ITEM 1.
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Description of Business
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Forward Looking Statements
This Annual Report on Form 10-KSB contains certain forward-looking statements which may be identified by the use of words
such as believe, expect, anticipate, should, planned, estimated and potential. Examples of forward-looking statements include, but are not limited to, estimates with
respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage and other loans, real estate values, competition, changes in accounting principles, policies, or
guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing products and services.
PSB Holdings, Inc.
PSB Holdings, Inc. is
the federally chartered stock holding company of Putnam Savings Bank, and owns 100% of the common stock of Putnam Savings Bank. PSB Holdings, Inc. also owns investment securities valued at $2.1 million as of June 30, 2007. We have not engaged
in any significant business activity other than owning the common stock of Putnam Savings Bank and investing in marketable securities. Our executive office is located at 40 Main Street, Putnam, Connecticut 06260, and our telephone number is
(860) 928-6501. 55.9% of the outstanding stock of PSB Holdings, Inc. is owned by Putnam Bancorp, MHC.
Putnam Bancorp, MHC
Putnam Bancorp, MHC is a federally chartered mutual holding company. Putnam Bancorp, MHC has not engaged in any significant business activity other than
owning the common stock of PSB Holdings, Inc. Putnam Bancorp, MHC owns 55.9% of the outstanding shares of common stock of PSB Holdings, Inc. So long as Putnam Bancorp, MHC exists, it is required to own a majority of the voting stock of PSB
Holdings, Inc. As a result, stockholders other than Putnam Bancorp, MHC will not be able to exercise voting control over most matters put to a vote of stockholders and Putnam Bancorp, MHC, through its Board of Directors, will be able to
exercise voting control over most matters put to a vote of stockholders.
Putnam Bancorp, MHC is headquartered at 40 Main Street in Putnam,
Connecticut and its telephone number at that address is (860) 928-6501.
Putnam Savings Bank
Putnam Savings Bank was originally founded in 1862 as a state-chartered mutual savings bank. In October 2004, the Bank converted to a federally
chartered stock savings bank in connection with the offering of common stock by PSB Holdings, Inc. The Bank is headquartered at 40 Main Street in Putnam, Connecticut and conducts substantially all of its business from seven full-service banking
offices and one loan origination center. In addition, the Bank maintains a Special Needs Limited Branch and a Limited Service (Mobile) Branch. The telephone number at the Banks main office is (860) 928-6501.
General
Our principal business
consists of attracting deposits from the general public in the areas surrounding Windham County and New London County, Connecticut and investing those deposits, together with funds generated from operations, primarily in one- to four-family
residential mortgage loans and, to a lesser extent, commercial real estate loans (including multi-family real estate loans), commercial loans, construction mortgage
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loans and consumer loans, and in investment securities. Our revenues are derived principally from interest on loans and securities, and from loan origination
and servicing fees. Our primary sources of funds are deposits and principal and interest payments on loans and securities.
Competition
We face intense competition within our market area both in making loans and attracting deposits. The Town of Putnam and the surrounding area have a
high concentration of financial institutions, including large commercial banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. As of
June 30, 2006, based on the FDICs annual Summary of Deposits Report (the most current data available), our market share of deposits represented 18.7% of deposits in Windham County and 1.0% in New London County.
Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face
additional competition for deposits from money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our role
as a community bank.
Market Area
We
operate in a primarily rural market area that has a stable population and household base. We currently operate out of seven offices, of which the most recent branch opened in August of 2006 in Putnam. All of our offices are located in Windham County
and New London County, Connecticut. According to a recent census report, during the past seven years, the population of Windham and New London Counties increased by 1.2% and 0.7% annually while the population of the United States increased by 1.2%
on an annual basis. During the same period, the number of households in Windham and New London Counties increased 1.1% and 0.9% on an annual basis, compared to the United States increase of 1.3% annually. In 2007, per capita income for Windham
County was $26,298, and the median household income was $55,549. In the same year, per capita income for New London County was $32,251, and the median household income was $63,477. These compare to per capita income for the State of Connecticut and
the United States of $37,645 and $27,916, respectively, and median household income of $68,430 and $53,154, respectively.
Windham County
is located in the Northeastern corner of Connecticut and borders both Massachusetts (to the north) and Rhode Island (to the east). New London County is to the south of Windham County, located in the Southeastern corner of Connecticut. Putnam is
approximately 45 miles from Hartford, Connecticut, 30 miles from Providence, Rhode Island, and 65 miles from Boston, Massachusetts. Windham County has a diversified mix of industry groups and employment sectors, including services, wholesale/retail
trade and manufacturing. These three sectors comprise approximately 64% of the employment base in Windham County. The same three sectors comprise a lesser 54% of the employment base in New London County, however, approximately 28% of the employment
base is employed by the government sector. Windham Countys July 2007 unemployment rate of 5.2% was higher than the New London County unemployment rate of 4.3%, higher than the comparable Connecticut unemployment rate of 4.8% and higher than
the national unemployment rate of 4.9%. In contrast to the national and Connecticut unemployment trends, Windham County and New London Countys July 2007 unemployment rates of 5.2% and 4.3% were lower than their July 2006 unemployment rates of
5.4% and 4.4%. Our primary market area for deposits includes the communities in which we maintain our main office and our branch office locations. Our primary lending area is broader than our primary deposit market area and includes all of Windham
County, and parts of the adjacent Connecticut Counties of New London and Tolland and the Rhode Island and Massachusetts communities adjacent to Windham County
Lending Activities
Historically, our principal lending activity has been the origination of first mortgage loans for the
purchase or refinancing of one- to four-family residential real estate. We retain most of the loans that we originate.
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However, we generally sell long-term fixed rate loans in the secondary market. When we sell loans, we generally retain the servicing rights for such loans.
One- to four-family residential real estate mortgage loans represented $168.1 million, or 70.0%, of our loan portfolio at June 30, 2007. We also offer commercial real estate loans (including multi-family real estate loans), commercial
loans, construction mortgage loans (primarily secured by single-family properties) and consumer loans. At June 30, 2007, commercial real estate loans totaled $59.3 million, or 24.6% of our loan portfolio, commercial loans totaled
$6.5 million, or 2.6% of our loan portfolio, construction mortgage loans totaled $5.4 million, or 2.2% of our loan portfolio and consumer loans, consisting primarily of auto loans and secured personal loans, totaled $1.4 million, or
0.6% of our loan portfolio.
Loan Portfolio Composition.
The following table sets forth the composition of our loan portfolio
at June 30,
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2007
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2006
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Amount
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Percent
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Amount
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Percent
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(Dollars in thousands)
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Mortgage Loans:
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Residential (1)
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$
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168,126
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69.86
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%
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$
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147,706
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71.50
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%
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Commercial real estate
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59,274
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24.63
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48,210
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23.34
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Residential construction
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5,376
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2.23
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3,551
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1.72
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Commercial
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6,449
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2.68
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5,693
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2.76
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Consumer and other
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1,439
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0.60
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1,410
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0.68
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Total loans
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$
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240,664
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100.00
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%
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$
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206,570
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100.00
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%
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Unadvanced construction loans
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(8,264
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)
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(5,486
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)
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232,400
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201,084
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Net deferred loan costs (fees)
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282
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35
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Allowance for loan losses
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(1,780
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)
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(1,582
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)
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Loans, net
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$
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230,902
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$
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199,537
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(1)
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Residential mortgage loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
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5
Loan Portfolio Maturities and Yields.
The following table summarizes the scheduled
repayments of our loan portfolio at June 30, 2007. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
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Residential (1)
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Commercial Real Estate
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Residential
Construction
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Commercial
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Consumer and Other
Loans
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Total Loans
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Due During the Years
Ending June 30,
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Amount
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Weighted
Average Rate
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Amount
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Weighted
Average Rate
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Amount
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Weighted
Average Rate
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Amount
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Weighted
Average Rate
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Amount
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Weighted
Average Rate
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Amount
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Weighted
Average Rate
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(Dollars in thousands)
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2008
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$
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25,786
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6.23
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%
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$
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18,847
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9.64
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%
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$
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3,236
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5.63
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%
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$
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4,275
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9.09
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%
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$
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575
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6.37
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%
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$
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52,719
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7.65
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%
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2009
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15,535
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5.47
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%
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7,602
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8.11
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%
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995
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7.28
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%
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374
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7.84
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%
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24,506
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6.40
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%
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2010
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14,796
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5.52
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%
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9,449
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7.97
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%
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527
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7.64
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%
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196
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7.85
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%
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24,968
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6.51
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%
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2011 to 2012
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33,105
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5.73
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%
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13,409
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7.65
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%
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465
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7.50
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%
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172
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7.71
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%
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47,151
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6.30
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%
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2013 to 2017
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36,030
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5.85
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%
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1,996
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7.51
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%
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179
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6.44
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%
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11
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7.25
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%
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38,216
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5.94
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%
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2018 and beyond
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43,855
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5.95
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%
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868
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7.75
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%
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117
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4.00
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%
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44,840
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5.98
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%
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Total
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$
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169,107
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5.85
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%
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$
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52,171
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8.49
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%
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$
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3,236
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5.63
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%
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$
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6,441
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8.50
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%
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$
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1,445
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6.93
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%
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$
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232,400
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6.51
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%
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(1)
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Residential mortgage loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
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6
The following table sets forth the scheduled repayments of fixed and adjustable rate loans at
June 30, 2007 that are contractually due after June 30, 2008.
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Fixed
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Adjustable
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Total
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(In thousands)
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Mortgage Loans:
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Residential (1)
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$
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90,634
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$
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52,687
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$
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143,321
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Commercial real estate
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26,659
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6,665
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33,324
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Commercial
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2,048
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118
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2,166
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Consumer and other
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758
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112
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870
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Total
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$
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120,099
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$
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59,582
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$
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179,681
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(1)
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Residential mortgage loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
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At June 30, 2007, the total amount of loans due after June 30, 2007 that have fixed interest rates was $133.8 million, and the total
amount of loans due after that date that have floating or adjustable interest rates was $98.6 million.
Residential Mortgage
Loans.
Our primary lending activity consists of the origination of one- to four-family residential mortgage loans that are primarily secured by properties located in Windham County and New London County. At June 30, 2007,
$168.1 million, or 69.9% of our loan portfolio, consisted of one- to four-family residential mortgage loans. Included within these one- to four-family loans at June 30, 2007 were $12.1 million of home equity loans and $11.8 million of home
equity lines of credit. Generally, one- to four-family residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a
loan-to-value ratio in excess of 80%. We will not make loans with a loan-to-value ratio in excess of 100% for loans secured by single family homes. Fixed rate mortgage loans generally are originated for terms of 10 to 30 years. Generally, all fixed
rate residential mortgage loans are underwritten according to Fannie Mae policies and procedures. Fixed rate residential mortgage loans with terms of more than 15 years are generally sold in the secondary market, while bi-weekly mortgages are
generally retained in our portfolio. Bi-weekly mortgages are loans that require payments be made every two weeks. We will usually retain the servicing rights for all loans that we sell in the secondary market. We originated $24.5 million of fixed
rate one- to four-family residential loans during the year ended June 30, 2007, of which $7.1 million were sold in the secondary market.
We also offer adjustable rate mortgage loans for one- to four-family properties, with an interest rate based on the one-year Constant Maturity Treasury Bill Index, which adjusts annually from the outset of the loan or which adjusts annually
after a three-, five-, seven-, or ten-year initial fixed rate period. We originated $33.0 million of adjustable rate one- to four-family residential loans during the year ended June 30, 2007, of which $3.0 million was sold in the secondary
market. Our adjustable rate mortgage loans generally provide for maximum rate adjustments of 100 basis points per adjustment, with a lifetime maximum adjustment up to 6%, regardless of the initial rate. Our adjustable rate mortgage loans amortize
over terms of up to 30 years.
Adjustable rate mortgage loans decrease the risk associated with changes in market interest rates by
periodically repricing, but involve other risks because, as interest rates increase, the monthly or bi-weekly payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the value of the underlying
collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the
effectiveness of adjustable rate mortgage loans may be limited during periods of rapidly rising interest rates. At June 30, 2007, $72.3 million, or 43.0%, of our one- to four-family residential loans had adjustable rates of interest.
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In an effort to provide financing for moderate income home buyers, we offer Veterans Administration (VA),
Federal Housing Administration (FHA), Connecticut Housing Finance Authority (CHFA) and Rural Development loans. These programs offer residential mortgage loans to qualified individuals. These loans are offered with fixed rates of interest and terms
of up to 30 years. Such loans are secured by one- to four-family residential properties. All of these loans are originated using agency underwriting guidelines. VA, FHA and CHFA loans are closed in the name of Putnam Savings Bank and are immediately
sold on a servicing-released basis. All such loans are originated in amounts of up to 100% of the lower of the propertys appraised value or the sale price. Private mortgage insurance is required on all such loans.
All residential mortgage loans that we originate include due-on-sale clauses, which give us the right to declare a loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. Regulations limit the amount that a savings association may lend relative to the
appraised value of the real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated. All borrowers are required to obtain title insurance. We also require homeowners insurance and fire and
casualty insurance and, where circumstances warrant, flood insurance, on properties securing real estate loans. At June 30, 2007, our largest residential mortgage loan had a principal balance of $700,000 and was secured by a residence located
in our primary market area. This loan was performing in accordance with its repayment terms.
We also offer home equity loans and home
equity of lines of credit, both of which are secured by owner-occupied one- to four-family residences. At June 30, 2007, home equity loans and equity lines of credit totaled $23.8 million, or 14.2% of our residential mortgage loans and
9.9% of total loans. Additionally, at June 30, 2007, the unadvanced amounts of home equity lines of credit totaled $10.7 million. The underwriting standards utilized for home equity loans and home equity lines of credit include a determination
of the applicants credit history, an assessment of the applicants ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. Home equity loans are offered with fixed rates of
interest and with terms up to 15 years. The loan-to-value ratio for a home equity loan is generally limited to 80%. However, we offer special programs to borrowers, who satisfy certain underwriting criteria, with loan-to-value ratios of up to 100%.
Our home equity lines of credit have adjustable rates of interest which are indexed to the prime rate, as reported in
The Wall Street Journal
. Interest rates on home equity lines of credit are generally limited to a maximum rate of 14.25%.
Commercial Real Estate Loans.
We originate commercial real estate loans, including multi-family real estate loans that are
generally secured by five or more unit apartment buildings, construction loans and loans on properties used for business purposes such as small office buildings, industrial facilities or retail facilities primarily located in our primary market
area. We also offer real estate development loans to licensed contractors and builders for the construction and development of commercial real estate projects and one- to four-family residential properties. At June 30, 2007, commercial mortgage
loans totaled $59.3 million, which amounted to 24.6% of total loans. Our commercial real estate underwriting policies provide that such real estate loans may be made in amounts of up to 80% of the appraised value of the property provided such
loan complies with our current loans-to-one-borrower limit, which at June 30, 2007 was $6.2 million. Our commercial real estate loans may be made with terms of up to five years with 20 year amortization schedules and are offered with
interest rates that are fixed or adjust periodically and are generally indexed to the prime rate as reported in
The Wall Street Journal
or Federal Home Loan Bank advance rates. In reaching a decision on whether to make a commercial real
estate loan, we consider the net operating income of the property, the borrowers expertise and credit history, and the profitability of the value of the underlying property. In addition, with respect to commercial real estate rental
properties, we will also consider the term of the lease and the quality of the tenants. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt
service) of at least 1.25x. Environmental surveys are generally required for commercial real estate loans. Generally, multi-family and commercial real estate loans made to corporations, partnerships and other business entities require personal
guarantees by the principals.
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A commercial borrowers financial information is monitored on an ongoing basis by requiring periodic
financial statement updates, payment history reviews and periodic face-to-face meetings with the borrower. We require commercial borrowers to provide annually updated financial statements and federal tax returns. These requirements also apply to all
guarantors on commercial loans. We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a tenant list and copies of leases, as applicable. The largest commercial real
estate loan in our portfolio at June 30, 2007 was a performing $2.6 million loan secured by property located in our primary market area.
Loans secured by commercial real estate, including multi-family properties, generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by
commercial real estate, including multi-family properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.
Residential Construction Loans.
We originate construction loans to individuals for the construction and acquisition of
personal residences. At June 30, 2007, construction mortgage loans totaled $5.4 million, or 2.2%, of total loans. At June 30, 2007, the unadvanced portion of these construction loans totaled $2.1 million.
Our construction mortgage loans generally provide for the payment of interest only during the construction phase, which is usually nine months. At the
end of the construction phase, the construction loan converts to a permanent mortgage loan. Construction loans can be made with a maximum loan-to-value ratio of 95%, provided that the borrower obtains private mortgage insurance on the loan if the
loan balance exceeds 80% of the appraised value or sales price, whichever is less, of the secured property. At June 30, 2007, our largest outstanding residential construction mortgage loan commitment was for $700,000, $510,000 of which was
outstanding. This loan was performing according to its terms at June 30, 2007. Construction loans to individuals are generally made on the same terms as our one- to four-family mortgage loans.
Before making a commitment to fund a residential construction loan, we require an appraisal of the property by an independent licensed appraiser. We also
review and inspect each property before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method.
Construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other
assumptions. If the estimate of construction cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value is inaccurate, we may
be confronted with a project, when completed, with a value that is insufficient to assure full payment.
Commercial Loans.
At
June 30, 2007, we had $6.5 million in commercial loans which amounted to 2.7% of total loans. We make commercial business loans primarily in our market area to a variety of professionals, sole proprietorships and small businesses.
Commercial lending products include term loans and revolving lines of credit. Such loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture. Commercial loans are made with either adjustable or fixed
rates of interest. Variable rates are based on the prime rate, as published in
The Wall Street Journal,
plus a margin. Fixed rate commercial loans are set at a margin above the comparable Federal Home Loan Bank advance rate.
When making commercial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities
of the borrower, the projected cash flows of the business and the value of the collateral. Commercial loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and equipment, and are supported by personal
guarantees. Depending on the collateral used
9
to secure the loans, commercial loans are made in amounts of up to 75% of the value of the collateral securing the loan. We generally do not make unsecured
commercial loans.
Commercial loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans,
which generally are made on the basis of the borrowers ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans generally
are made on the basis of the borrowers ability to repay the loan from the cash flow of the borrowers business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the
business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our underwriting standards. At June 30, 2007, our largest
commercial loan was a $686,000 loan secured by business assets located in our primary market area. This loan was performing according to its terms at June 30, 2007.
Consumer and Other Loans.
We offer a limited range of consumer loans, principally to Putnam Savings Bank customers residing in our primary market area with acceptable credit ratings. Our consumer loans
generally consist of loans on new and used automobiles, loans secured by deposit accounts and unsecured personal loans. Consumer loans totaled $1.4 million, or 0.6% of our total loan portfolio, at June 30, 2007.
The following table shows loan origination, sale and principal repayment activity during the periods indicated.
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Total loans at beginning of period
|
|
$
|
201,119
|
|
$
|
166,365
|
Loans originated:
|
|
|
|
|
|
|
Residential (1)
|
|
|
57,533
|
|
|
58,879
|
Commercial real estate
|
|
|
30,271
|
|
|
31,545
|
Residential construction
|
|
|
8,549
|
|
|
5,528
|
Commercial
|
|
|
10,007
|
|
|
6,542
|
Consumer and other
|
|
|
1,171
|
|
|
1,596
|
|
|
|
|
|
|
|
Total loans originated
|
|
|
107,531
|
|
|
104,090
|
Deduct:
|
|
|
|
|
|
|
Principal repayments
|
|
|
65,081
|
|
|
55,617
|
Loan sales
|
|
|
10,096
|
|
|
13,690
|
Other repayments
|
|
|
791
|
|
|
29
|
|
|
|
|
|
|
|
Net loan activity
|
|
|
31,563
|
|
|
34,754
|
|
|
|
|
|
|
|
Total loans at end of period
|
|
$
|
232,682
|
|
$
|
201,119
|
|
|
|
|
|
|
|
(1)
|
Residential mortgage loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
|
Origination, Purchase, Sale and Servicing of Loans.
Lending activities are conducted primarily by our loan personnel operating at our seven
branch offices and one loan origination center. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both adjustable rate and fixed rate loans. Our ability to originate fixed or adjustable rate loans is
dependent upon the relative customer demand for such loans, which is affected by current and expected future levels of market interest rates.
Generally, we retain in our portfolio all bi-weekly loans and other loans that we originate, with the exception of longer-term, fixed rate one- to four-family mortgage loans. The one- to four-family loans that we
10
currently originate for sale include mortgage loans which conform to the underwriting standards specified by Fannie Mae. We also sell all mortgage loans
insured by CHFA, FHA, VA and Rural Development loans. Generally, all one- to four-family loans that we sell are sold pursuant to master commitments negotiated with Fannie Mae. We sell our loans without recourse. We generally retain the servicing
rights on the mortgage loans sold to Fannie Mae, but generally sell all CHFA, VA, FHA and Rural Development loans on a servicing-released basis.
At June 30, 2007, Putnam Savings Bank was servicing loans sold in the amount of $26.3 million. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.
During the fiscal year ended June 30, 2007, we originated $57.5 million of fixed rate and adjustable rate one-to four-family loans, of which
$47.4 million were retained by us. We recognize at the time of sale, the cash gain or loss on the sale of the loans based on the difference between the net cash proceeds received and the carrying value of the loans sold.
Loan Approval Procedures and Authority.
The Board of Directors establishes the lending policies and loan approval limits of Putnam Savings
Bank. Loan officers generally have the authority to originate mortgage loans, consumer loans and commercial loans up to amounts established for each lending officer. Loans in amounts above the individual authorized limits require the approval of
Putnam Savings Banks Credit Committee. The Credit Committee is authorized to approve the following types of loans in amounts up to $500,000: all one- to four family mortgage loans, commercial real estate loans, commercial loans and secured
consumer loans. All loans of $500,000 or greater must receive the approval of Putnam Savings Banks Board of Directors.
The Board
annually approves independent appraisers used by Putnam Savings Bank. For larger loans, the Bank may require an environmental site assessment to be performed by an independent professional for all non-residential mortgage loans. It is Putnam Savings
Banks policy to require hazard insurance on all mortgage loans.
Loan Origination Fees and Other Income.
In addition to
interest earned on loans, Putnam Savings Bank receives loan origination fees. Such fees and costs vary with the volume and type of loans and commitments made and purchased, principal repayments, and competitive conditions in the mortgage markets,
which in turn respond to the demand and availability of money.
Loans to One Borrower.
The maximum amount that we may lend to
one borrower and the borrowers related entities is limited, by regulation, to generally 15% of our stated capital and reserves. At June 30, 2007, our regulatory limit on loans to one borrower was $6.2 million. At that date, the largest
aggregate amount loaned by Putnam Savings Bank to one borrower was $3.9 million. The loans comprising this lending relationship were performing in accordance with their terms as of June 30, 2007.
Non-Performing and Problem Assets
A
computer-generated delinquency notice is mailed monthly to all delinquent borrowers, advising them of the amount of their delinquency. When a loan becomes 60 days delinquent, Putnam Savings Bank sends a letter advising the borrower of the
delinquency. The borrower is given 30 days to pay the delinquent payments or to contact Putnam Savings Bank to make arrangements to bring the loan current over a longer period of time. If the borrower fails to bring the loan current in 30 days or to
make arrangements to cure the delinquency over a longer period of time, the matter is referred to legal counsel and foreclosure proceedings are started. We may consider forbearance in cases of a temporary loss of income if a plan is presented by the
borrower to cure the delinquency in a reasonable period of time after his or her income resumes.
11
All non-commercial mortgage loans are reviewed on a regular basis and such loans are placed on
non-accrual status when they become more than 90 days delinquent. Commercial loans are evaluated for non-accrual status on a case-by-case basis. When loans are placed on non-accrual status, unpaid accrued interest is fully reserved, and further
income is recognized only to the extent received.
Non-Performing Assets.
The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated. At each date presented, we had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less
than current market rates). A loan classified in the table below as non-accrual does not necessarily mean that such loan is or has been delinquent. Once a loan is more than 90 days delinquent or the borrower or collateral securing the
loan experiences an event that makes collectibility suspect, the loan is placed on non-accrual status. Our policies require six months of continuous payments in order for the loan to be removed from non-accrual status.
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Residential mortgage loans (1)
|
|
$
|
55
|
|
|
$
|
63
|
|
Commercial real estate
|
|
|
1,480
|
|
|
|
1,313
|
|
Residential construction
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3
|
|
|
|
|
|
Consumer and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,538
|
(2)
|
|
|
1,376
|
(2)
|
|
|
|
|
|
|
|
|
|
Accruing loans past due 90 days and under:
|
|
|
|
|
|
|
|
|
Residential mortgage loans (1)
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Consumer and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past due over 90 days:
|
|
|
|
|
|
|
|
|
Residential mortgage loans (1)
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
75
|
|
Residential construction
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Consumer and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
1,538
|
|
|
|
1,451
|
|
|
|
|
|
|
|
|
|
|
Real estate owned
|
|
|
|
|
|
|
|
|
Other non-performing assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
|
1,538
|
|
|
|
1,451
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructures and total non-performing assets
|
|
$
|
1,538
|
|
|
$
|
1,451
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans to total loans
|
|
|
0.64
|
%
|
|
|
0.70
|
%
|
Total non-performing loans to total assets
|
|
|
0.31
|
|
|
|
0.31
|
|
Total non-performing assets and troubled debt restructurings to total assets
|
|
|
0.31
|
|
|
|
0.31
|
|
(1)
|
Residential mortgage loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
|
(2)
|
The gross interest income that would have been reported if the loans had performed in accordance with their original terms was $97,942 and $122,046 for the year ended June 30,
2007 and 2006, respectively. Actual income recognized in income was $10,835 and $77,098 for the year ended June 30, 2007 and 2006, respectively.
|
12
The following table sets forth certain information with respect to our loan portfolio delinquencies at
the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Delinquent For
|
|
Total
|
|
|
60-89 Days Past Due
|
|
90 Days and Over
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
|
(Dollars in thousands)
|
At June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1)
|
|
|
|
$
|
|
|
1
|
|
$
|
16
|
|
1
|
|
$
|
16
|
Commercial real estate
|
|
1
|
|
|
128
|
|
|
|
|
|
|
1
|
|
|
128
|
Residential construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
1
|
|
|
3
|
|
1
|
|
|
3
|
Consumer and other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1
|
|
$
|
128
|
|
2
|
|
$
|
19
|
|
3
|
|
$
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1)
|
|
3
|
|
$
|
133
|
|
|
|
$
|
|
|
3
|
|
$
|
133
|
Commercial real estate
|
|
1
|
|
|
633
|
|
2
|
|
|
755
|
|
3
|
|
|
1,388
|
Residential construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
4
|
|
$
|
766
|
|
2
|
|
$
|
755
|
|
6
|
|
$
|
1,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Residential mortgage loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
|
Classified Assets.
Office of Thrift Supervision regulations provide that loans and other assets considered to be of lesser quality be
classified as substandard, doubtful or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment
of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for loan losses in an
amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending
activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allowance for losses
equal to 100% of the amount of the asset so classified or to charge off such amount. An institutions determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of Thrift
Supervision which can order the establishment of additional general or specific loss allowances.
On the basis of managements review
of its assets, at June 30, 2007 we had classified $1.8 million of our assets as substandard. Of these loans, $1.5 million were considered non-performing and included in the table of Non-Performing Assets. At June 30, 2007, none of our
assets were classified as doubtful or loss.
The loan portfolio is reviewed on a regular basis to determine whether any loans require
classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets.
13
Allowance for Loan Losses
Our allowance for loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses
inherent in our loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. We utilize a two-tier approach: (1) identification and establishment of specific loss
allowances on such loans; and (2) establishment of general valuation allowances on the remainder of our loan portfolio. Once a loan becomes delinquent or is otherwise identified as a problem, we may establish a specific loan loss allowance
based on a review of among other things, delinquency status, size of loans, type and market value of collateral and financial condition, of the borrowers. General loan loss allowances are based upon a combination of factors including, but not
limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions, managements judgment and losses which are probable and reasonably estimable. The allowance is increased through provisions charged against
current earnings and recoveries of previously charged-off loans. Loans that are determined to be uncollectible are charged against the allowance. While management uses available information to recognize probable and reasonably estimable loan losses,
future loss provisions may be necessary based on changing economic conditions. Payments received on impaired loans are applied first to accrued interest receivable and then to principal. The allowance for loan losses as of June 30, 2007 was
maintained at a level that represents managements best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable.
In addition, the Office of Thrift Supervision, as an integral part of their examination process, periodically reviews our allowance for loan losses. This
agency may require that we recognize additions to the allowance based on its judgment of information available to it at the time of its examination.
The following table sets forth activity in our allowance for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
1,582
|
|
|
$
|
1,359
|
|
Provision for loan losses
|
|
|
264
|
|
|
|
200
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
Residential (1)
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
(26
|
)
|
|
|
(10
|
)
|
Residential construction
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Consumer and other
|
|
|
(86
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(112
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Residential (1)
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
19
|
|
|
|
|
|
Consumer and other
|
|
|
27
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
46
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(66
|
)
|
|
|
(75
|
)
|
Transfer to allowance for off-balance sheet items
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
1,780
|
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Allowance for loan losses to non-performing loans at end of period
|
|
|
115.73
|
%
|
|
|
109.03
|
%
|
Allowance for loan losses to total loans outstanding at the end of the period
|
|
|
0.77
|
%
|
|
|
0.79
|
%
|
Net charge-offs to average loans outstanding
|
|
|
0.03
|
%
|
|
|
0.04
|
%
|
(1)
|
Residential mortgage loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
|
14
Allocation of Allowance for Loan Losses.
The following table sets forth the allowance for
loan losses allocated by loan category, the total loan balances by category (including loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is
not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
% of
Allowance to
Total
Allowance
|
|
|
% of Loans
in Category
to Total
Loans
|
|
|
Amount
|
|
% of
Allowance to
Total
Allowance
|
|
|
% of Loans
in Category
to Total
Loans
|
|
|
|
(Dollars in thousands)
|
|
Residential mortgages (1)
|
|
$
|
919
|
|
51.63
|
%
|
|
72.09
|
%
|
|
$
|
570
|
|
36.03
|
%
|
|
73.23
|
%
|
Commercial loans (2)
|
|
|
788
|
|
44.27
|
|
|
27.31
|
|
|
|
978
|
|
61.82
|
|
|
26.09
|
|
Consumer loans
|
|
|
25
|
|
1.40
|
|
|
0.60
|
|
|
|
29
|
|
1.83
|
|
|
0.68
|
|
Unallocated
|
|
|
48
|
|
2.70
|
|
|
|
|
|
|
5
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
1,780
|
|
100.00
|
%
|
|
100.00
|
%
|
|
$
|
1,582
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Residential mortgage loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
|
(2)
|
Commercial loans include commercial real estate loans and C & I loans.
|
Each quarter, management evaluates the total balance of the allowance for loan losses based on several factors, some of which are not loan specific but are reflective of the inherent losses in the loan portfolio. This
process includes, but is not limited to, a periodic review of loan collectibility in light of historical experience, the nature and volume of loan activity, conditions that may affect the ability of the borrower to repay, underlying value of
collateral, if applicable, and economic conditions in our immediate market area. First, we group loans by delinquency status. All loans 90 days or more delinquent are evaluated individually, based primarily on the value of the collateral securing
the loan. Specific loss allowances are established as required by this analysis. All loans for which a specific loss allowance has not been assigned are segregated by type, delinquency status or loan grade and a loss allowance is established by
using loss experience data and managements judgment concerning other matters it considers significant. The allowance is allocated to each category of loan based on the results of the above analysis. Small differences between the allocated
balances and recorded allowances are reflected as unallocated to absorb losses resulting from the inherent imprecision involved in the loss analysis process.
This analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance
at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.
Investment Activities
Putnam Savings Banks Executive Committee is responsible for implementing
Putnam Savings Banks Investment Policy. The Investment Policy is reviewed annually and any changes to the policy are recommended to, and subject to, the approval of our Board of Directors. The Executive Committee is comprised of our Chairman,
President and one rotating director. Authority to make investments under the approved Investment Policy guidelines is delegated by the Executive Committee to appropriate officers. While general investment strategies are developed and authorized by
the Asset/Liability Committee, the execution of specific actions rests with the Chief Executive Officer or President who may act jointly or severally as Putnam Savings Banks Investment Officer. The Investment Officer is responsible for
ensuring that the guidelines and requirements included in the Investment Policy are followed and that all securities are considered prudent for investment. The Investment Officer is authorized to execute investment transactions (purchases and sales)
up to $5 million per
15
transaction without the prior approval of the Executive Committee and within the scope of the established investment policy. Each transaction in excess of
established limits must receive prior approval of the Executive Committee.
In addition, Putnam Savings Bank may utilize the services of an
independent investment advisor to assist in managing the investment portfolio. The investment advisor is responsible for maintaining current information regarding securities dealers with whom they are conducting business on our behalf. A list of
appropriate dealers is provided annually to the Board of Directors for approval and authorization prior to execution of trades. The investment advisor, through its assigned portfolio manager, must contact our President or Treasurer to review all
investment recommendations and transactions and receive approval from the President or Treasurer prior to execution of any transaction that might be transacted on our behalf. Upon receipt of approval, the investment advisor, or its assigned
portfolio manager, is authorized to conduct all investment business on our behalf.
Our Investment Policy requires that all securities
transactions be conducted in a safe and sound manner. Investment decisions must be based upon a thorough analysis of each security instrument to determine its quality, inherent risks, fit within our overall asset/liability management objectives,
effect on our risk-based capital measurement and prospects for yield and/or appreciation.
Consistent with our overall business and
asset/liability management strategy, which focuses on sustaining adequate levels of core earnings, all securities purchased are held available-for-sale.
U.S. Government and Agency Obligations.
At June 30, 2007, the Companys U.S. Government and Agency securities portfolio totaled $45.0 million, or 20.0% of total investments, all of
which were classified as available-for-sale. There were no structured notes in the portfolio. While U.S. Government and Agency securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these
investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and prepayment protection.
State Agency
and Municipal Obligations.
These securities consist of obligations issued by states, counties and municipalities or their agencies and include general obligation bonds, industrial development revenue bonds and other revenue bonds. Our
investment policy requires that such state agency or municipal obligations be rated A- or better by a nationally recognized rating agency. If the debt obligation rating goes below A- then the investment is placed on an
investment watch report and is monitored by our Investment Officer. The investment is then reviewed quarterly by our Board of Directors where a determination is made to hold or dispose of the investment. At June 30, 2007, the
Companys state agency and municipal obligations portfolio totaled $9.1 million, or 4.1% of total investments, all of which was classified as available-for-sale.
Corporate Bonds.
At June 30, 2007, the Companys corporate bond portfolio totaled $20.9 million, or 9.3% of total
investments, all of which was classified as available-for-sale. Although corporate bonds may offer higher yields than U.S. Treasury or agency securities of comparable duration, corporate bonds also have a higher risk of default due to possible
adverse changes in the credit-worthiness of the issuer. In order to mitigate this risk, our investment policy requires that corporate debt obligations be rated A- by a nationally recognized rating agency. If the bond rating goes below
A- then the investment is placed on an investment watch report and is monitored by our Investment Officer. The investment is then reviewed quarterly by our Board of Directors where a determination is made to hold or dispose
of the investment.
Mortgage-Backed Securities.
The Company purchases mortgage-backed securities insured or guaranteed by
Fannie Mae, Freddie Mac and Ginnie Mae. We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and lower our credit risk as a result of the guarantees provided by Freddie Mac, Fannie
Mae and Ginnie Mae. The Company also invests in collateralized mortgage obligations (CMOs), also insured or issued by Freddie Mac, Fannie Mae and Ginnie Mae, or private issuers such as Washington Mutual and Countrywide Home Loans. All private issuer
CMOs were rated AAA.
16
Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an
interest rate that is less than the interest rate on the underlying mortgage. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we focus our investments on
mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities (generally U.S. government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the
participation interests in the form of securities to investors such as Putnam Savings Bank, and guarantee the payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such
securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize our specific liabilities and obligations.
CMOs are a type of debt security issued by a special purpose entity that aggregates pools of mortgage-backed securities and creates
different classes of CMO securities with varying maturities and amortization schedules as well as a residual interest, with each class, or tranche, possessing different risk characteristics. A particular tranche of CMOs may, therefore,
carry prepayment risk that differs from that of both the underlying collateral and other tranches. CMO tranches are purchased by the Company in an attempt to moderate reinvestment risk associated with mortgage-backed securities resulting from
unexpected prepayment activities.
At June 30, 2007, mortgage-backed securities totaled $137.5 million, or 61.2% of total
investments, all of which were classified as available-for-sale. At June 30, 2007, 40.3% of the mortgage-backed securities were backed by adjustable rate loans and 59.7% were backed by fixed rate mortgage loans. The mortgage-backed securities
portfolio had a weighted average yield of 5.27% at June 30, 2007. The estimated fair value of our mortgage-backed securities at June 30, 2007 was $135.3 million, which is less than the amortized cost of $137.5 million.
Investments in mortgage-backed securities involve a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount
relating to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or if such securities are redeemed by the issuer. In addition, the market value of
such securities may be adversely affected by changes in interest rates.
Marketable Equity Securities.
At June 30, 2007,
our equity securities portfolio totaled $12.2 million, or 5.4% of total investments, all of which were classified as available for sale. At June 30, 2007, the portfolio primarily consisted of $7.2 million of Federal Home Loan Bank stock
and $5.0 million of auction rate preferred stock. Auction rate preferred stock is a floating rate preferred stock, on which the dividend rate generally resets every 49 days based on an auction process to reflect the yield demand for the instruments
by potential purchasers. At June 30, 2007, our investments in preferred stock consisted of investments in one corporate issuer.
Investments in equity securities involve risk as they are not insured or guaranteed investments and are affected by stock market fluctuations. Such investments are carried at their market value and can directly affect our net capital
position.
17
Investment Securities Portfolio.
The following table sets forth the carrying values of our
investment securities portfolio at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
|
|
2007
|
|
2006
|
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
|
(In thousands)
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
45,026
|
|
$
|
44,679
|
|
$
|
42,886
|
|
$
|
42,038
|
State agency and municipal obligations
|
|
|
9,128
|
|
$
|
9,382
|
|
|
9,124
|
|
$
|
9,413
|
Corporate bonds and other securities
|
|
|
20,902
|
|
|
20,937
|
|
|
24,730
|
|
|
24,581
|
Mortgage-backed securities
|
|
|
137,530
|
|
|
135,324
|
|
|
113,808
|
|
|
110,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
212,586
|
|
|
210,322
|
|
|
190,548
|
|
|
186,532
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Bank stock
|
|
|
7,180
|
|
|
7,180
|
|
|
6,377
|
|
|
6,377
|
Preferred stock
|
|
|
5,000
|
|
|
5,000
|
|
|
52,198
|
|
|
52,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
12,180
|
|
|
12,180
|
|
|
58,575
|
|
|
58,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
224,766
|
|
$
|
222,502
|
|
$
|
249,123
|
|
$
|
245,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Portfolio Maturities and Yields.
The composition and maturities of the investment
securities portfolio at June 30, 2007 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State agency and
municipal obligations as well as common and preferred stock yields have not been adjusted to a tax-equivalent basis. Certain mortgage-backed securities have interest rates that are adjustable and will reprice annually within the various maturity
ranges. These repricing schedules are not reflected in the table below. At June 30, 2007, mortgage-backed securities with adjustable rates totaled $54.5 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
More than One Year to
Five Years
|
|
|
More than Five Years to
Ten Years
|
|
|
More than Ten Years
|
|
|
Total
|
|
|
|
Carrying
Value
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
Weighted
Average
Yield
|
|
|
|
(Dollars in thousands)
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
17,345
|
|
3.90
|
%
|
|
$
|
14,193
|
|
5.03
|
%
|
|
$
|
3,774
|
|
5.55
|
%
|
|
$
|
9,367
|
|
6.13
|
%
|
|
$
|
44,679
|
|
4.87
|
%
|
State agency and municipal obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,410
|
|
4.52
|
%
|
|
|
7,972
|
|
4.93
|
%
|
|
|
9,382
|
|
4.87
|
%
|
Corporate bonds and other securities
|
|
|
2,973
|
|
5.26
|
%
|
|
|
9,831
|
|
5.38
|
%
|
|
|
|
|
|
|
|
|
8,133
|
|
6.27
|
%
|
|
|
20,937
|
|
5.71
|
%
|
Mortgage-backed securities
|
|
|
8
|
|
5.49
|
%
|
|
|
5,353
|
|
4.26
|
%
|
|
|
8,505
|
|
4.31
|
%
|
|
|
121,458
|
|
5.38
|
%
|
|
|
135,324
|
|
5.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
20,326
|
|
|
|
|
$
|
29,377
|
|
|
|
|
$
|
13,689
|
|
|
|
|
$
|
146,930
|
|
|
|
|
$
|
210,322
|
|
5.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
4.87
|
%
|
FHLB Restricted Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,180
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,180
|
|
5.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
20,326
|
|
|
|
|
$
|
29,377
|
|
|
|
|
$
|
13,689
|
|
|
|
|
$
|
146,930
|
|
|
|
|
$
|
222,502
|
|
5.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Sources of Funds
General.
Deposits have traditionally been our primary source of funds for use in lending and investment activities. In addition to deposits, funds are derived from scheduled loan payments, investment
maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by
prevailing interest rates, market conditions and levels of competition. Borrowings from the Federal Home Loan Bank of Boston and brokered certificates of deposit may be used to compensate for reductions in deposits and to fund loan growth.
Deposits.
A majority of our depositors are persons who work or reside in Windham County and New London County, Connecticut.
We offer a selection of deposit instruments, including checking, savings, money market deposit accounts, negotiable order of withdrawal (NOW) accounts and fixed-term certificates of deposit. Deposit account terms vary, with the principal differences
being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate.
Interest rates paid,
maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth
goals. To attract and retain deposits, we rely upon personalized customer service, long-standing relationships and competitive interest rates.
The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in
obtaining funds and responding to changes in consumer demand. Based on historical experience, management believes our deposits are relatively stable. However, the ability to attract and maintain money market accounts and certificates of deposit, and
the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. At June 30, 2007, $153.7 million, or 52.4%, of our deposit accounts were certificates of deposit, of which $107.8 million
had maturities of one year or less.
The following table sets forth the distribution of total deposit accounts, by account type, at the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Balance
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
Demand deposits
|
|
$
|
43,493
|
|
14.82
|
%
|
|
|
%
|
|
$
|
46,494
|
|
15.66
|
%
|
|
|
%
|
NOW accounts
|
|
|
27,468
|
|
9.36
|
|
|
1.83
|
|
|
|
27,143
|
|
9.14
|
|
|
1.42
|
|
Regular savings
|
|
|
50,225
|
|
17.11
|
|
|
0.74
|
|
|
|
55,054
|
|
18.54
|
|
|
0.74
|
|
Money market accounts
|
|
|
18,250
|
|
6.22
|
|
|
1.84
|
|
|
|
23,167
|
|
7.80
|
|
|
1.63
|
|
Club accounts
|
|
|
318
|
|
0.11
|
|
|
4.17
|
|
|
|
298
|
|
0.10
|
|
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transaction accounts
|
|
|
139,754
|
|
47.62
|
|
|
0.88
|
|
|
|
152,156
|
|
51.24
|
|
|
0.78
|
|
Certificates of deposit
|
|
|
153,719
|
|
52.38
|
|
|
4.66
|
|
|
|
144,809
|
|
48.76
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
293,473
|
|
100.00
|
%
|
|
2.86
|
%
|
|
$
|
296,965
|
|
100.00
|
%
|
|
2.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
As of June 30, 2007, the aggregate amount of outstanding certificates of deposit in amounts greater
than or equal to $100,000 was approximately $49.3 million. The following table sets forth the maturity of those certificates as of June 30, 2007.
|
|
|
|
Maturity Period
|
|
At June 30,
2007
|
|
|
(In thousands)
|
Three months or less
|
|
$
|
11,393
|
Over three through six months
|
|
|
7,108
|
Over six months through one year
|
|
|
17,223
|
Over one year through three years
|
|
|
7,448
|
Over three years
|
|
|
6,082
|
|
|
|
|
Total
|
|
$
|
49,254
|
|
|
|
|
The following table sets forth the certificate of deposits, classified by interest rate, as of the
dates indicated.
|
|
|
|
|
|
|
|
|
At June 30,
|
|
|
2007
|
|
2006
|
Interest Rate:
|
|
|
|
|
|
|
0.00% - 1.00%
|
|
$
|
14
|
|
$
|
|
1.01 - 2.00
|
|
|
380
|
|
|
2,216
|
2.01 - 3.00
|
|
|
15,227
|
|
|
21,956
|
3.01 - 4.00
|
|
|
16,701
|
|
|
44,057
|
4.01 - 5.00
|
|
|
32,245
|
|
|
71,690
|
5.01 - 6.00
|
|
|
89,152
|
|
|
4,890
|
|
|
|
|
|
|
|
|
|
$
|
153,719
|
|
$
|
144,809
|
|
|
|
|
|
|
|
The following table sets forth the amount and maturities of certificate of deposits at
June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Due
|
|
Percent of
Total
Certificate
Accounts
|
|
|
|
Less Than
One Year
|
|
Over One
Year To
Two
Years
|
|
Over Two
Years to
Three
Years
|
|
Over
Three
Years to
Four
Years
|
|
Over
Four
Years to
Five
Years
|
|
Total
|
|
|
|
(In thousands)
|
|
0 - 1.00%
|
|
$
|
14
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
14
|
|
0.0
|
%
|
1.01 - 2.00
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380
|
|
0.2
|
|
2.01 - 3.00
|
|
|
14,736
|
|
|
489
|
|
|
2
|
|
|
|
|
|
|
|
|
15,227
|
|
9.9
|
|
3.01 - 4.00
|
|
|
9,929
|
|
|
3,826
|
|
|
2,453
|
|
|
493
|
|
|
|
|
|
16,701
|
|
10.9
|
|
4.01 - 5.00
|
|
|
26,097
|
|
|
1,756
|
|
|
959
|
|
|
2,243
|
|
|
1,190
|
|
|
32,245
|
|
21.0
|
|
5.01 - 6.00
|
|
|
56,735
|
|
|
16,737
|
|
|
3,656
|
|
|
949
|
|
|
11,075
|
|
|
89,152
|
|
58.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
107,891
|
|
$
|
22,808
|
|
$
|
7,070
|
|
$
|
3,685
|
|
$
|
12,265
|
|
$
|
153,719
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
The following table sets forth the interest-bearing deposit activities for the periods indicated.
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands)
|
Beginning balance
|
|
$
|
250,471
|
|
|
$
|
192,147
|
Net deposits (withdrawals) before interest credited
|
|
|
(8,546
|
)
|
|
|
52,692
|
Interest credited
|
|
|
8,055
|
|
|
|
5,632
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
(491
|
)
|
|
|
58,324
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
249,980
|
|
|
$
|
250,471
|
|
|
|
|
|
|
|
|
Borrowings.
Our borrowings consist of advances from, and a line of credit with, the
Federal Home Loan Bank of Boston and repurchase agreements. At June 30, 2007, we had an available line of credit with the Federal Home Loan Bank of Boston in the amount of $2.4 million and access to additional Federal Home Loan Bank
advances of up to $35.7 million. At June 30, 2007, retail repurchase agreements were $4.0 million. The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at the dates and
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Maximum amount of advances outstanding at any month end during the period:
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
137,883
|
|
|
$
|
121,967
|
|
Repurchase Agreements with other companies
|
|
|
1,722
|
|
|
|
1,949
|
|
Repurchase Agreements with customers
|
|
|
5,389
|
|
|
|
1,334
|
|
|
|
|
Average advances outstanding during the period:
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
126,524
|
|
|
|
73,580
|
|
Repurchase Agreements with other companies
|
|
|
754
|
|
|
|
405
|
|
Repurchase Agreements with customers
|
|
|
3,330
|
|
|
|
1,121
|
|
|
|
|
Balance outstanding at end of period:
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
137,883
|
|
|
|
121,967
|
|
Repurchase Agreements with other companies
|
|
|
|
|
|
|
1,717
|
|
Repurchase Agreements with customers
|
|
|
3,974
|
|
|
|
909
|
|
|
|
|
Weighted average interest rate during the period:
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
5.19
|
%
|
|
|
4.24
|
%
|
Repurchase Agreements with other companies
|
|
|
5.40
|
|
|
|
5.11
|
|
Repurchase Agreements with customers
|
|
|
3.92
|
|
|
|
2.90
|
|
|
|
|
Weighted average interest rate at end of period:
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
4.98
|
%
|
|
|
4.97
|
%
|
Repurchase Agreements with other companies
|
|
|
|
|
|
|
5.26
|
|
Repurchase Agreements with customers
|
|
|
3.97
|
|
|
|
3.78
|
|
Subsidiary Activities
PSB Holdings Inc.s only subsidiary is Putnam Savings Bank. Putnam Savings Bank has three subsidiaries, Windham North Properties, LLC, PSB Realty, LLC and Putnam Bank Mortgage Servicing Company. Windham North
Properties, LLC is used to acquire title to selected properties on which Putnam Savings Bank forecloses. As of June 30, 2007, Windham North Properties, LLC, did not own any such properties. PSB Realty, LLC owns a single parcel of real estate
located immediately adjacent to Putnam Savings Banks main office. This real estate is utilized as a loan center for Putnam Savings Bank and there are no outside tenants that occupy the premises.
22
Putnam Bank Mortgage Servicing Company is a qualified passive investment company that is intended to reduce Connecticut state taxes on interest
earned on real estate loans.
Personnel
As of June 30, 2007, we had 84 full-time employees and 33 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.
FEDERAL AND STATE TAXATION
Federal Taxation
General
.
PSB Holdings, Inc. and Putnam Savings Bank are subject to federal income taxation in the same general
manner as other corporations, with some exceptions discussed below. PSB Holdings, Inc.s and Putnam Savings Banks tax returns have not been audited during the past five years. The following discussion of federal taxation is intended
only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to PSB Holdings, Inc. or Putnam Savings Bank.
Method of Accounting
.
For federal income tax purposes, PSB Holdings, Inc. and Putnam Savings Bank currently report their income
and expenses on the accrual method of accounting and use a tax year ending June 30 for filing their federal income tax returns.
Bad Debt Reserves
.
Prior to the Small Business Protection Act of 1996 (the 1996 Act), Putnam Savings Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These
additions could, within specified formula limits, be deducted in arriving at our taxable income. As a result of the 1996 Act, Putnam Savings Bank was required to use the specific charge off method in computing its bad debt deduction beginning with
its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). At June 30, 2007 Putnam Savings Bank had no reserves subject to recapture
in excess of its base year reserves.
Taxable Distributions and Recapture
.
Prior to the 1996 Act, bad debt reserves
created prior to January 1, 1988 were subject to recapture into taxable income if Putnam Savings Bank failed to meet certain thrift asset and definitional tests. Federal legislation has eliminated these thrift-related recapture rules. At
June 30, 2007, our total federal pre-1988 base year reserve was approximately $2.3 million. However, under current law, pre-1988 base year reserves remain subject to recapture if Putnam Savings Bank makes certain non-dividend distributions,
repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.
Alternative Minimum Tax
.
The Internal Revenue Code of 1986, as amended (the Code) imposes an alternative minimum tax (AMT) at a rate of 20% on a base of regular taxable income plus certain tax preferences,
which we refer to as alternative minimum taxable income. The AMT is payable to the extent such alternative minimum taxable income is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can
offset no more than 90% of alternative minimum taxable income. Certain AMT payments may be used as credits against regular tax liabilities in future years. Putnam Savings Bank has not been subject to the AMT and has no such amounts available as
credits for carryover.
Net Operating Loss Carryovers
.
A financial institution may carry back net operating losses to
the preceding two taxable years and forward to the succeeding 20 taxable years. At June 30, 2007, Putnam Savings Bank had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction
.
PSB Holdings, Inc. may exclude from its income 100% of dividends received from Putnam
Savings Bank as a member of the same affiliated group of corporations. The
23
corporate dividends-received deduction is 80% in the case of dividends received from corporations with which a corporate recipient does not file a
consolidated tax return, and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf.
State Taxation
Connecticut State
Taxation
.
PSB Holdings, Inc. and Putnam Savings Bank and its subsidiaries, are subject to the Connecticut corporation business tax. Both entities are required to pay the regular corporation business tax (income tax).
The Connecticut corporation business tax is based on the federal taxable income before net operating loss and special deductions and makes certain
modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate of 7.5% to arrive at Connecticut income tax.
In 1998, the State of Connecticut enacted legislation permitting the formation of passive investment companies by financial institutions. This
legislation exempts qualifying passive investment companies from the Connecticut corporation business tax and excludes dividends paid from a passive investment company from the taxable income of the parent financial institution. Putnam Savings Bank
established a passive investment company, Putnam Bank Mortgage Servicing Company, during 2007 and eliminated the state income tax expense of Putnam Savings Bank effective July 1, 2006. If the State of Connecticut were to pass legislation in the
future to eliminate the passive investment company exemption Putnam Savings Bank would be subject to state income taxes in Connecticut.
PSB Holdings, Inc. and Putnam Savings Bank are not currently under audit with respect to their income tax returns, and their state tax returns have not been audited for the past five years.
SUPERVISION AND REGULATION
General
Putnam Savings Bank is examined and supervised by the Office of Thrift Supervision. This regulation and supervision establishes a comprehensive framework
of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporations deposit insurance funds and depositors. Under this system of federal regulation, financial institutions
are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the federal
agency critiques the institutions operations and assigns its rating (known as an institutions CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. Putnam Savings Bank also is a member of and
owns stock in the Federal Home Loan Bank of Boston, which is one of the twelve regional banks in the Federal Home Loan Bank System. Putnam Savings Bank also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System,
governing reserves to be maintained against deposits and other matters. The Office of Thrift Supervision examines Putnam Savings Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Putnam Savings
Banks relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of Putnam Savings Banks
mortgage documents.
Any change in these laws or regulations, whether by the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision or Congress, could have a material adverse impact on PSB Holdings, Inc. and Putnam Savings Bank and their operations.
24
Federal Banking Regulation
Business Activities.
A federal savings association derives its lending and investment powers from the Home Owners Loan Act, as amended, and the regulations of the Office of Thrift Supervision.
Under these laws and regulations, Putnam Savings Bank may invest in mortgage loans secured by residential real estate without limitations as a percentage of assets and non-residential real estate loans which may not in the aggregate exceed 400% of
capital, commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate, certain types of debt securities and certain other assets. Putnam Savings Bank also may establish subsidiaries that may
engage in activities not otherwise permissible for Putnam Savings Bank, including real estate investment and securities and insurance brokerage.
Capital Requirements.
Office of Thrift Supervision regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for associations receiving the highest
rating on the CAMELS rating system) and an 8% risk-based capital ratio. The prompt corrective action standards discussed below, in effect, establish a minimum 2% tangible capital standard.
The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core
capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0%
to 100%, assigned by the Office of Thrift Supervision based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and
up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally,
a savings association that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings association. Putnam Savings Bank does not typically engage in asset
sales.
At June 30, 2007, Putnam Savings Banks capital exceeded all applicable requirements.
Loans-to-One Borrower.
A federal savings association generally may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate.
As of June 30, 2007, Putnam Savings Bank was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender
Test.
As a federal savings association, Putnam Savings Bank must satisfy the qualified thrift lender, or QTL, test. Under the QTL test, Putnam Savings Bank must maintain at least 65% of its portfolio assets in
qualified thrift investments in at least nine of the most recent 12-month period. Portfolio assets generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the conduct of the savings associations business.
Qualified thrift investments include various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal,
family, household and certain other purposes up to a limit of 20% of portfolio assets. Qualified thrift investments also include 100% of an institutions credit card loans, education loans and small business loans. Putnam Savings
Bank also may satisfy the QTL test by qualifying as a domestic building and loan association as defined in the Internal Revenue Code.
25
A savings association that fails the qualified thrift lender test must either convert to a bank charter
or operate under specified restrictions. At June 30, 2007, Putnam Savings Bank satisfied this test.
Capital
Distributions.
Office of Thrift Supervision regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account. A savings
association must file an application for approval of a capital distribution if:
|
|
|
the total capital distributions for the applicable calendar year exceed the sum of the associations net income for that year to date plus the
associations retained net income for the preceding two years;
|
|
|
|
the association would not be at least adequately capitalized following the distribution;
|
|
|
|
the distribution would violate any applicable statute, regulation, agreement or Office of Thrift Supervision-imposed condition; or
|
|
|
|
the association is not eligible for expedited treatment of its filings.
|
Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must still file a notice with the
Office of Thrift Supervision at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.
The
Office of Thrift Supervision may disapprove a notice or application if:
|
|
|
the association would be undercapitalized following the distribution;
|
|
|
|
the proposed capital distribution raises safety and soundness concerns; or
|
|
|
|
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
|
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making
such distribution the institution would be undercapitalized.
Liquidity.
A federal savings association is required to
maintain a sufficient amount of liquid assets to ensure its safe and sound operation.
Community Reinvestment Act and Fair Lending
Laws.
All savings associations have a responsibility under the Community Reinvestment Act and related regulations of the Office of Thrift Supervision to help meet the credit needs of their communities, including low- and moderate-income
neighborhoods. In connection with its examination of a federal savings association, the Office of Thrift Supervision is required to assess the associations record of compliance with the Community Reinvestment Act. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An associations failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in denial of certain corporate applications, such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could
result in enforcement actions by the Office of Thrift Supervision, as well as other federal regulatory agencies and the Department of Justice. Putnam Savings Bank received a satisfactory Community Reinvestment Act rating in its most
recent federal examination.
Privacy Standards.
Effective July 2001, financial institutions, including Putnam Savings
Bank, became subject to FDIC regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Act. These regulations require Putnam Savings Bank to disclose its privacy policy, including identifying with whom it shares
non-public personal information to customers at the time of establishing the customer relationship and annually thereafter.
The regulations also require Putnam Savings Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, Putnam Savings Bank is required to provide its customers with
the ability to opt-out of having Putnam Savings Bank share their non-public personal
26
information with unaffiliated third parties before it can disclose such information, subject to certain exceptions. The implementation of these regulations
did not have a material adverse effect on PSB Holdings, Inc. or Putnam Savings Bank. The Gramm-Leach-Bliley Act also allows each state to enact legislation that is more protective of consumers personal information. We cannot predict
whether Connecticut may enact such legislation or what impact, if any, it would have if enacted.
On February 1, 2001, the FDIC and
other federal banking agencies adopted guidelines establishing standards for safeguarding customer information to implement certain provisions of The Gramm-Leach Bliley Act. The guidelines describe the agencies expectations for the creation,
implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The
standards set forth in the guidelines are intended to insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against
unauthorized access to or use of such records, or information that could result in substantial harm or inconvenience to any customer. Putnam Savings Bank has implemented these guidelines, and such implementation did not have a material adverse
effect on our operations.
Transactions with Related Parties.
A federal savings associations authority to engage in
transactions with its affiliates is limited by Office of Thrift Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act (the FRA). The term affiliates for these purposes generally means any
company that controls, is controlled by, or is under common control with an institution. PSB Holdings, Inc. is an affiliate of Putnam Savings Bank. In general, transactions with affiliates must be on terms that are as favorable to the
association as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the associations capital. Collateral in specified amounts must usually be provided by
affiliates in order to receive loans from the association. In addition, Office of Thrift Supervision regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank
holding companies and from purchasing the securities of any affiliate, other than a subsidiary.
Putnam Savings Banks authority to
extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the
Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to
such persons, individually and in the aggregate, which limits are based, in part, on the amount of Putnam Savings Banks capital. In addition, extensions of credit in excess of certain limits must be approved by Putnam Savings Banks Board
of Directors.
Enforcement.
The Office of Thrift Supervision has primary enforcement responsibility over federal savings
institutions and has the authority to bring enforcement action against all institution-affiliated parties, including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action
likely to have an adverse effect on an insured institution. Formal enforcement action by the Office of Thrift Supervision may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the
institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1
million per day. The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or to recommend to the Director of the Office of Thrift Supervision that enforcement action be taken with respect to a particular
savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances.
27
Standards for Safety and Soundness.
Federal law requires each federal banking agency to
prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset
growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness
standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The
guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to submit a compliance plan.
Prompt Corrective Action
Regulations
.
Under the prompt corrective action regulations, the Office of Thrift Supervision is required and authorized to take supervisory actions against undercapitalized savings associations. For this purpose, a savings
association is placed in one of the following five categories based on the associations capital:
|
|
|
well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);
|
|
|
|
adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);
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undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital);
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significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and
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critically undercapitalized (less than 2% tangible capital).
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Generally, the banking regulator is required to appoint a receiver or conservator for an association that is critically undercapitalized within specific time frames. The regulations also provide that a
capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date an association receives notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring
compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities the savings association will engage in while the capital restoration plan is in effect, and assurances that the capital
restoration plan will not appreciably increase the current risk profile of the savings association. Any holding company for the savings association required to submit a capital restoration plan must guarantee the lesser of: an amount equal to 5% of
the savings associations assets at the time it was notified or deemed to be undercapitalized by the Office of Thrift Supervision, or the amount necessary to restore the savings association to adequately capitalized status. This guarantee
remains in place until the Office of Thrift Supervision notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the Office of Thrift Supervision has the authority to
require payment and collect payment under the guarantee. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings association, such as restrictions on the ability to declare and pay
dividends, pay executive compensation and management fees, and increase assets or expand operations. The Office of Thrift Supervision may also take any one of a number of discretionary supervisory actions against undercapitalized associations,
including the issuance of a capital directive and the replacement of senior executive officers and directors.
At June 30, 2007,
Putnam Savings Bank met the criteria for being considered well-capitalized.
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Insurance of Deposit Accounts.
Deposit accounts in Putnam Savings Bank are insured by the
Federal Deposit Insurance Corporation, generally up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. Putnam Savings Banks deposits, therefore, are subject to
Federal Deposit Insurance Corporation deposit insurance assessments. Recent legislation, among other things, has increased the amount of federal deposit insurance coverage for certain types of accounts while preserving the $100,000 coverage limit
for individual accounts and municipal deposits. The legislation also gives the Federal Deposit Insurance Corporation discretion to adjust insurance coverage for inflation, beginning in 2010. The legislation also gives the Federal Deposit Insurance
Corporation flexibility to adjust the insurance fund reserve ratio between 1.15% and 1.50% of estimated insured deposits, depending on projected losses, economic changes and assessment ratios at the end of a calendar year, and allows for dividends
to insured institutions whenever reserve ratios exceed specified levels.
On November 2, 2006, the Federal Deposit Insurance
Corporation adopted final regulations that assess insurance premiums based on risk. As a result, the new regulation will enable the Federal Deposit Insurance Corporation to more closely tie each financial institutions deposit insurance
premiums to the risk it poses to the deposit insurance fund. Under the new risk-based assessment system, the Federal Deposit Insurance Corporation will evaluate the risk of each financial institution based on its supervisory rating, its financial
ratios, and its long-term debt issuer rating for larger institutions. The new rates for nearly all of the financial institutions industry vary between five and seven cents for every $100 of domestic deposits. If this rule had been in effect on
June 30, 2007, Putnam Savings Bank would have paid an annual deposit insurance assessment to the Federal Deposit Insurance Corporation of approximately $203,000. At the same time, the Federal Deposit Insurance Corporation adopted final
regulations designating the reserve ratio for the deposit insurance fund during 2007 at 1.25% of estimated insured deposits.
Effective
March 31, 2006, the Federal Deposit Insurance Corporation merged the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into a single fund called the Deposit Insurance Fund. As a result of the
merger, the BIF and the SAIF were abolished. The merger of the BIF and the SAIF into the Deposit Insurance Fund does not affect the authority of the Financing Corporation (FICO) to impose and collect, with the approval of the Federal
Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO
are due to mature in 2017 through 2019. For the quarter ended June 30, 2007, the annualized FICO assessment was equal to 1.22 basis points for each $100 in domestic deposits maintained at an institution.
Prohibitions Against Tying Arrangements
.
Federal savings associations are prohibited, subject to some exceptions, from extending
credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services
of a competitor of the institution.
Federal Home Loan Bank System.
Putnam Savings Bank is a member of the Federal Home Loan
Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Boston, Putnam Savings Bank is
required to acquire and hold shares of capital stock in the Federal Home Loan Bank in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or
1/20 of its borrowings from the Federal Home Loan Bank, whichever is greater. As of June 30, 2007, Putnam Savings Bank was in compliance with this requirement.
Federal Reserve System
.
The Federal Reserve Board regulations require savings associations to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of
withdrawal and regular checking accounts. At June 30, 2007, Putnam Savings Bank was in compliance with these reserve requirements.
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The USA PATRIOT Act
The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. Certain provisions of the act impose affirmative obligations on a broad range of financial institutions, including savings banks, like Putnam Savings Bank. These obligations include enhanced anti-money laundering
programs, customer identification programs and regulations relating to private banking accounts or correspondence accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United
States).
The federal banking agencies have begun to propose and implement regulations pursuant to the USA PATRIOT Act. These proposed and
interim regulations would require financial institutions to adopt the policies and procedures contemplated by the USA PATRIOT Act.
Sarbanes-Oxley Act
of 2002
The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate accountability in connection with
certain accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the Securities and Exchange
Commission, under the Securities Exchange Act of 1934.
The Sarbanes-Oxley Act includes very specific additional disclosure requirements
and new corporate governance rules requiring the Securities and Exchange Commission and national securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of
certain issues by the Securities and Exchange Commission. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state
corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.
Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the regulations that have been promulgated to implement the Sarbanes-Oxley Act, management does not expect that such
compliance will have a material impact on our results of operations or financial condition.
Holding Company Regulation
General
.
Putnam Bancorp, MHC and PSB Holdings, Inc. are nondiversified savings and loan holding companies within the meaning of
the Home Owners Loan Act. As such, Putnam Bancorp, MHC and PSB Holdings, Inc. are registered with the Office of Thrift Supervision and are subject to Office of Thrift Supervision regulations, examinations, supervision and reporting
requirements. In addition, the Office of Thrift Supervision has enforcement authority over PSB Holdings, Inc. and Putnam Bancorp, MHC, and their subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to
restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. As federal corporations, PSB Holdings, Inc. and Putnam Bancorp, MHC are generally not subject to state business organization laws.
Permitted Activities
.
Pursuant to Section 10(o) of the Home Owners Loan Act and Office of Thrift
Supervision regulations and policy, a mutual holding company and a federally chartered mid-tier holding company such as PSB Holdings, Inc. may engage in the following activities: (i) investing in the stock of a savings association;
(ii) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding
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company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) investing in a
corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director of the Office of Thrift Supervision, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in
which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; (x) any activity permissible for financial holding companies under Section 4(k) of the Bank Holding Company
Act, including securities and insurance underwriting; and (xi) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved
by the Director. If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in
(i) through (xi) above, and has a period of two years to cease any nonconforming activities and divest any nonconforming investments.
The Home Owners Loan Act prohibits a savings and loan holding company, including PSB Holdings, Inc. and Putnam Bancorp, MHC, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another
savings institution or holding company thereof, without prior written approval of the Office of Thrift Supervision. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in
activities other than those permitted by the Home Owners Loan Act, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Office
of Thrift Supervision must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the
community and competitive factors.
The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the
acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company
acquisitions.
Waivers of Dividends by Putnam Bancorp, MHC
.
Office of Thrift Supervision regulations require Putnam
Bancorp, MHC to notify the Office of Thrift Supervision of any proposed waiver of its receipt of dividends from PSB Holdings, Inc. The Office of Thrift Supervision reviews dividend waiver notices on a case- by-case basis, and, in general, does
not object to any such waiver if: (i) the mutual holding companys board of directors determines that such waiver is consistent with such directors fiduciary duties to the mutual holding companys members; (ii) for as long
as the savings association subsidiary is controlled by the mutual holding company, the dollar amount of dividends waived by the mutual holding company is considered as a restriction on the retained earnings of the savings association, which
restriction, if material, is disclosed in the public financial statements of the savings association as a note to the financial statements; (iii) the amount of any dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with SFAS 5, where the savings association determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded as a
liability; and (iv) the amount of any waived dividend is considered as having been paid by the savings association in evaluating any proposed dividend under Office of Thrift Supervision capital distribution regulations. Except for the receipt
of $50,000, Putnam Bancorp, MHC has waived all dividends paid by PSB Holdings, Inc. and is expected to do so in the
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future. Under Office of Thrift Supervision regulations, our public stockholders would not be diluted because of any dividends waived by Putnam Bancorp, MHC
(and waived dividends would not be considered in determining an appropriate exchange ratio) in the event Putnam Bancorp, MHC converts to stock form.
Conversion of Putnam Bancorp, MHC to Stock Form
.
Office of Thrift Supervision regulations permit Putnam Bancorp, MHC to convert from the mutual form of organization to the capital stock form of
organization (a Conversion Transaction). There can be no assurance when, if ever, a Conversion Transaction will occur, and the Board of Directors has no current intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new stock holding company would be formed as the successor to PSB Holdings, Inc. (the New Holding Company), Putnam Bancorp, MHCs corporate existence would end, and certain depositors of Putnam Savings Bank would
receive the right to subscribe for additional shares of the New Holding Company. In a Conversion Transaction, each share of common stock held by stockholders other than Putnam Bancorp, MHC (Minority Stockholders) would be automatically
converted into a number of shares of common stock of the New Holding Company determined pursuant to an exchange ratio that ensures that Minority Stockholders own the same percentage of common stock in the New Holding Company as they owned in PSB
Holdings, Inc. immediately prior to the Conversion Transaction. Under Office of Thrift Supervision regulations, Minority Stockholders would not be diluted because of any dividends waived by Putnam Bancorp, MHC (and waived dividends would not be
considered in determining an appropriate exchange ratio), in the event Putnam Bancorp, MHC converts to stock form. The total number of shares held by Minority Stockholders after a Conversion Transaction also would be increased by any purchases by
Minority Stockholders in the stock offering conducted as part of the Conversion Transaction.
Federal Securities Laws
PSB Holdings, Inc. common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. PSB
Holdings, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
PSB Holdings, Inc. common stock held by persons who are affiliates (generally officers, directors and principal shareholders) of PSB Holdings, Inc. may not be resold without registration or unless sold in accordance
with certain resale restrictions. If PSB Holdings, Inc. meets specified current public information requirements, each affiliate of PSB Holdings, Inc. is able to sell in the public market, without registration, a limited number of shares in any
three-month period.
Reports to Security Holders
PSB Holdings, Inc. files annual and quarterly reports with the SEC on Forms 10-KSB and 10-QSB, respectively. PSB Holdings, Inc. also files current reports on the Form 8-K with the SEC. Finally, PSB Holdings, Inc.
files preliminary and definitive proxy materials with the SEC.
The public may read and copy any materials filed by PSB Holdings, Inc. with
the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. PSB Holdings, Inc. is an electronic
filer. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the site is http://www.sec.gov.