loans past due 90 days or more:		-			-

Total non-performing loans		5,969			7,056

Other real estate owned		3,197			1,549
Total non-performing assets	$	9,166		$	8,605

Total non-performing loans to total loans		2.63	%		3.04	%
Total non-performing assets to total assets		1.90	%		1.87	%

Management is focused on working with borrowers and guarantors to resolve non-accrual loans 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. 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.

The following table sets forth information regarding past due loans at March 31, 2015 and June 30, 2014:


					90 days
	30–59 Days		60–89 Days		or greater		Total
At March 31, 2015	Past Due		Past Due		Past Due		Past Due
	(in thousands)
Real Estate:
Residential	$	1,007	$	233	$	1,255	$	2,495
Commercial		377		200		2,093		2,670
Consumer and other		3		-		-		3
Total	$	1,387	$	433	$	3,348	$	5,168

At June 30, 2014

Real Estate:
Residential	$	358	$	571	$	1,497	$	2,426
Commercial		-		383		2,208		2,591
Consumer and other		6		-		-		6
Total	$	364	$	954	$	3,705	$	5,023

The following is a summary of information pertaining to impaired loans at March 31, 2015 and June 30, 2014:


	At March 31, 2015						At June 30, 2014
			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	$	1,370	$	1,449			$	2,101	$	2,229
Commercial		3,779		4,391				3,646		4,122
Commercial		343		343				397		397
Total impaired with no valuation allowance		5,492		6,183				6,144		6,748

Impaired loans with a valuation allowance:
Real Estate:
Residential		1,565		1,639	$	134		1,651		1,711	$	104
Commercial		359		422		25		741		804		104
Total impaired with a valuation allowance		1,924		2,061		159		2,392		2,515		208

Total impaired loans:
Real Estate:
Residential		2,935		3,088		134		3,752		3,940		104
Commercial		4,138		4,813		25		4,387		4,926		104
Commercial		343		343		-		397		397		-
Total impaired loans	$	7,416	$	8,244	$	159	$	8,536	$	9,263	$	208

The following is a summary of additional information pertaining to impaired loans:


	Three months ended						Three months ended
	March 31, 2015						March 31, 2014
	Average		Interest		Interest Income		Average		Interest		Interest Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
					(in thousands)
Real Estate:
Residential	$	2,938	$	12	$	1	$	3,274	$	15	$	4
Commercial		4,575		20		-		3,278		2		-
Commercial		398		4		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	7,911	$	36	$	1	$	6,552	$	17	$	4


		Nine months ended						Nine months ended
		March 31, 2015						March 31, 2014
	Average		Interest		Interest Income		Average		Interest		Interest Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
		(in thousands)
Real Estate:
Residential	$	3,282	$	35	$	1	$	3,559	$	48	$	13
Commercial		4,438		61		-		3,385		40		33
Commercial		371		16		-		-		-		-
Consumer and other		-		-		-		8		-		-
Total impaired loans	$	8,091	$	112	$	1	$	6,952	$	88	$	46

NOTE 9 – Allowance for Loan Losses

An analysis of the allowance for loan losses for the three and nine months ended March 31, 2015 and 2014 is as follows:


Three months ended
March 31, 2015	Residential			Commercial			Residential						Consumer
	Real Estate			Real Estate			Construction			Commercial			and Other			Unallocated			Total
Allowance for loan losses:	(in thousands)
Beginning balance	$	1,117		$	878		$	13		$	13		$	22		$	81		$	2,124
Charge-offs		(93	)		(547	)		-			-			(10	)		-			(650	)
Recoveries		12			175			-			3			-			-			190
Provision (credit)		85			508			(5	)		(4	)		13			(17	)		580
Ending Balance	$	1,121		$	1,014		$	8		$	12		$	25		$	64		$	2,244

Three months ended
March 31, 2014	Residential			Commercial			Residential						Consumer
	Real Estate			Real Estate			Construction			Commercial			and Other			Unallocated			Total
Allowance for loan losses:		(in thousands)
Beginning balance	$	1,247		$	1,167		$	14		$	14		$	25		$	142		$	2,609
Charge-offs		(22	)		-			-			-			(14	)		-			(36	)
Recoveries		10			-			1			3			11			-			25
Provision (credit)		(45	)		2			4			(1	)		1			54			15
Ending Balance	$	1,190		$	1,169		$	19		$	16		$	23		$	196		$	2,613

Nine months ended
March 31, 2015	Residential			Commercial			Residential						Consumer
	Real Estate			Real Estate			Construction			Commercial			and other			Unallocated			Total
Allowance for loan losses:		(in thousands)
Beginning balance	$	1,279		$	907		$	13		$	12		$	24		$	145		$	2,380
Charge-offs		(99	)		(879	)		-			-			(36	)		-			(1,014	)
Recoveries		34			175			-			9			10			-			228
Provision (credit)		(93	)		811			(5	)		(9	)		27			(81	)		650
Ending Balance	$	1,121		$	1,014		$	8		$	12		$	25		$	64		$	2,244

Nine months ended
March 31, 2014	Residential			Commercial			Residential						Consumer
	Real Estate			Real Estate			Construction			Commercial			and other			Unallocated			Total
Allowance for loan losses:		(in thousands)
Beginning balance	$	1,201		$	1,315		$	22		$	17		$	36		$	102		$	2,693
Charge-offs		(163	)		-			-			-			(38	)		-			(201	)
Recoveries		25			-			6			11			24			-			66
Provision (credit)		127			(146	)		(9	)		(12	)		1			94			55
Ending Balance	$	1,190		$	1,169		$	19		$	16		$	23		$	196		$	2,613

Further information pertaining to the allowance for loan losses at March 31, 2015 and June 30, 2014 is as follows:


At March 31, 2015	Residential		Commercial		Residential				Consumer
	Real Estate		Real Estate		Construction		Commercial		and Other		Unallocated		Total
(in thousands)
Amount of allowance for loan losses for impaired loans	$	134	$	25	$	-	$	-	$	-	$	-	$	159

Amount of allowance for loan losses for non-impaired loans	$	987	$	989	$	8	$	12	$	25	$	64	$	2,085

Impaired loans	$	2,935	$	4,138	$	-	$	343	$	-	$	-	$	7,416

Non-impaired loans	$	177,333	$	38,943	$	1,074	$	1,677	$	646	$	-	$	219,673

At June 30, 2014	Residential		Commercial		Residential				Consumer
	Real Estate		Real Estate		Construction		Commercial		and Other		Unallocated		Total
(in thousands)
Amount of allowance for loan losses for impaired loans	$	104	$	104	$	-	$	-	$	-	$	-	$	208

Amount of allowance for loan losses for non-impaired loans	$	1,175	$	803	$	13	$	12	$	24	$	145	$	2,172

Impaired loans	$	3,752	$	4,387	$	-	$	397	$	-	$	-	$	8,536

Non-impaired loans	$	180,628	$	38,928	$	1,575	$	1,507	$	627	$	-	$	223,265

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 consolidated balance sheets, such items are components of accumulated other comprehensive income (loss).

The components of accumulated other comprehensive loss and related tax effects are as follows:


	March 31,			June 30,
	2015			2014
	(in thousands)
Net unrealized loss on securities available-for-sale	$	(226	)	$	(362	)
Tax effect		78			125
Accumulated other comprehensive loss	$	(148	)	$	(237	)

NOTE 11 – FAIR VALUE MEASUREMENTS

The Company groups its assets measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value as follows:

Level 1 – Valuations for assets 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.

Level 2 – Valuations for assets traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets.

Level 3 – Valuations for assets 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.

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 carried at fair value for March 31, 2015.

The Company’s mortgage-backed securities and other debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these securities, we obtain fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

The Company’s impaired loans and other real estate owned 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 and adjusted by management as needed.

The Company did not have any transfers of assets between Levels 1 and 2 of the fair value hierarchy during the three or nine months ended March 31, 2015.

The following summarizes assets measured at fair value on a recurring basis at March 31, 2015 and June 30, 2014:


At March 31, 2015	Total Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Observable Inputs
(in thousands)	Value		Level 1		Level 2		Level 3
Securities available-for-sale:
U.S. government and government-sponsored securities	$	993	$	-	$	993	$	-
Corporate bonds and other securities		5,045		-		5,045		-
U.S. Government-sponsored and guaranteed mortgage-backed securities		25,232		-		25,232		-
Non-agency mortgage-backed securities		6,095		-		6,095		-
Equity securities		10,000		-		-		10,000
Total	$	47,365	$	-	$	37,365	$	10,000


At June 30, 2014	Total Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Value		Level 1		Level 2		Level 3
Securities available-for-sale:
U.S. government and government-sponsored securities	$	976	$	-	$	976	$	-
Corporate bonds and other securities		5,163		-		5,163		-
U.S. Government-sponsored and guaranteed mortgage-backed securities		25,262		-		25,262		-
Non-agency mortgage-backed securities		6,680		-		6,680		-
Equity securities		10,000		-		-		10,000
Total	$	48,081	$	-	$	38,081	$	10,000

The table below represents the changes in level 3 assets measured at fair value for the nine months ended March 31, 2015.


(in thousands)
Beginning balance, June 30, 2014	$	10,000
Unrealized losses included in other comprehensive loss		-
Ending balance, March 31, 2015	$	10,000

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, 2015 and 2014:


At March 31, 2015	Total Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Losses for the three months ended			Total Losses for the nine months ended
	Value		Level 1		Level 2		Level 3		March 31, 2015			March 31, 2015
	(in thousands)
Impaired loans	$	1,397	$	-	$	-	$	1,397	$	(211	)	$	(411	)
Other real estate owned		82		-		-		82		-			(33	)
	$	1,479	$	-	$	-	$	1,479	$	(211	)	$	(444	)


At March 31, 2014	Total Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Losses for the three months ended			Total Losses for the nine months ended
	Value		Level 1		Level 2		Level 3		March 31, 2014			March 31, 2014
	(in thousands)

Impaired loans	$	121	$	-	$	-	$	121	$	(31	)	$	(31	)
Other real estate owned		869		-		-		869		(132	)		(228	)
	$	990	$	-	$	-	$	990	$	(163	)	$	(259	)

The amount of loans represents the carrying value of impaired loans net of related write-downs and valuation allowances for which adjustments are based on the estimated fair value of the underlying collateral. The other real estate owned amount represents the carrying value for which write-downs 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, 2015 and 2014 or June 30, 2014.

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 or available market evidence. 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 such as demand deposits, NOW, regular savings, and money market deposit accounts and mortgagors’ escrow 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 14, 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.

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, 2015 and June 30, 2014:


	March 31, 2015
	Carrying Amount		Level 1		Fair Value Hierarchy Level 2		Level 3		Fair Value
					(in thousands)
Financial assets:
Cash and cash equivalents	$	22,462	$	22,462	$	-	$	-	$	22,462
Securities available-for-sale		47,365		-		37,365		10,000		47,365
Securities held-to-maturity		152,488		-		154,983		-		154,983
Federal Home Loan Bank stock		5,371		-		-		5,371		5,371
Loans, net		225,650		-		-		229,047		229,047
Accrued interest receivable		1,101		-		-		1,101		1,101

Financial liabilities:
Deposits		356,981		-		-		358,661		358,661
Mortgagors’ escrow accounts		1,278		-		-		1,278		1,278
Federal Home Loan Bank advances		52,573		-		53,914		-		53,914
Securities sold under agreements to repurchase		17,279		-		17,279		-		17,279
Accrued interest payable		117		-		-		117		117

	June 30, 2014
	Carrying Amount		Level 1		Fair Value Hierarchy Level 2		Level 3		Fair Value
					(in thousands)
Financial assets:
Cash and cash equivalents	$	7,335	$	7,335	$	-	$	-	$	7,335
Securities available-for-sale		48,081		-		38,081		10,000		48,081
Securities held-to-maturity		142,176		-		143,257		-		143,257
Federal Home Loan Bank stock		5,927		-		-		5,927		5,927
Loans held-for-sale		100		-		-		101		101
Loans, net		230,126		-		-		231,986		231,986
Accrued interest receivable		1,018		-		-		1,018		1,018

Financial liabilities:
Deposits		347,256		-		-		349,235		349,235
Mortgagors’ escrow accounts		2,267		-		-		2,267		2,267
Federal Home Loan Bank advances		53,500		-		55,196		-		55,196
Securities sold under agreements to repurchase		4,181		-		4,181		-		4,181
Accrued interest payable		124		-		-		124		124

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.

At March 31, 2015 and June 30, 2014, 141,107 options and 15,717 restricted shares were available to be issued under the Incentive Plan. There were no unvested stock awards/options outstanding at or during the nine months ended March 31, 2015 and 2014, respectively.

NOTE 13 – Subsequent Events - Dividends

On May 6, 2015, the Board of Directors of the Company declared a cash dividend of $0.03 a share for all stockholders of record as of May 20, 2015 and payable on June 4, 2015.

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,
	2015		2014
	(in thousands)
Commitments to extend credit:
Loan commitments	$	3,066	$	2,867
Unadvanced construction loans		118		1,658
Unadvanced lines of credit		13,187		12,217
Standby letters of credit		396		488
Outstanding commitments	$	16,767	$	17,230

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, 2015 and June 30, 2014 and results of operations for the three and nine months ended March 31, 2015 and 2014, and should be read in conjunction with the Company’s Consolidated Financial Statements (unaudited) and the notes thereto, appearing in Part I, Item 1 of this quarterly report. These financial statements should be read in conjunction with the 2014 Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on September 24, 2014.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in: interest rates, general economic conditions, legislation and regulations, real estate values, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

Except as required by applicable law and regulation, the Company does not undertake – and specifically disclaims any obligation – to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

The Company’s results of 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 loss amounted to ($309,000) or ($0.05) per basic and diluted share for the quarter ended March 31, 2015 compared to net income of $187,000 or $0.03 per basic and diluted share for the quarter ended March 31, 2014. Non-interest income decreased $38,000 for the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014. During the quarters ended March 31, 2015 and 2014, the Company did not record any OTTI charges on investment securities. Net interest income decreased $65,000 during the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014. Net interest margin decreased 17 basis points to 2.21% from 2.38% when comparing the quarters ended March 31, 2015 and 2014, respectively. In addition, non-interest expense decreased $25,000 during the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014. The provision for loan losses increased $565,000 during the quarter ended March 31, 2015 as compared to the quarter ended March 31, 2014. Income tax expense decreased $147,000 during the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014.

Net income amounted to $115,000 or $0.02 per basic and diluted share for the nine months ended March 31, 2015 compared to net income of $670,000 or $0.10 per basic and diluted share for the nine months ended March 31, 2014. During the nine months ended March 31, 2015, the Company recorded OTTI charges on investment securities of $155,000 on non-agency mortgage-backed securities which contributed to non-interest income decreasing $209,000 compared to the nine months ended March 31, 2014. Net interest income increased $99,000 during the nine months ended March 31, 2015 compared to the nine months ended March 31, 2014. Net interest margin decreased eight basis points to 2.24% from 2.32% when comparing the nine months ended March 31, 2015 and 2014, respectively. In addition, non-interest expense increased $17,000 during the nine months ended March 31, 2015 compared to the nine months ended March 31, 2014. The provision for loan losses increased $595,000 during the nine months ended March 31, 2015 as compared to the nine months ended March 31, 2014. Income tax expense decreased $167,000 during the nine months ended March 31, 2015 compared to the nine months ended March 31, 2014.

Comparison of Financial Condition at March 31, 2015 and June 30, 2014

Assets

Total assets increased to $482.0 million at March 31, 2015 from $461.0 million at June 30, 2014. Cash and cash equivalents increased $15.1 million and totaled $22.5 million or 4.7% of total assets at March 31, 2015. Investments in available-for-sale securities decreased $716,000 and totaled $47.4 million or 9.8% of total assets at March 31, 2015. Investments in held-to-maturity securities increased $10.3 million and totaled $152.5 million or 31.6% of total assets at March 31, 2015. The increases in cash and cash equivalents and held-to-maturity securities was due to investing cash received from the $13.1 million increase in securities sold under agreements to repurchase during the nine months ended March 31, 2015. Net loans decreased $4.5 million and totaled $225.7 million or 46.8% of total assets at March 31, 2015.

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, 2015 and June 30, 2014. For additional information, see “Comparison of Operating Results for the three and nine months ended March 31, 2015 and 2014 – Provision for loan losses.”


	March 31,			June 30,
	2015			2014
	(Dollars in thousands)

Allowance for loan losses	$	2,244		$	2,380
Gross loans outstanding		227,894			232,506
Non-performing loans		5,969			7,056

Allowance/gross loans outstanding		0.98	%		1.02	%
Allowance/non-performing loans		37.6	%		33.7	%

Liabilities

Total liabilities increased to $430.5 million at March 31, 2015 from $409.6 million at June 30, 2014. Total deposits increased to $357.0 million at March 31, 2015 from $347.3 million at June 30, 2014, an increase of $9.7 million. Federal Home Loan Bank advances decreased to $52.6 million at March 31, 2015 from $53.5 million at June 30, 2014. Securities sold under agreements to repurchase increased to $17.3 million at March 31, 2015 from $4.2 million at June 30, 2014, an increase of $13.1 million or 313.3%. This change in repurchase agreements was primarily due to increases in municipality accounts.

Stockholders’ Equity

Stockholders’ equity remained unchanged at $51.5 million at March 31, 2015 and June 30, 2014. On January 20, 2015, the Board of Directors of the Company declared a cash dividend of $0.03 a share for all stockholders of record as of February 6, 2015 and payable on February 24, 2015.

Comparison of Operating Results for the three and nine months ended March 31, 2015 and 2014

Interest and Dividend Income

Interest and dividend income decreased $143,000 or 4.1% to $3.3 million for the quarter ended March 31, 2015 compared to $3.5 million for the quarter ended March 31, 2014. This was primarily due to a decrease in yield on earning assets of 28 basis points to 3.01% for the quarter ended March 31, 2015 compared to 3.29% for the quarter ended March 31, 2014. The yield on investment securities decreased nine basis points to 2.03% for the quarter ended March 31, 2015 compared to 2.12% for the quarter ended March 31, 2014. The yield on loans decreased 20 basis points to 4.13% for the quarter ended March 31, 2015 compared to 4.33% for the quarter ended March 31, 2014. This was partially offset by an increase in average interest-bearing assets of $20.5 million from the quarter ended March 31, 2014 to quarter ended March 31, 2015. Average investment securities increased $8.5 million to $199.6 million for the quarter ended March 31, 2015 compared to $191.1 million for the quarter ended March 31, 2014. Average other earning assets increased $15.7 million to $20.6 million for the quarter ended March 31, 2015 compared to $4.9 million for the quarter ended March 31, 2014. Average loans decreased by $3.6 million to $228.0 million for the quarter ended March 31, 2015 compared to $231.6 million for the quarter ended March 31, 2014.

Interest and dividend income decreased $163,000 or 1.6% to $10.3 million for the nine months ended March 31, 2015 compared to $10.4 million for the nine months ended March 31, 2014. This was primarily due to a decrease in yield on earning assets of 20 basis points to 3.07% for the nine months ended March 31, 2015 compared to 3.27% for the nine months ended March 31, 2014. The yield on investment securities increased seven basis points to 2.02% for the nine months ended March 31, 2015 compared to 1.95% for the nine months ended March 31, 2014. The yield on loans decreased 24 basis points to 4.15% for the nine months ended March 31, 2015 compared to 4.39% for the nine months ended March 31, 2014. This was partially offset by an increase in average interest-bearing assets of $19.7 million from March 31, 2014 to March 31, 2015. Average investment securities increased $12.3 million to $199.5 million for the nine months ended March 31, 2015 compared to $187.2 million for the nine months ended March 31, 2014. Average other earning assets increased $8.8 million to $13.5 million for the nine months ended March 31, 2015 compared to $4.7 million for the nine months ended March 31, 2014. Average loans decreased by $1.4 million to $231.6 million for the nine months ended March 31, 2015 compared to $233.0 million for the nine months ended March 31, 2014.

Interest Expense

Interest expense amounted to $889,000 for the quarter ended March 31, 2015 compared to $967,000 for the quarter ended March 31, 2014, a decrease of $78,000 or 8.1%. The decrease was primarily due to changes in rates of interest-bearing liabilities. The cost of average interest-bearing liabilities decreased 12 basis points to 0.98% for the quarter ended March 31, 2015 from 1.10% for the quarter ended March 31, 2014. The average rate on interest-bearing deposits decreased by seven basis points to 0.74% for the quarter ended March 31, 2015 compared to 0.81% for the quarter ended March 31, 2014. The average rate on borrowed money decreased by 45 basis points to 1.96% for the quarter ended March 31, 2015 compared to 2.41% for the quarter ended March 31, 2014. These changes in rates were partially offset by an $11.6 million increase in average interest-bearing liabilities.

Interest expense amounted to $2.8 million for the nine months ended March 31, 2015 compared to $3.0 million for the nine months ended March 31, 2014, a decrease of $262,000 or 8.6%. The decrease was primarily due to changes in rates of interest-bearing liabilities. The cost of average interest-bearing liabilities decreased 13 basis points to 1.01% for the nine months ended March 31, 2015 from 1.14% for the nine months ended March 31, 2014. The average rate on interest-bearing deposits decreased by ten basis points to 0.75% for the nine months ended March 31, 2015 compared to 0.85% for the nine months ended March 31, 2014. The average rate on borrowed money decreased by 35 basis points to 2.14% for the nine months ended March 31, 2015 compared to 2.49% for the nine months ended March 31, 2014. These changes in rates were partially offset by a $10.4 million increase in average interest-bearing liabilities.

Net Interest and Dividend Income

Net interest and dividend income amounted to $2.4 million for the quarter ended March 31, 2015 compared to $2.5 million for the quarter ended March 31, 2014, a decrease of $65,000 or 2.6%. Net interest rate spread decreased by 16 basis points to 2.03% for the quarter ended March 31, 2015 from 2.19% for the quarter ended March 31, 2014. Net interest margin decreased 17 basis points to 2.21% from 2.38% when comparing the quarters ended March 31, 2015 and 2014, respectively. These decreases were offset by an increase in net interest-earning assets of $8.9 million to $80.3 million for the quarter ended March 31, 2015 compared to $71.4 million for the quarter ended March 31, 2014.

Net interest and dividend income amounted to $7.5 million for the nine months ended March 31, 2015 compared to $7.4 million for the nine months ended March 31, 2014, an increase of $99,000 or 1.3%. Net interest rate spread decreased by seven basis points to 2.06% for the nine months ended March 31, 2015 from 2.13% for the nine months ended March 31, 2014. Net interest margin decreased eight basis points to 2.24% from 2.32% when comparing the nine months ended March 31, 2015 and 2014, respectively. These decreases were offset by an increase in net interest-earning assets of $9.3 million to $80.1 million for the nine months ended March 31, 2015 compared to $70.8 million for the nine months ended March 31, 2014.

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 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 totaled $580,000 for the three months ended March 31, 2015 compared to $15,000 for the three months ended March 31, 2014, an increase of $565,000. This was primarily due to a $547,000 charge-off on one commercial loan relationship. Net charge-offs were $460,000 for the quarter ended March 31, 2015 compared to net charge-offs of $11,000 for the quarter ended March 31, 2014. The ratio of the allowance to gross loans outstanding was 0.98% as of March 31, 2015 and 1.02% as of June 30, 2014.

The provision for loan losses totaled $650,000 for the nine months ended March 31, 2015 compared to $55,000 for the nine months ended March 31, 2014, an increase of $595,000. This was primarily due to a $847,000 charge-off on one commercial loan relationship. Net charge-offs were $786,000 for the nine months ended March 31, 2015 compared to net charge-offs of $135,000 for the nine months ended March 31, 2014. Non-performing loans decreased to $6.0 million at March 31, 2015 from $7.1 million for the nine months ended March 31, 2014, a decrease of $1.1 million or 15.4%.

For more information, see “Note 7 – Loans” of the Notes to the Consolidated Financial Statements.

Non-interest Income

Non-interest income totaled $533,000 for the quarter ended March 31, 2015 compared to $571,000 for the quarter ended March 31, 2014, a decrease of $38,000 or 6.7%. This was primarily due to a decrease in service fees of $24,000.

Non-interest income totaled $1.6 million for the nine months ended March 31, 2015 compared to $1.8 million for the nine months ended March 31, 2014, a decrease of $209,000 or 11.6%. This was primarily due to an increase in other-than-temporary impairment charges on available-for-sale securities of $148,000. The impairment charges for the nine months ended March 31, 2015 and March 31, 2014 were the result of credit losses on non-agency mortgage-backed securities.

Non-interest Expense

Non-interest expense totaled $2.8 million for the quarter ended March 31, 2015 compared to $2.9 million for the quarter ended March 31, 2014, a decrease of $25,000 or 0.9%. Compensation and benefits expense increased $79,000 or 5.4% due to an increase in salary expense of $45,000 or 4.1%. Occupancy expense increased $37,000 or 11.9%. Other real estate owned expense increased by $77,000 or 108.5%, and write-downs of other real estate owned decreased $132,000 or 100.0%. These increases were primarily the result of taking two additional properties into other real estate owned during the quarter. FDIC deposit insurance decreased by $43,000 or 28.5% and regulatory assessments decreased by $42,000 or 87.5%.

Non-interest expense totaled $8.4 million for the nine months ended March 31, 2015 and 2014. Compensation and benefits expense increased $227,000 or 5.1% due to an increase in salary expense of $160,000 or 4.8%. Occupancy expense totaled $946,000 for the nine months ended March 31, 2015 compared to $900,000 for the nine months ended March 31, 2014, an increase of $46,000 or 5.1%. FDIC deposit insurance decreased by $184,000 or 40.4%, Regulatory assessments decreased $72,000 or 50.3% and write-downs of other real estate owned decreased by $195,000 or 85.5%. Other real estate owned expense increased by $173,000 or 129.1%.

Provision for Income Taxes

Income tax benefit amounted to $140,000 for the quarter ended March 31, 2015 compared to income tax expense of $7,000 for the quarter ended March 31, 2014. The effective tax rate was (31.2%) for the quarter ended March 31, 2015 compared to 3.6% for the quarter ended March 31, 2014, a result of pre-tax income decreasing $643,000 or 331.4% and other tax preference items. Tax expense is recorded on a year-to-date basis. 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 benefit amounted to $98,000 for the nine months ended March 31, 2015 compared to income tax expense of $69,000 for the nine months ended March 31, 2014. The effective tax rate was (576.5%) for the nine months ended March 31, 2015 compared to 9.3% for the nine months ended March 31, 2014, a result of pre-tax income decreasing $722,000 or 97.7% and other tax preference items. 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.

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,
	2015							2014
	(Dollars in thousands)

	Average		Interest		Yield/			Average		Interest		Yield/
Interest-earning assets:	Balance		Income/Expense		Cost			Balance		Income/Expense		Cost
Investment securities	$	199,607	$	997		2.03	%	$	191,149	$	997		2.12	%
Loans		227,976		2,324		4.13	%		231,631		2,475		4.33	%
Other earning assets		20,628		10		0.20	%		4,894		2		0.17	%
Total interest-earning assets		448,211		3,331		3.01	%		427,674		3,474		3.29	%
Non-interest-earning assets		31,535							30,691
Total assets	$	479,746						$	458,365

Interest-bearing liabilities:
NOW accounts	$	88,435		100		0.46	%	$	88,283		108		0.50	%
Savings accounts (1)		66,214		22		0.13	%		61,287		22		0.15	%
Money market accounts		18,146		13		0.29	%		16,317		15		0.37	%
Time deposits		122,491		403		1.33	%		125,325		436		1.41	%
Borrowed money		72,609		351		1.96	%		65,084		386		2.41	%
Total interest-bearing liabilities		367,895		889		0.98	%		356,296		967		1.10	%
Non-interest-bearing demand deposits (1)		56,492							47,802
Other non-interest-bearing liabilities		3,438							3,620
Capital accounts		51,921							50,647
Total liabilities and capital accounts	$	479,746						$	458,365

Net interest income			$	2,442						$	2,507
Interest rate spread						2.03	%						2.19	%
Net interest-earning assets	$	80,316						$	71,378
Net interest margin						2.21	%						2.38	%
Average earning assets to
average interest-bearing liabilities						121.83	%						120.03	%

(1)

During the three months ended March 31, 2014, no interest was paid on escrow accounts, so these accounts were reported in non-interest-bearing demand deposits. During the three months ended March 31, 2015, the Bank began paying interest on escrow accounts, and such accounts are now reported in savings accounts.

	For the Nine Months Ended March 31,
	2015							2014
	(Dollars in thousands)

	Average		Interest/		Yield/			Average		Interest/		Yield/
Interest-earning assets:	Balance		Dividends		Cost			Balance		Dividends		Cost
Investment securities	$	199,530	$	3,031		2.02	%	$	187,198	$	2,745		1.95	%
Loans		231,608		7,208		4.15	%		232,987		7,670		4.39	%
Other earning assets		13,497		20		0.20	%		4,718		7		0.20	%
Total interest-earning assets		444,635		10,259		3.07	%		424,903		10,422		3.27	%
Non-interest-earning assets		28,921							29,132
Total assets	$	473,556						$	454,035

Interest-bearing liabilities:
NOW accounts	$	87,523		302		0.46	%	$	89,611		332		0.49	%
Savings accounts (1)		65,681		69		0.14	%		59,965		66		0.15	%
Money market accounts		19,042		41		0.29	%		15,631		44		0.37	%
Time deposits		123,685		1,257		1.35	%		126,158		1,417		1.50	%
Borrowed money		68,592		1,100		2.14	%		62,741		1,172		2.49	%
Total interest-bearing liabilities		364,523		2,769		1.01	%		354,106		3,031		1.14	%
Non-interest-bearing demand deposits (1)		54,908							47,024
Other non-interest-bearing liabilities		2,255							2,458
Capital accounts		51,870							50,447
Total liabilities and capital accounts	$	473,556						$	454,035

Net interest income			$	7,490						$	7,391
Interest rate spread						2.06	%						2.13	%
Net interest-earning assets	$	80,112						$	70,797
Net interest margin						2.24	%						2.32	%
Average earning assets to
average interest-bearing liabilities						121.98	%						119.99	%

(1)

During the nine months ended March 31, 2014, no interest was paid on escrow accounts, so these accounts were reported in non-interest-bearing demand deposits. During the nine months ended March 31, 2015, the Bank began paying interest on escrow accounts, and such accounts are now reported in savings accounts.

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, 2015
	Compared to the Three Months Ended March 31, 2014
	Increase (Decrease) Due to change in
INTEREST INCOME	Rate			Volume			Net
	(In thousands)
Investment securities	$	(175	)	$	175		$	-
Loans		(112	)		(39	)		(151	)
Other interest-earning assets		-			8			8
TOTAL INTEREST INCOME		(287	)		144			(143	)

INTEREST EXPENSE

NOW accounts		(9	)		1			(8	)
Savings accounts		(7	)		7			-
Money Market accounts		(10	)		8			(2	)
Time deposits		(23	)		(10	)		(33	)
Borrowed money		(244	)		209			(35	)
TOTAL INTEREST EXPENSE		(293	)		215			(78	)
CHANGE IN NET INTEREST INCOME	$	6		$	(71	)	$	(65	)

	For the Nine Months Ended March 31, 2015
	Compared to the Nine Months Ended March 31, 2014
	Increase (Decrease) Due to change in
INTEREST INCOME	Rate			Volume			Net
	(In thousands)

Investment securities	$	101		$	185		$	286
Loans		(417	)		(45	)		(462	)
Other interest-earning assets		-			13			13
TOTAL INTEREST INCOME		(316	)		153			(163	)

INTEREST EXPENSE

NOW accounts		(22	)		(8	)		(30	)
Savings accounts		(4	)		7			3
Money Market accounts		(15	)		12			(3	)
Time deposits		(133	)		(27	)		(160	)
Borrowed money		(219	)		147			(72	)
TOTAL INTEREST EXPENSE		(393	)		131			(262	)
CHANGE IN NET INTEREST INCOME	$	77		$	22		$	99

Market Risk, Liquidity and Capital Resources

Market Risk

The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk (“IRR”). Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and other borrowings. As a result, a principal part of our business strategy is to manage IRR and reduce the exposure of our net interest income (“NII”) to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Management Committee which is responsible for evaluating the IRR inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. With the assistance of an IRR management consultant, the committee monitors the level of IRR on a regular basis and generally meets at least on a quarterly basis to review our asset/liability policies and IRR position.

We have sought to manage our IRR in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset/liability management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances from the Federal Home Loan Bank of Boston, to “match fund” certain investments and/or loans; (ii) continued emphasis on increasing core deposits; (iii) offering adjustable rate and shorter-term home equity loans, commercial real estate loans, construction loans and commercial and industrial loans; (iv) offering a variety of consumer loans, which typically have shorter-terms; (v) investing in mortgage-backed securities with variable rates or fixed rates with shorter durations. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our NII to changes in market interest rates.

Net interest income at-risk measures the risk of a decline in earnings due to potential short-term and long- term changes in interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in NII, resulting from an instantaneous and sustained parallel shift in the yield curve (+100 and +200 basis points) at March 31, 2015 and June 30, 2014.

Net Interest Income At-Risk

	Estimated Increase (Decrease)	Estimated Increase (Decrease)
Change in Interest Rates	in NII	in NII
(Basis Points)	March 31, 2015	June 30, 2014

+ 100	0.85%	0.93%
+ 200	-1.74%	-1.99%

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.

The tables below set forth, at March 31, 2015, 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)

+300	$	43,121	$	(11,675	)		-21.31	%		9.73	%		(169	)
+200	$	48,423	$	(6,373	)		-11.63	%		10.62	%		(80	)
+100	$	52,768	$	(2,028	)		-3.70	%		11.26	%		(15	)
0	$	54,796	$	-			0.00	%		11.41	%		0
-100	$	59,162	$	4,366			7.97	%		12.05	%		63

(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, 2015 of $52.6 million, with unused borrowing capacity of $53.6 million. The Bank has an internal limit of wholesale borrowings to total assets ratio of 30.0%. As of March 31, 2015, the ratio of wholesale borrowings to total assets was 10.9%.

The Bank’s primary investing activities are the origination of loans and the purchase of investment securities. During the nine months ended March 31, 2015 and 2014, the Bank’s loan originations net of principal collections were $1.3 million and $2.3 million. Purchases of securities totaled $33.7 million and $39.4 million for the nine months ended March 31, 2015 and 2014, respectively.

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

Certificates of deposit totaled $121.3 million at March 31, 2015. 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.

In July 2013, federal banking regulators approved final rules that implement changes to the regulatory capital framework for U.S. banks. The rules set minimum requirements for both the quantity and quality of capital held by community banking institutions. The final rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. Additionally, community banking institutions must contain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The phase-in period for the rules began for the Bank on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule.

At March 31, 2015, the Bank exceeded each of the applicable regulatory capital requirements. The Company, as a federally chartered holding company, is not subject to capital requirements. As of March 31, 2015, the most recent notification from the Office of Comptroller of the Currency, categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized” the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the in the following table. There is also a requirement to maintain a ratio of 2.0% tangible capital to tangible assets. There are no conditions or events since that notification that management believes would change our category. The following table shows the Bank’s required minimum capital ratios in order to be considered well-capitalized and the actual capital ratios as of March 31, 2015 and June 30, 2014.

	As of March 31, 2015
	(Dollars in Thousands)

	Required			Actual		Actual
	Ratio			Amount		Ratio
Tier 1 Leverage		5.00	%	$	40,715		8.63	%
Common Equity Tier 1 Capital		6.50	%	$	40,715		13.59	%
Tier 1 Risk-based Capital		8.00	%	$	40,715		13.59	%
Total Capital		10.00	%	$	42,979		14.35	%

		As of June 30, 2014
		(Dollars in Thousands)

	Required			Actual		Actual
	Ratio			Amount		Ratio
Tier 1 Leverage		5.00	%	$	40,093		8.87	%
Tier 1 Risk-based Capital		6.00	%	$	40,093		17.62	%
Total Capital		10.00	%	$	42,494		18.68	%

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, 2015, 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.

Part II. – OTHER INFORMATION

Item 1. Legal Proceedings – Not applicable

Item 1A. Risk Factors – Not applicable to smaller reporting companies

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 and nine months ended March 31, 2015, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

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 15, 2015	/s/ Thomas A. Borner
		Thomas A. Borner
		President and Chief Executive Officer

Date:	May 15, 2015	/s/ Robert J. Halloran, Jr.
		Robert J. Halloran, Jr.
		Executive Vice-President, Chief Financial Officer and Treasurer

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