U.S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

|(Mark one)                                                                                   |                                                                                                            
|-------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------
|ý                                                                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934,                      
|for the fiscal year ended December 31, 2003,                                                
|or                                                                                          
|o                                                                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required),
|for the transition period
from                             to           
                  .

Commission file number: 000-24601

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PSB BANCORP, INC.(Exact name of registrant as specified in its charter)

|Pennsylvania(State or other jurisdiction of
incorporation or organization)              |  | 23-2930740(I.R.S. Employer
Identification No.)
|--------------------------------------------------------------------------------------- |  | ----------------------------------------------
|1835 Market Street
Philadelphia, PA 19103(Address of principal executive offices)      
|(215) 979-7900Registrant's telephone number, including area code:                      
|SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None                       
|SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock (no par value)

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Indicate by checkmark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. ý

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the
Act). Yes o    No ý

As of June 30, 2003 the aggregate market value of the 4,534,611 shares of voting and non-voting common equity of the Registrant outstanding on
such date, held by non-affiliates of the Registrant, was approximately $29,210,987. This figure is based on the last known sales price, prior to July 1, 2003, reported to the
Registrant of $7.60 per share for Common Stock. Although directors, officers and five percent beneficial owners of the Registrant were assumed to be "affiliates" of the Registrant for purposes of this
calculation, the classification is not to be interpreted as an admission of such status.

Documents
incorporated by reference: None



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PSB BANCORP, INC.    FORM 10-KFor the Year Ended December 31, 2003TABLE OF CONTENTS

|PART I   |          | 1 
|-------- | -------- | --
|         | ITEM 1.  |   
|         | ITEM 2.  |   
|         | ITEM 3.  |   
|         | ITEM 4.  |   
|PART II  |          | 7 
|         | ITEM 5.  |   
|         | ITEM 6.  |   
|         | ITEM 7.  |   
|         | ITEM 7A. |   
|         | ITEM 8.  |   
|         | ITEM 9.  |   
|         | ITEM 9A. |   
|PART III |          | 33
|         | ITEM 10. |   
|         | ITEM 11. |   
|         | ITEM 12. |   
|         | ITEM 13. |   
|         | ITEM 14. |   
|PART IV  |          | 34
|         | ITEM 15. |   

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PART I

ITEM 1. BUSINESS

PSB Bancorp, Inc. ("PSB") was organized as a Pennsylvania business corporation on October 3, 1997 for the purpose of becoming a holding company for
First Penn Bank (the "Bank"). PSB is subject to regulation by the Federal Reserve Bank of Philadelphia, and its principal business is the ownership of First Penn Bank. At December 31, 2003, PSB
had total assets of $470.3 million, total deposits of $416.2 million and shareholders' equity of $47.1 million.

On
October 12, 1999, PSB completed its acquisition of First Bank of Philadelphia. In connection with the acquisition, each outstanding share of First Bank of Philadelphia was
exchanged for .857 shares of PSB common stock ("Common Stock"). In addition, options to acquire 1,612,500 shares of First Bank of Philadelphia were converted into options to acquire 1,381,912 shares
of Common Stock. Subsequent to the conversion of the options, 1,371,200 of the original First Bank of Philadelphia options were deemed by PSB to be invalid and were voided. Certain of the purported
optionholders are contesting this determination. See "Legal Proceedings."

As
part of the transaction, PSB merged Pennsylvania Savings Bank, which held a state savings bank charter, with and into First Bank of Philadelphia, which held a state commercial bank
charter. The resulting operating subsidiary operates under the name First Penn Bank and holds a state commercial bank charter. This provides the Bank with greater lending flexibility.

On
June 29, 2001, PSB acquired Jade Financial Corp. ("Jade") and its wholly-owned subsidiary, IGA Federal Savings Bank ("IGA"), in a cash transaction valued at approximately
$25 million. As part of that transaction, IGA, which held a federal thrift charter, was merged with and into the Bank. The Bank operates 12 full-service offices, eight of the
offices are located in Philadelphia, Pennsylvania, one office is located in Montgomery County, Pennsylvania, one office in Bucks County, Pennsylvania, one office in Delaware County, Pennsylvania and
one office in Chester County, Pennsylvania. The Bank plans to open a new branch office in the Chinatown section of Philadelphia, Pennsylvania in 2004.

The
Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area and investing the deposits in loans secured by residential mortgage
loans, commercial real estate loans, commercial business loans, construction loans, student loans, and mortgage-backed securities. The Bank's deposits are insured by the Savings Association Insurance
Fund of the FDIC to the extent that such deposits were assumed from the mutual savings bank in the 1995 mutual holding company reorganization or in connection with the acquisition of IGA. Deposits
accepted by the Bank after the mutual holding company reorganization or as a result of the acquisition of First Bank of Philadelphia are insured by the FDIC's Bank Insurance Fund.

Historically,
the Bank focused its lending activities primarily on the origination of loans secured by first mortgages on owner-occupied, one- to four-family
residences for retention in the Bank's portfolio. As part of a strategy to diversify its loan portfolio, achieve a higher net interest margin, and reduce interest rate risk, the Bank has increased its
origination of construction loans, commercial real estate loans, commercial business loans, multifamily real estate loans, consumer loans, and student loans. The Bank is continuing to pursue its
strategy of increasing its concentration in commercial lending.

The
addition of the IGA loan portfolio with a high concentration of consumer loans, particularly automobile and personal loans has helped diversify the Bank's loan portfolio. The
acquisition of IGA also provided the Bank with an additional five branch offices in Philadelphia and the counties surrounding the Philadelphia metropolitan area which increased the Bank's geographical
reach and provided access to a larger customer base.

Through
the Bank's subsidiary, Transnational Mortgage Company, the Bank has conducted a mortgage banking operation since 1989. Mortgage banking consists primarily of the origination,

1

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purchase,
sale, and servicing of first mortgage loans secured by one- to four-family homes. Such loans are sold either as individual loans, as mortgage-backed securities, or as
participation certificates issued or guaranteed by FNMA, GNMA or FHLMC. Loans may be sold either on a servicing retained or servicing released basis.

First
Penn Bank's principal sources of funds are deposits and the principal and interest payments on loans, investment securities, and mortgage-backed securities. The Bank has available
credit with the Federal Home Loan Bank of Pittsburgh ("FHLB"). At December 31, 2003, the Bank had no advances outstanding with the FHLB. The Bank's principal source of income is interest
received from loans, investment securities and mortgage-backed securities. The Bank's principal expenses are the interest paid on deposits and borrowings and the cost of employee compensation and
benefits.

BUSINESS STRATEGY

PSB's strategy is to maximize profitability by providing quality deposit and loan products in an efficient manner. Generally, PSB seeks to implement this strategy
by emphasizing retail deposits as its primary source of funds and by maintaining a substantial part of its assets in locally-originated residential first mortgage, commercial real estate loans,
commercial business loans, construction loans, student loans, mortgage-backed securities, and other liquid investment securities. PSB's business strategy incorporates the following elements:
(1) increasing deposits by expanding its retail branch network to include other contiguous segments of the metropolitan Philadelphia market, (2) expanding its lending operations
throughout the metropolitan Philadelphia area and the adjacent counties of Pennsylvania, New Jersey, and Delaware, and (3) increasing net interest income and reducing interest rate risk by
emphasizing primarily the origination of commercial real estate, construction, commercial business loans, and consumer loans that generally bear higher interest rates and have shorter terms than
residential mortgage loans.

SUBSIDIARIES

PSB has three subsidiaries: First Penn Bank, Jade Abstract Company, and Jade Insurance Company. Jade Abstract Company is engaged in the business of issuing title
insurance for residential and commercial real estate properties. Jade Insurance Company is an inactive corporation that was formed by Jade to act as an insurance agency. First Penn Bank owns four
subsidiaries as follows: Transnational Mortgage Company is engaged in a mortgage banking business, PSA Service Corp. conducts real estate appraisals, processes credit applications and provides other
services in connection with the origination of loans, PSA Financial Corp. primarily originates business loans and commercial real estate loans, First Penn Bank Revocable Trust is the owner and
beneficiary of life insurance policies purchased by the trust on a select group of employees. PSA Financial Corp.'s as wholly-owned subsidiary, PSA Consumer Discount Company, primarily originates
consumer loans.

PERSONNEL

As of December 31, 2003, PSB and the Bank had 160 full-time and equivalent part-time employees. The Bank is not a party to any
collective bargaining agreements.

COMPETITION

In the Philadelphia metropolitan market area, the banking business is highly competitive. The Bank competes with local commercial banks as well as numerous
regional commercial banks that have assets, capital, and lending limits significantly larger than those of the Bank. The Bank also competes with thrift institutions, savings institutions, credit
unions, issuers of commercial paper and other securities, and other non-depository institutions. The Bank seeks to be competitive with respect to interest rates paid and charged, and for
service charges on customer accounts. Among the additional

2

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advantages
many of the Bank's competitors have over the Bank in addition to larger asset and capital bases, are the ability to finance wide-ranging advertising campaigns and to allocate
their deposits and other funding to the geographic regions offering highest yield and demand. Many international banking services are indirectly offered by the Bank's competitors through correspondent
relationships. By virtue of their greater capital base, most competitors have a substantially higher lending limit than the Bank. Although the Bank is at some disadvantage when competing with larger
banks, the Bank believes that its philosophy of providing high-quality service to small and mid-size customers offsets much of the bigger banks' advantages and provides a
unique opportunity to provide growth for the Bank.

REGULATION OF FIRST PENN BANK

As a state-chartered bank, the Bank is subject to regulation, supervision, and regular examination by the Pennsylvania Department of Banking (the "Department")
and is subject to the applicable provisions of the Pennsylvania Banking Code of 1965, as amended (the "Banking Code"). The Bank is a member of the Federal Reserve System and is subject to regulation,
supervision, reporting requirements, and regular examinations by the Federal Reserve Board. In addition, the Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to
a maximum of $100,000 per insured account holder. Some aspects of the lending and deposit business that are regulated by the Federal Reserve Board and the FDIC include personal lending, commercial
lending, mortgage lending, reserve requirements against certain deposit and loan accounts and the maintenance of the requisite capital to asset ratios. The Bank is also subject to numerous federal,
state, and local laws and regulations that set forth specific restrictions and procedural requirements with respect to the extension of credit, credit practices, the disclosure of credit terms, and
discrimination in credit transactions. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to changes in
federal and state legislation and regulation that may negatively affect the cost of doing business.

In
December of 1992, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. Among other things, FDICIA provided increased funding for the FDIC Bank
Insurance Fund ("BIF") and provides for expanded regulation of depository institutions and their
affiliates, including parent holding companies. FDICIA provides the federal banking agencies with broad powers to take corrective action to resolve problems of insured depository institutions. The
extent of these powers depends upon whether the institutions in question are categorized as "well-capitalized," "adequately-capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized." A depository institution's capital tier will depend upon where its capital levels are in relation to various relevant capital measures, which will
include risk-based capital measures, a leverage ratio, and certain other factors. A bank is deemed to be "well-capitalized" if it has a total risk-based capital
ratio of 10.0% or greater, a tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater. At December 31, 2003, First Penn Bank was
"well-capitalized" under these regulations.

REGULATION OF PSB

PSB is a bank holding company subject to supervision and regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended. As a bank
holding company, PSB's activities and those of its subsidiaries are limited to the business of banking and activities closely related or incidental to banking, and PSB may not directly or indirectly
acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, without prior approval of the Federal Reserve.

Under
Federal Reserve policy, PSB is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank, i.e., to downstream funds to the Bank. Any
capital loans by PSB to the Bank are subordinate in right of payment to deposits and to certain other indebtedness

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of
the Bank. In the event of PSB's bankruptcy, any commitment by PSB to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.

PSB
is subject to restrictions under federal law that limit its ability to receive funds from the Bank, whether in the form of loans, other extensions of credit, investments, or asset
purchases. Such transfers by the Bank to PSB are generally limited in amount to 10% of the Bank's capital and surplus. Furthermore, any loans or extensions of credit are required to be secured in
specific amounts, and all transactions are required to be on an arm's length basis. The Bank has never made any loan or extension of credit to PSB nor has it purchased any assets from PSB.

SARBANES-OXLEY ACT OF 2002

On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002. The stated goals of this sweeping legislation are to enhance penalties for
accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws. The
Sarbanes-Oxley Act generally applies to all companies, including PSB, that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act
of 1934 (the "Exchange Act"). The legislation includes provisions, among other things, governing the services that can be provided by a public company's independent auditors and the procedures for
approving such services, requiring the chief executive officer and chief financial officer to certify certain matters relating to PSB's periodic filings under the Exchange Act, requiring expedited
filings of reports by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical
financial accounting policies and their application, increasing penalties for securities law violations, and creating a new public accounting oversight board, a regulatory body subject to SEC
jurisdiction with broad powers to set auditing, quality control and ethics standards for accounting firms. The legislation also required the national securities exchanges and Nasdaq to adopt rules
relating to certain matters, including the independence of members of a company's audit committee as a condition to listing or continued listing.

NATIONAL MONETARY POLICY

As previously indicated, the earnings and growth of the Bank are, and will continue to be, affected by the policies of the regulatory authorities, including the
Pennsylvania Department of Banking, the Federal Reserve, and the FDIC. In addition to the supervisory and regulatory duties as they relate to the operation of a bank, the Federal Reserve is also
responsible for the regulation of the United States money supply and certain credit conditions. Among the means available to the Federal Reserve to implement their objectives are open market
operations in U.S. government securities, establishing the interest rate on temporary loans made to banks (i.e., the discount rate), and other measures. Alternatives to controlling economic conditions
are used in varying combinations to influence overall growth and credit distribution, lending, investing, and savings. The effect of these various controlling influences may affect interest rates
charged on loans or paid on deposits. Bank profitability is significantly dependent on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and
borrowed money and the interest received by a bank on securities held in its investment portfolio, and loans originated and maintained by the bank comprise the major portion of a bank's earnings.
Thus, the earnings and growth of a bank will be subject to the influence of economic conditions, both domestic and foreign, and on the levels of and changes in interest rates. The monetary policies
and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such
policies upon the future business, earnings and growth of the Bank cannot be predicted.

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DIVIDEND LIMITATIONS

The Banking Code provides that cash dividends may be declared and paid only out of accumulated net earnings and that, prior to the declaration of any dividend, if
the surplus of the Bank is less than the amount of its capital, the Bank shall, until the surplus is equal to such amount, transfer to surplus an amount which is at least 10% of the net earnings of
the Bank for the period since the end of the last fiscal year or for any shorter period since the declaration of a dividend. If the surplus of the Bank is less than 50% of the amount of the capital,
no dividend may be declared or paid without the prior approval of the PDOB until the surplus is equal to 50% of the Bank's capital. Additionally, the PDOB has the power to issue orders prohibiting the
payment of dividends where such payment is deemed to be an unsafe or unsound banking practice.

Under
the Federal Reserve Act ("FRA"), as amended, if losses have at any time been sustained by the Bank, equal to or exceeding its undivided profits then on hand, no dividend shall be
made; and no dividends shall ever be made in an amount greater than the Bank's net profits. Cash dividends must be approved by the Federal Reserve, if the total of all cash dividends declared by the
Bank in any calendar year, including the proposed cash dividend, exceeds the total of the Bank's net profits for that year plus its retained net profits from the preceding two years less any required
transfers to surplus or a fund for the retirement of preferred stock, if any. The Federal Reserve has the authority under the FRA to prohibit the payment of cash dividends by a bank when it determines
such payment to be an "unsafe and unsound banking practice" under the existing circumstances. (See Financial StatementsRegulatory MattersNote P.)

TRANSACTIONS WITH AFFILIATES

Extensions of credit by the Bank to executive officers, trustees, and principal shareholders and related interests of such persons are subject to Sections 22(g)
and 22(h) of the FRA and the Federal Reserve's Regulation O. These rules limit the aggregate amount of loans to any such individual and their related interests, and require that all such loans
be pre-approved by the full board of directors of the Bank, voting without such person being present. These rules also provide that no institution shall make any loan or extension of
credit in any manner to any of such persons, unless such loan or extension of credit is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, does not involve more than the normal risk of repayment or present other unfavorable features, and the institution follows underwriting procedures that
are not less stringent than those applicable to comparable transactions by the institution with persons who are not executive officers, directors, principal shareholders, or employees of the
institution. Loans can be made to employees, including executives and directors, on more favorable terms than to the general public, if all employees are eligible for such preferential terms.
Regulation O also sets forth additional limitations on extensions of credit by an institution to its executive officers. Management believes that the Bank is in compliance with
Sections 22(g) and 22(h) of the FRA and the Federal Reserve's Regulation O.

ITEM 2. PROPERTIES

As of December 31, 2003, the Bank conducted its business through an executive/ administrative office and 12 full-service branch offices. The
aggregate net book value of the Bank's office premises and equipment was $2.9 million as of December 31, 2003. Seven of the branches are owned and five are leased. The Bank is leasing
its center city Philadelphia, Pennsylvania full-service office and executive office for a term of 11 years, its 1632 Walnut Street, Philadelphia, Pennsylvania office for ten years,
its Media, Pennsylvania office for a term of four years, its Chesterbrook, Pennsylvania office for a term of five years, and its 23rd Street, Philadelphia, Pennsylvania office, on a month to month
basis.

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ITEM 3. LEGAL PROCEEDINGS

In the fourth quarter of 2001, PSB declared 1,371,200 options previously issued by First Bank of Philadelphia to be void because PSB believes, among other
reasons, that these options were unlawfully and improperly granted.

On
March 6, 2002, certain of the purported option holders brought an action in United States District Court for the Eastern District of Pennsylvania to have the voided options
declared valid and enforceable, or, alternatively, seeking aggregate damages of not less than $4.3 million.

Subsequent Events

On March 31, 2004, the U.S. District Court for the Eastern District of Pennsylvania (the "Court") granted the plaintiffs' motion for summary judgment in an
action in which the plaintiffs seek to have certain stock options, previously voided by PSB Bancorp, Inc., to be declared enforceable. PSB will appeal the court's decision. If on appeal, the motion is
upheld, the aggregate number of shares underlying outstanding stock options would change from 308,315 shares to 1,203,550 shares. This action only effects 895,240 of the 1,371,200 options previously
declared void by PSB.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

PSB's 2003 annual meeting of shareholders was held on December 5, 2003. The following matters were voted upon and approved or rejected by the vote
indicated.

Matter No. 1

The
election of three Class II directors to hold office for three years from the date of election and until their successors are elected and qualified:

Nominee

Voting ResultsJames W. Eastwood

For:

3,795,481Withheld:

583,456Stephen Marcus

For:

3,795,681Withheld:

583,756Dennis P. Wesley

For:

3,798,567Withheld:

580,870


Matter No. 2

Shareholder
proposal to engage an investment banker to explore a sale or merger of PSB:

For:

870,517Against:

1,936,265Abstain:

20,229Broker Non-vote:

1,549,764


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PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The common stock of PSB is traded over-the-counter on the National Association of Securities Dealers Automated Quotation System ("Nasdaq")
under the symbol "PSBI." The following table sets forth the high and low bid prices for PSB's common stock, as reported by Nasdaq. The following quotes reflect inter-dealer prices without retail
mark-up, markdown, or commission and may not necessarily represent actual transactions. As the table indicates, PSB did not declare any cash dividends for the periods indicated.

|               |  | 2003
Bid Prices |  | 2002
Bid Prices |  |     
|-------------- |  | --------------- |  | --------------- |  | ----
|
|
|First Quarter  |  | 7.50            |  | 6.62            |  | 7.50
|Second Quarter |  | 7.85            |  | 6.82            |  | 7.80
|Third Quarter  |  | 8.30            |  | 7.20            |  | 6.72
|Fourth Quarter |  | 10.74           |  | 8.36            |  | 7.46

As
of March 30, 2004, PSB's Common Stock was held by 458 holders of record.

The
following chart presents summary information with respect to all of PSB's and First Penn Bank's equity compensation plans in effect as of the date of this report.

Equity Compensation Plan Information

|Plan category                                              |       | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights |         | Weighted-average exercise
price of outstanding
options, warrants and
rights |      | Number of securities
remaining available for
future issuance under
equity compensation plan
(excluding securities
reflected in column 9a))
|---------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------- | ------- | --------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------
|
|Equity compensation plan approved by security holders      |       | 283,316                                                                                     |         | $                                                                           | 5.45 |                                                                                                                                           
|                                                           |       |                                                                                             |         |                                                                             |      |                                                                                                                                           
|Equity compensation plans not approved by security holders |       | 24,999                                                                                      |         | $                                                                           | 4.75 |                                                                                                                                           
|                                                           |       |                                                                                             |         |                                                                             |      |                                                                                                                                           
|                                                           | Total |                                                                                             | 308,315 |                                                                             | $    | 5.39                                                                                                                                      
|                                                           |       |                                                                                             |         |                                                                             |      |                                                                                                                                           

The
1999 Director Stock Option Plan (the "1999 Plan") included in this chart was the only equity compensation plan adopted without shareholder approval. The 1999 Plan was adopted by the
Board of Directors to provide an incentive program to attract and retain qualified individuals as directors on both the boards of PSB and the Bank. Grants under the 1999 Plan can only be made to
non-employee directors of PSB or the Bank and are limited to grants totaling 24,999 options.

7

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial and operating information set forth below should be read in conjunction with "Management's Discussion and Analysis of the Financial
Condition and Results of Operations" of PSB and the financial statements of PSB included elsewhere herein (Dollars in thousands, except for per share data.)

|                                                             |  | 2003 |         | 2002 |   | 2001    |   | 2000 |         | 1999 |  
|------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | -
|BALANCE SHEET DATA                                           |  |      |         |      |   |         |   |      |         |      |  
|Total assets                                                 |  | $    | 470,330 |      | $ | 496,780 |   | $    | 467,644 |      | $
|Cash and cash equivalents                                    |  |      | 52,408  |      |   | 110,269 |   |      | 54,756  |      |  
|Loans receivable, net                                        |  |      | 237,383 |      |   | 288,630 |   |      | 297,180 |      |  
|Loans held-for-sale                                          |  |      | 51,859  |      |   | 18,855  |   |      | 17,142  |      |  
|Investment securities available for sale                     |  |      | 102,882 |      |   | 49,730  |   |      | 69,934  |      |  
|Investment securities held to maturity                       |  |      | 775     |      |   | 6,468   |   |      | 2,310   |      |  
|Deposits                                                     |  |      | 416,160 |      |   | 442,224 |   |      | 404,560 |      |  
|Shareholders' equity                                         |  |      | 47,123  |      |   | 46,167  |   |      | 41,415  |      |  
|Book value per share                                         |  | $    | 10.39   |      | $ | 9.81    |   | $    | 9.13    |      | $
|SUMMARY STATEMENT OF OPERATIONS                              |  |      |         |      |   |         |   |      |         |      |  
|Interest income                                              |  | $    | 28,327  |      | $ | 31,698  |   | $    | 26,928  |      | $
|Interest expense                                             |  |      | 9,575   |      |   | 13,252  |   |      | 14,011  |      |  
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|Net interest income                                          |  |      | 18,752  |      |   | 18,446  |   |      | 12,917  |      |  
|Provision for loan losses                                    |  |      | 45      |      |   | 1,437   |   |      | 270     |      |  
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|Net interest income after provision for loan losses          |  |      | 18,707  |      |   | 17,009  |   |      | 12,647  |      |  
|Non-interest income                                          |  |      | 2,168   |      |   | 3,081   |   |      | 1,554   |      |  
|Non-interest expense                                         |  |      | 17,846  |      |   | 17,052  |   |      | 10,240  |      |  
|Loss on investment in Iron Bridge Holdings, Inc.             |  |      | 0       |      |   | 32      |   |      | 154     |      |  
|Loss on investment in ZipFinancial.com, Inc.                 |  |      | 0       |      |   | 0       |   |      | 0       |      |  
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|Income before income taxes                                   |  |      | 3,029   |      |   | 3,006   |   |      | 3,807   |      |  
|Income tax provision                                         |  |      | 1,024   |      |   | 1,189   |   |      | 755     |      |  
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|Income before cumulative effect of accounting change         |  |      | 2,005   |      |   | 1,817   |   |      | 3,502   |      |  
|Cumulative effect of accounting change                       |  |      | 0       |      |   | 1,329   |   |      | 0       |      |  
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|Net income                                                   |  | $    | 2,005   |      | $ | 3,146   |   | $    | 3,052   |      | $
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|PER SHARE DATA                                               |  |      |         |      |   |         |   |      |         |      |  
|Income before cumulative effect of accounting changebasic   |  | $    | 0.47    |      | $ | 0.43    |   | $    | 0.73    |      | $
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|Income before cumulative effect of accounting changediluted |  | $    | 0.46    |      | $ | 0.42    |   | $    | 0.72    |      | $
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|Cumulative effect of accounting changebasic                 |  | $    |        |      | $ | 0.32    |   | $    |        |      | $
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|Cumulative effect of accounting changediluted               |  | $    |        |      | $ | 0.32    |   | $    |        |      | $
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|Net incomebasic                                             |  | $    | 0.47    |      | $ | 0.75    |   | $    | 0.73    |      | $
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|Net incomediluted                                           |  | $    | 0.46    |      | $ | 0.74    |   | $    | 0.72    |      | $
|                                                             |  |      |         |      |   |         |   |      |         |      |  
|PERFORMANCE DATA                                             |  |      |         |      |   |         |   |      |         |      |  
|Return on average assets                                     |  |      | 0.41    | %    |   | 0.65    | % |      | 0.73    | %    |  
|Return on average equity                                     |  |      | 4.28    | %    |   | 7.07    | % |      | 7.75    | %    |  
|Equity to assets                                             |  |      | 9.66    | %    |   | 9.14    | % |      | 9.36    | %    |  
|Interest rate spread                                         |  |      | 3.83    | %    |   | 3.80    | % |      | 2.80    | %    |  
|                                                             |  |      |         |      |   |         |   |      |         |      |  

8

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|ASSET QUALITY DATA                                                               |  |   |       |   |   |       |   |   |       |   |   |       |   |   |       |  
|-------------------------------------------------------------------------------- |  | - | ----- | - | - | ----- | - | - | ----- | - | - | ----- | - | - | ----- | -
|Non-performing loans to total loans                                              |  |   | 2.16  | % |   | 1.53  | % |   | 1.37  | % |   | 2.10  | % |   | 1.21  | %
|Non-performing assets to total assets                                            |  |   | 1.19  | % |   | 0.98  | % |   | 1.00  | % |   | 1.63  | % |   | 1.11  | %
|Allowance for loan losses to total loans                                         |  |   | 1.28  | % |   | 1.23  | % |   | 0.95  | % |   | 0.91  | % |   | 0.73  | %
|Allowance for loan losses to non-performing loans                                |  |   | 58.99 | % |   | 80.42 | % |   | 69.52 | % |   | 43.59 | % |   | 59.70 | %
|Allowance for loan losses to non-performing assets                               |  |   | 55.03 | % |   | 74.11 | % |   | 61.37 | % |   | 32.58 | % |   | 39.60 | %
|Net charge-offs as a percentage of total loans                                   |  |   | 0.24  | % |   | 0.24  | % |   | 0.21  | % |   |      |   |   |      |  
|Loans past due 90 days or more as to interest or principal and accruing interest |  |   |      |   |   |      |   |   |      |   |   |      |   |   | 180   |  
|Non-accrual loans                                                                |  | $ | 5,203 |   | $ | 4,480 |   | $ | 4,130 |   | $ | 3,095 |   | $ | 1,882 |  
|                                                                                 |  |   |       |   |   |       |   |   |       |   |  
|Total non-performing loans                                                       |  |   | 5,203 |   |   | 4,480 |   |   | 4,130 |   |   | 3,095 |   |   | 2,062 |  
|Real estate owned (REO)                                                          |  |   | 374   |   |   | 382   |   |   | 548   |   |   | 1,046 |   |   | 1,047 |  
|                                                                                 |  |   |       |   |   |       |   |   |       |   |  
|Total non-performing assets                                                      |  | $ | 5,577 |   | $ | 4,862 |   | $ | 4,678 |   | $ | 4,141 |   | $ | 3,109 |  
|                                                                                 |  |   |       |   |   |       |   |   |       |   |  

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of operations of PSB should be read in conjunction with the consolidated financial
statements of PSB, including the related notes thereto, included elsewhere herein.

GENERAL

PSB's results of operations depend primarily on the Bank's net interest income, which is the difference between interest income on interest-earning assets, and
interest expense on its interest-bearing liabilities. Its interest-earning assets consist primarily of loans receivable, investment securities, and interest earning deposits while its interest-bearing
liabilities consist primarily of deposits. The Bank's net income is also affected by its provision for loan losses and its level of non-interest income as well as by its
non-interest expense, such as salary and employee benefits, occupancy costs, and charges relating to non-performing and other classified assets.

IMPACT OF INFLATION

The financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles which require
the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact
of inflation on the operation of the Bank is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of inflation. Interest rates do not necessarily move in the
same direction or in the same magnitude as the price of goods and services.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies of the Company and its subsidiaries conform with accounting principles generally accepted in the United States of America
(US GAAP) applicable to the financial services industry. All significant inter-company transactions are eliminated in consolidated and certain reclassifications are made when necessary to conform with
the previous year's financial statements to the current year's presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect
the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ significantly from
those estimates.

9

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Allowance
For Credit LossesPSB uses the reserve method of accounting for credit losses. The balance in the allowance for loan losses is determined based on management's
review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors,
including management's assumptions as to future delinquencies, recoveries and losses. Increases to the allowance for loan and lease losses are made by charges to the provision for loan losses. Credit
exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses. While
management considers the allowance for loan and lease losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic
conditions or management's assumptions as to future delinquencies, recoveries and losses and management's intent with regard to the disposition of loans and leases. In addition, the regulators, as an
integral part of their examination process, periodically review PSB's allowance for loan losses. The regulators may require the Bank to recognize additions to the allowance for loan losses based on
their judgments about information available to them at the time of their examination.

Income
TaxesUnder the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets
and liabilities. Based upon the review of all components of the deferred tax assets and liabilities, future taxable income of PSB and regulatory guidelines, management has determined that no allowance
is deemed necessary at December 31, 2003. However, circumstances could arise that would require management to revisit the need for such an allowance.

PERFORMANCE OVERVIEW

PSB's net income for 2003 was $2.0 million or $0.46 on a diluted per share basis, compared to net income of $3.1 million or $0.74 per diluted share
for 2002 after the cumulative effect of an accounting change (net income of $1.3 million or $0.32 per diluted share prior to the cumulative effect of an accounting change) and net income of
$3.1 million or $0.72 per diluted share for 2001. The increase in earnings for 2003 was principally caused by the Bank's decision to allow some deposit run off which substantially decreased the
Bank's interest expense.

Upon
adoption of SFAS No. 142, on January 1, 2002, after the revaluation of certain deferred assets relating to the acquisition of Jade, PSB recognized a cumulative
effect of an accounting change of $1.3 million which represented the remaining unamortized portion of negative goodwill related to the Jade acquisition.

10

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NET INTEREST INCOME AND AVERAGE BALANCES



Net interest income is the key component of the Bank's profitability structure and is managed in coordination with the Bank's interest rate sensitivity position.
Net interest income in 2003 of $18.8 million was $306,000 or 1.66% higher than 2002 net interest income of $18.4 million. In 2003 total interest income decreased $3.4 million or
10.63% to $28.3 million from $31.7 million in 2002. The Bank had a decrease in total interest expense in 2003 of $3.7 million.

The
Bank's net interest margin, net interest income divided by total average interest-earning assets, increased one basis point to 4.08% in 2003. The modest increase in 2003 is primarily
related to the decision to allow some of the Bank's higher rate deposits to run off, therefore decreasing the Bank's overall cost of funds and improving the net interest margin.

The
Bank's net interest spread, the difference between the yield on interest-earning assets and the rates paid on interest-bearing liabilities, increased three basis points for 2003 to
3.83% from 3.80% in 2002. During the twelve month period of 2003, the Bank experienced an overall decrease on the yield of its interest-earning assets of 84 basis points. In 2003, the rate paid by the
Bank on its interest-bearing liabilities decreased 87 basis points from 3.20% in 2002 to 2.33%. Because of the Bank's excellent liquidity position, it was able to decrease the rate paid on deposits
and allow some run off without affecting its ability to meet loan demand. The result was a modest increase in the interest rate spread and net interest margin and increased interest income.

At
December 31, 2003, the Bank's average loans were $289.7 million representing 63.0% of total interest-earning assets and provided a yield of 8.28% compared to average
loans of $320.0 million for 2002 which represented 70.55% of total assets and provided a yield of 8.25%. The three basis point increase in the yield on the loan portfolio in 2003 is almost
exclusively due to a $1.0 million facility fee related to a construction loan that was received in 2003.

Average
investments (including mortgage-backed securities) and interest-earning deposits with banks increased $36.8 million or 27.62% at December 31, 2003 to
$170.2 million compared to $133.4 million at December 31, 2002. The increase in 2003 in average investments and interest-earning deposits with banks is largely due to a decrease
in loan demand. Due to the declining interest rate environment, the Bank experienced a high volume of consumer and mortgage loan amortization that the Bank was unable to replace because of weak loan
demand. However, this run off of loans and lack of new loan demand did provide PSB the opportunity to increase its investments without endangering its liquidity position.

At
December 31, 2003, total average interest-bearing liabilities decreased $3.1 million or 0.74% to $411.0 million compared to $414.0 million at
December 31, 2002. Total interest expense decreased $3.7 million at December 31, 2003 to $9.6 million as compared to total interest expense of $13.3 million at
December 31, 2002. The decrease in the Bank's total average interest-bearing liabilities was caused by a decision by the Bank to allow some deposit run off. When coupled with an overall
decrease in the rates paid on interest-bearing liabilities this decision resulted in a lower aggregate cost of funds. The Bank's cost of funds over the last two years was 2.33% in 2003 and 3.20% in
2002.

AVERAGE BALANCE SHEETS AND RATE/YIELD ANALYSIS

Net interest income is affected by changes in both average interest rates and average volumes of interest-earning assets and interest-bearing liabilities. The
following table presents, on a tax equivalent basis, the average daily balances of assets, liabilities and shareholders' equity and the respective interest

11

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earned
or incurred on interest-earning assets and interest-bearing liabilities, as well as average rates for the period indicated:

|                                                                 |  | Year Ended December 31, |        
|---------------------------------------------------------------- |  | ----------------------- | -------
|
|
|
|ASSETS                                                           |  |                         |        
|Interest-earning assets:                                         |  |                         |        
|Interest-earning deposits                                        |  | $                       | 94,454 
|Investment securities(1)                                         |  |                         | 39,127 
|Mortgage-backed securities                                       |  |                         | 36,620 
|Net loans(2)                                                     |  |                         | 289,690
|                                                                 |  |                         |        
|Total interest-earning assets                                    |  | $                       | 459,891
|Noninterest-earning assets                                       |  |                         | 24,736 
|                                                                 |  |                         |        
|Total assets                                                     |  | $                       | 484,627
|                                                                 |  |                         |        
|LIABILITIES                                                      |  |                         |        
|Interest-bearing liabilities:                                    |  |                         |        
|Now checking accounts                                            |  | $                       | 22,680 
|Money market accounts                                            |  |                         | 72,356 
|Savings deposits                                                 |  |                         | 93,453 
|Certificates                                                     |  |                         | 221,377
|                                                                 |  |                         |        
|Total deposits                                                   |  | $                       | 409,866
|Borrowed money                                                   |  |                         | 1,092  
|                                                                 |  |                         |        
|Total interest-bearing liabilities                               |  | $                       | 410,958
|Noninterest-bearing liabilities                                  |  |                         | 26,843 
|                                                                 |  |                         |        
|Total liabilities                                                |  |                         | 437,801
|Retained earnings and shareholders' equity                       |  |                         | 46,826 
|                                                                 |  |                         |        
|Total liabilities and retained earnings and shareholders' equity |  | $                       | 484,627
|                                                                 |  |                         |        
|Net interest income                                              |  |                         |        
|Interest rate spread                                             |  |                         |        
|Net yield on interest-earning assets                             |  |                         |        
|Ratio of interest-earning assets to interest-bearing liabilities |  |                         |        

---

12

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The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Bank's
interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined
impact of changes in volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate (in thousands):

|                                     |  | 2003 versus 2002 |        | 2002 versus 2001 |  
|------------------------------------ |  | ---------------- | ------ | ---------------- | -
|
|
|Interest Income:                     |  |                  |        |                  |  
|Interest bearing deposits with banks |  | $                | 300    |                  | $
|Investment securities                |  |                  | 840    |                  |  
|Mortgage-backed securities           |  |                  | (1,032 | )                |  
|Loans                                |  |                  | (2,475 | )                |  
|                                     |  |                  |        |                  |  
|Total interest income                |  |                  | (2,367 | )                |  
|Interest Expense:                    |  |                  |        |                  |  
|Now checking accounts                |  |                  | 70     |                  |  
|Money market accounts                |  |                  | 149    |                  |  
|Savings accounts                     |  |                  | (34    | )                |  
|Certificates of deposit              |  |                  | (218   | )                |  
|Borrowings                           |  |                  | (305   | )                |  
|                                     |  |                  |        |                  |  
|Total interest expense               |  |                  | (338   | )                |  
|Net change in net interest income    |  | $                | (2,029 | )                | $
|                                     |  |                  |        |                  |  

PROVISION FOR LOAN LOSSES

The provision for loan losses represents the charge against earnings that is required to fund the allowance for loan losses. The Bank determines the level of the
allowance for loan losses through a regular review of the loan portfolio. Management's evaluation of the adequacy of the allowance for loan losses is based upon an examination of the portfolio as well
as such factors as declining trends, the volume of loan concentrations, adverse situations that may affect the borrower's ability to pay, prior loss experience within the portfolio, current economic
conditions and the results of the most recent regulatory examinations. The Bank allocated $45,000, $1.4 million and $270,000 as additions to the allowance for loan loss and had
charge-offs against the allowance of $762,000, $856,000 and $788,000 for the years ended December 31, 2003, 2002 and 2001, respectively. For 2003, management determined that, based
on stable economic conditions and a review of the specific factors affecting the allowance, only a minimal provision was required.

The
methodology for determining the adequacy of the allowance for loan loss considers both risk and economic factors. The analysis includes all types of loans, with the applied
methodology commensurate to the risk assessment for the portfolio and present economic conditions. The risk rating of the loan portfolio is updated quarterly by management and utilized for an overall
assessment of the loan loss reserve adequacy, the results of which are reported quarterly to the Board. The results of the assessment of the adequacy of the loan loss reserve, utilizing the risk
ratings and economic factors, receive the close attention of management on an ongoing basis, with appropriate revisions made to the methodology in accordance with regulatory standards, changes in
lending policies, economic/business conditions, past due/classified loans, quality of loan review, concentration of credit, and examination

13

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input.
It is important to note that an effective internal loan review function is an essential element in satisfactorily implementing the Bank's methodology.

Although
management utilizes its best judgment in providing for loan losses, there can be no assurance that the Bank will not have to increase its provision for loan losses in the future
as a result of possible future increases to its non-performing loans or for other reasons based on changes in facts and circumstances. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's allowance for loan losses and the carrying value of its non-performing assets. Such agencies may require the Bank
to recognize additions to its allowance for loan losses based on their judgments about information available to them at the time of their examination.

NON-INTEREST INCOME

The following table provides a summary of non-interest income, by category of income, for the three years ended December 31, 2003, 2002, and
2001 (in thousands):

Year Ended December 31,2003

2002

2001Service fees on deposit accounts

$
1,105

$
1,665

$
1,074Loss on write down of equity investment


(37
)

(32
)

(154
)Loss on sale of loans and real estate owned


(14
)

(16
)

(18
)Bank owned life insurance


504


560


310Other


610


904


342Total

$
2,168

$
3,081

$
1,554


The
major source of non-interest income is income from bank owned life insurance and service fees on deposit accounts. Non-interest income decreased $913,000 or
29.63% from $3.1 million in 2002 to $2.2 million in 2003. This decrease is primarily due the loss of a significant service fee relationship and the result of a Bank relationship program
where customer fees have been discounted in the current year.

NON-INTEREST EXPENSE

The following table provides a summary of non-interest expense, by category of expense, for the three years ended December 31, 2003, 2002 and
2001 (in thousands):

Year Ended December 31,2003

2002

2001Salaries and employee benefits

$
9,543

$
8,294

$
5,053Occupancy and equipment expense


2,086


1,932


1,154Professional services


1,046


1,062


385FDIC insurance expense


187


73


38General insurance


256


246


138Advertising


309


257


66Data processing


640


677


594Director fees


447


388


282Other operating expense


3,332


4,155


2,684Total

$
17,846

$
17,084

$
10,394


Total
non-interest expense for 2003 increased $762,000 or 4.46% to $17.8 million from $17.1 million in 2002. The increase in non-interest expense
for 2003 was primarily attributable to: (i) an

14

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increase
in salaries and employee benefits related to the staffing of a new credit administration department; (ii) the one-time expense of $750,000 incurred for severance payments
related to a management-restructuring plan that management initiated in the fourth quarter of 2003 as opposed to fiscal 2004. Management believes this restructuring plan will position the Bank for
increased profitability in 2004 and beyond; and (iii) increased FDIC insurance assessments and additional professional services because the Bank remains subject to a Memorandum of
Understanding. Total other expenses for 2003 decreased $823,000 or 19.8% to $3.3 million from $4.2 million in 2002. The decrease in other expenses for 2003 was primarily due to expenses
incurred in conjunction with the Bank's operating system conversion in 2002.

INCOME TAXES

PSB accounts for income taxes under the liability method specified by SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The principal types of accounts resulting in differences
between assets and liabilities for financial statement and tax return purposes are the allowance for loan losses, leased assets, deferred loan fees and compensation. PSB had an income tax provision of
$1.0 million, $1.2 million and $755,000 for the years ended December 31, 2003, 2002 and 2001, respectively. PSB had an effective tax rate of 33.81%, 29.55% and 24.7% for the years
ended December 31, 2003, 2002 and 2001.

LIQUIDITY AND INTEREST RATE SENSITIVITY

Integral to the management of PSB's balance sheet is the maintenance of adequate liquidity and the ability to evaluate and control interest rate risk. Liquidity
represents the ability to meet potential cash outflows resulting from deposit customers who need to withdraw funds or borrowers who need available credit. Interest rate sensitivity focuses on the
impact of fluctuating interest rates and the repricing characteristics of rate sensitive assets and liabilities on net interest income.

PSB's
asset/liability management committee monitors the level of short-term assets and liabilities to maintain an appropriate balance between liquidity, risk, and return.
Liquidity is derived from various sources that include increases in core deposits, sales of certificates of deposits, loan principal repayments, loan maturities, and cash received on maturities or
amortization of investment securities.

The
liquidity position of PSB is also strengthened by the availability of a $161.6 million credit facility with the FHLB. Advances are secured by FHLB stock and qualifying
mortgage loans. There were no advances outstanding against this line at December 31, 2003 or at December 31, 2002.

Management
anticipates utilizing its liquidity to increase its commercial lending portfolio during 2004. Additional liquidity has been utilized to increase PSB's investment securities
portfolio in accordance with current ALCO policies and procedures in an attempt to maximize the Bank's net interest margin.

Maximizing
cash flow over time is crucial to the maintenance of adequate liquidity. PSB's total cash flow is a product of its operating activities, investing activities and financing
activities. During the twelve month period ended December 31, 2003, net cash used in operating activities was $32.1 million,
compared to net cash provided by operating activities of $4.7 million for the same period of 2002. During 2003, net cash provided by investing activities was $948,000, compared to net cash
provided by investing activities of $25.0 million for the same period of 2002. Financing activities used cash of $26.7 million during the twelve months ended December 31, 2003,
compared to $25.7 million in net cash provided by financing activities for the same period of 2002. The net result of these items was a $57.9 million decrease in cash and cash
equivalents for the twelve month period ended December 31, 2003, compared to a $55.5 million increase in cash and cash equivalents for the same period of 2002. The decrease in cash and
cash equivalents in 2003 is primarily due to a decision by the Bank to use its excess liquidity to purchase investment securities in an effort to improve the Bank's net interest margin.

15

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Interest rate risk management is closely related to liquidity management because each is directly affected by the maturity of assets and liabilities. Interest rate risk management
monitors the effect that fluctuations in interest rates have on net interest income. The primary function of PSB's interest rate sensitivity management is to reduce exposure to interest rate risk
through an appropriate balance between interest-earning assets and interest-bearing liabilities. The goal is to minimize fluctuations in the net interest margin of the Bank due to general changes in
interest rates.

The
net interest margin of a bank that does not have a relatively close relationship between the quantity of assets that mature or re-price within a given time period and the
quantity of liabilities that mature or re-price within the same time period will fluctuate more widely than a bank that has a closer match. Furthermore, a bank that has liabilities that
reprice earlier than its assets will have a decline in its net interest margin as interest rates rise.

The
blending of fixed and floating-rate loans and investments to match their pricing and maturity characteristics against those of the various funding sources is a continuous
process in an attempt to minimize fluctuations in net interest income caused by changes in interest rates. The composition of the balance sheet is designed to minimize any significant fluctuation in
net interest income and to maximize liquidity.

One
tool used by management to gauge the structure of the balance sheet is a "gap" analysis that categorizes assets and liabilities on the basis of maturity date, the date of next
re-pricing, and the applicable amortization schedule. This analysis summarizes the matching or mismatching of rate-sensitive assets versus rate sensitive liabilities according
to specified time periods. Management concentrates on the zero to three month and one year gap intervals. At December 31, 2003, PSB had a one-year positive gap of
$60.1 million and a gap ratio of 3.09 or 13.00% of total assets as of that date.

16

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The
following table shows the interest rate sensitive data at December 31, 2003 (in thousands):

INTEREST RATE SENSITIVITY ANALYSIS

|Gap Table At December 31, 2003                              |  | 0-3
Months |         | 4-12
Months |   | 1-5 Yrs. |   | More than
5 Yrs. |         | No Stated
Maturity |   | Balance at
12/31/03 |  
|----------------------------------------------------------- |  | ---------- | ------- | ----------- | - | -------- | - | ---------------- | ------- | ------------------ | - | ------------------- | -
|Cash due and from banks                                     |  |            |         |             |   |          |   |                  |         |                    |   |                     |  
|Interest bearing deposits with banks and federal funds sold |  | $          | 49,324  |             |   |          |   |                  |         |                    |   |                     |  
|Investment securities                                       |  |            | 8,466   |             | $ | 18,326   |   | $                | 63,675  |                    | $ | 11,187              |  
|Mortgage loans                                              |  |            | 7,467   |             |   | 13,913   |   |                  | 24,983  |                    |   | 30,655              |  
|Commercial loans                                            |  |            | 42,055  |             |   | 20,746   |   |                  | 68,253  |                    |   | 19,030              |  
|Consumer loans                                              |  |            | 17,313  |             |   | 11,269   |   |                  | 18,149  |                    |   | 1,202               |  
|Construction loans                                          |  |            | 4,354   |             |   | 8,655    |   |                  | 4,267   |                    |   |                    |  
|Loan loss reserve                                           |  |            |         |             |   |          |   |                  |         |                    |   |                     |  
|Other assets                                                |  |            |         |             |   |          |   |                  |         |                    |   |                     |  
|Total assets                                                |  | $          | 128,979 |             | $ | 72,909   |   | $                | 179,327 |                    | $ | 62,074              |  
|                                                            |  |            |         |             |   |          |   |                  |         |                    |   |                     |  
|Non interest bearing deposits                               |  |            | 21,014  |             |   |          |   |                  |         |                    |   |                     |  
|NOW accounts                                                |  |            | 2,490   |             |   |          |   |                  |         |                    |   | 21,894              |  
|Money market accounts                                       |  |            | 54,037  |             |   |          |   |                  |         |                    |   | 21,252              |  
|Savings accounts                                            |  |            | 45,298  |             |   |          |   |                  |         |                    |   | 44,686              |  
|Time deposits                                               |  |            | 47,714  |             |   | 90,783   |   |                  | 57,643  |                    |   | 301                 |  
|Borrowed funds                                              |  |            | 207     |             |   | 436      |   |                  | 456     |                    |   |                     |  
|Other liabilities                                           |  |            |         |             |   |          |   |                  |         |                    |   |                     |  
|                                                            |  |            |         |             |   |          |   |                  |         |                    |   |                     |  
|Total liabilities                                           |  |            | 170,760 |             |   | 91,219   |   |                  | 58,099  |                    |   | 88,133              |  
|                                                            |  |            |         |             |   |          |   |                  |         |                    |   |                     |  
|Shareholders' equity                                        |  |            |         |             |   |          |   |                  |         |                    |   |                     |  
|                                                            |  |            |         |             |   |          |   |                  |         |                    |   |                     |  
|Total liabilities and shareholders' equity                  |  | $          | 170,760 |             | $ | 91,219   |   | $                | 58,099  |                    | $ | 88,133              |  
|                                                            |  |            |         |             |   |          |   |                  |         |                    |   |                     |  
|GAP                                                         |  |            | (41,781 | )           |   | (18,310  | ) |                  | 121,228 |                    |   | (26,059             | )
|Gap Ratio                                                   |  |            | 0.76    |             |   | 0.80     |   |                  | 3.09    |                    |   | 0.70                |  
|Cumulative Gap                                              |  |            | (41,781 | )           |   | (60,091  | ) |                  | 61,137  |                    |   | 35,078              |  
|Cumulative Gap Ratio                                        |  |            | 0.76    |             |   | 0.77     |   |                  | 1.19    |                    |   | 1.08                |  

Management
also simulates possible economic conditions and interest rate scenarios in order to quantify the impact on interest income. The effect that changing interest rates have on
PSB's net interest income is simulated by increasing and decreasing interest rates. This simulation is known as rate shocking. The report below forecasts changes in PSB's market value of equity under
alternative

17

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interest
rate environments. The market value of equity is defined as the net present value of PSB's existing assets and liabilities.

|                  |  | Market Value
of Equity |        | Change in Market
Value of Equity |   | Percentage
Change |  
|----------------- |  | ---------------------- | ------ | -------------------------------- | - | ----------------- | -
|+300 Basis Points |  | $                      | 69,141 |                                  | $ | 9,150             |  
|+200 Basis Points |  |                        | 67,473 |                                  |   | 7,482             |  
|+100 Basis Points |  |                        | 64,606 |                                  |   | 4,615             |  
|Flat Rate         |  |                        | 59,991 |                                  |   |                  |  
|-300 Basis Points |  |                        | 48,248 |                                  |   | (11,743           | )
|-200 Basis Points |  |                        | 51,156 |                                  |   | (8,835            | )
|-100 Basis Points |  | $                      | 55,166 |                                  | $ | (4,825            | )

A
plus or minus 300 basis point rate shock test for the change in the market value of equity indicates at most limited economic value sensitivity to changes in interest rates. A rate
shock test indicates the market value of equity increases as rates rise and decreases as rates decline. The Bank's largest exposure is a negative 8.04% reduction in the change in the market value of
equity in a minus 100 basis point scenario and a gain of 15.25% in a plus 300 basis point scenario.

In
the event PSB should experience a mismatch in its desired gap ranges or an excessive decline in its market value of equity resulting from changes in interest rates, it has a number of
options that it could utilize to remedy such a mismatch. PSB could restructure its investment portfolio through the sale or purchase of securities with more favorable repricing attributes. It could
also emphasize growth in loan products with appropriate maturities or repricing attributes, or attract deposits or obtain borrowings with desired maturities.

There
are no known trends or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in liquidity increasing or decreasing in
any material way.

The
commitment expiration periods for commitments of PSB as of December 31, 2003 are as follows:

Commitment PeriodTotal Amount
Committed

One Year
or Less

1-3 yrs.

4-5 yrs.

Over 5 yrs.COMMITMENTSLines of Credit

$
57,813

$
20,886

$
29,869



$
7,058Unfunded residential mortgages

$
4,893


4,893







Standby letters of credit

$
2,346


2,346







Leases

$
3,834


808


1,571

328


1,127Remaining contractual maturities of time deposits

$
196,441


138,507


50,865

6,768


301




The Bank's net interest income of $18.4 million in 2002 was $5.5 million or 42.80% higher than 2001's net interest income of $12.9 million.
In 2002 total interest income increased $4.8 million to $31.7 million from $26.9 million in 2001. The Bank had a decrease in total interest expense in 2002 of $759,000. In 2002,
both net interest income; and interest income increased primarily due to the acquisition of the Jade loan portfolio.

In
2002, the Bank's net interest margin increased 78 basis points to 4.07% from 3.29% in 2001. The increase in the net interest margin is related to a facility fee of $482,000 realized
in the fourth

18

---

quarter
and an improvement in the Bank's yield on other interest-earning assets and a lower cost of funds primarily time deposits and borrowed funds.

The
Bank's net interest spread increased 100 basis points to 3.80% in 2002 from 2.80% in 2001. The Bank's yield on its interest-earning assets increased 15 basis points to 7.00% in 2002
from 6.85% in 2001. For 2002, the rate paid by the Bank on its interest-bearing liabilities decreased by 85 basis points to 3.20%.

Average
loans of $320.0 million at December 31, 2002 represented 71% of total interest-earning assets, providing an average yield of 8.25%, average loans of
$275.8 million at December 31, 2001, represented 70% of total average interest-earning assets, and provided an average yield of 7.77%. The 48 basis point increase in the yield on the
loan portfolio in 2002 was primarily due to a $482,000 facility fee received in the fourth quarter.

At
December 31, 2002, total average-interest bearing liabilities increased $68.3 million or 19.75% to $414.0 million compared to $345.8 million at
December 31, 2001. Total interest expense decreased $759,000 at December 31, 2002 to $13.3 million as compared to a total interest expense decrease of $3.4 million to
$14.0 million at December 31, 2001. The Bank's cost of funds for 2002 and 2001 was 3.20% and 4.05%, respectively.

Average
investments and interest-earning deposits with banks increased $16.0 million or 13.67% at December 31, 2002, compared to an increase of $32.0 million or
37.36% at December 31, 2001. The increase in the PSB's liquidity position at December 31, 2002 is attributable to higher than anticipated prepayments on loans and investment securities,
an increase in deposit activity, lower than anticipated loan volume in the fourth quarter of 2002, and the uncertainties within the interest rate environment.

The
Bank allocated $1.4 million and $270,000 as additions to the allowance for loan loss and had charge-offs against the allowance of $788,000 and $0 for the years
ended December 31, 2002, and 2001, respectively.

Non-interest
income in 2002 increased $1.5 million or 98.26% compared to 2001, primarily due to the Bank receiving a full year of service fees and other income of Jade
in 2002 compared to six months in 2001 because the merger of Jade was not effective until July 1, 2001.

19

---



Total non-interest expense for 2002 increased $6.7 million or 64.36% to $17.1 million from $10.4 million in 2001. The increase in noninterest expense is
primarily due to non-recurring expenses related to a computer system conversion during 2002. On November 2, 2002, the Bank completed a successful core hardware and software
conversion to the OSI system from the Fiserv Summit system to enhance the quality of our banking services.

PSB
had an income tax provision of $1.2 million, and $755,000 for the years ended December 31, 2002, and 2001, respectively.

During
the twelve-month period ended December 31, 2002, net cash provided by operating activities was $4.8 million, compared to net cash used by operating activities of
$1.6 million for the same period of 2001. During the twelve-month period ended December 31, 2002, net cash provided by investing activities was $25.0 million, compared to net cash
provided by investing activities of $19.6 million for the same period of 2001. Financing activities provided net cash of $25.7 million during the twelve months ended December 31,
2002, compared to $18.9 million in net cash provided in financing activities for the same period of 2001. The net result of these items was a $55.5 million increase in cash and cash
equivalents for the twelve month period ended December 31, 2002, compared to a $36.9 million increase in cash and cash equivalents for the same period of 2001.

CAPITAL ADEQUACY

The Bank is required to maintain minimum ratios of Tier I and total capital to total "risk weighted" assets and a minimum Tier I leverage ratio, as
defined by the banking regulators. At December 31, 2003, the Bank was required to have minimum Tier I and total capital ratios of 4.0% and 8.0%, respectively, and a minimum Tier I
leverage ratio of 4.0%. The Bank's actual Tier I and total capital ratios at December 31, 2003, were 12.45% and 13.47%, respectively, and the Bank's Tier I leverage ratio was
7.94%. These ratios exceed the requirements for classification as a "well-capitalized" institution, the industry's highest capital category.

|                         |                                          | Actual |   | For capital
adequacy purposes |  | To be well-
capitalized under
prompt corrective
action provisions |  
|------------------------ | ---------------------------------------- | ------ | - | ----------------------------- |  | ----------------------------------------------------------------- | -
|
|
|As of December 31, 2003: |                                          |        |   |                               |  |                                                                   |  
|                         | Total capital (to risk-weighted assets)  |        |   |                               |  |                                                                   |  
|                         | Company                                  |        | $ | 48,987                        |  | 16.22                                                             | %
|                         | Bank                                     |        | $ | 40,463                        |  | 13.47                                                             | %
|                         | Tier I capital (to risk-weighted assets) |        |   |                               |  |                                                                   |  
|                         | Company                                  |        | $ | 45,918                        |  | 15.20                                                             | %
|                         | Bank                                     |        | $ | 37,394                        |  | 12.45                                                             | %
|                         | Tier I capital (to average assets)       |        |   |                               |  |                                                                   |  
|                         | Company                                  |        | $ | 45,918                        |  | 9.72                                                              | %
|                         | Bank                                     |        | $ | 37,394                        |  | 7.94                                                              | %

20

---

|                         |                                          | Actual |   | For capital
adequacy purposes |  | To be well-
capitalized under
prompt corrective
action provisions |  
|------------------------ | ---------------------------------------- | ------ | - | ----------------------------- |  | ----------------------------------------------------------------- | -
|
|
|As of December 31, 2002: |                                          |        |   |                               |  |                                                                   |  
|                         | Total capital (to risk-weighted assets)  |        |   |                               |  |                                                                   |  
|                         | Company                                  |        | $ | 48,492                        |  | 15.47                                                             | %
|                         | Bank                                     |        | $ | 38,954                        |  | 12.53                                                             | %
|                         | Tier I capital (to risk-weighted assets) |        |   |                               |  |                                                                   |  
|                         | Company                                  |        | $ | 44,862                        |  | 14.31                                                             | %
|                         | Bank                                     |        | $ | 35,346                        |  | 11.37                                                             | %
|                         | Tier I capital (to average assets)       |        |   |                               |  |                                                                   |  
|                         | Company                                  |        | $ | 44,862                        |  | 9.10                                                              | %
|                         | Bank                                     |        | $ | 35,346                        |  | 7.22                                                              | %

Management is confident that the Bank will remain "well capitalized."

FINANCIAL CONDITION

GENERAL

PSB's total assets decreased to $470.3 million at December 31, 2003. This represents a decrease of 5.33% compared to assets of $496.8 million
at December 31, 2002. The decrease is primarily attributable to the Bank's decision to allow some run off of deposits due to decreasing loan demand and the lack of availability of investments
with profitable yields.

At
December 31, 2003, PSB's net loan portfolio, inclusive of loans held for sale, totaled $289.2 million as compared to $307.5 million for the year ended
December 31, 2002. This decrease of $18.2 million or 5.93% is primarily the result of an increase in payoffs of consumer and mortgage loans and a decrease in loan demand.

INVESTMENT ACTIVITIES

The Bank's investment portfolio is comprised of mortgage-backed and investment securities. The carrying value of the Bank's investment securities and
mortgaged-backed securities portfolio totaled $103.7 million at December 31, 2003, compared to $56.2 million at December 31, 2002. The Bank's cash and cash equivalents,
consisting of cash and due from banks, and interest-earning deposits with other financial institutions, totaled $52.4 million at December 31, 2003, compared to $110.3 million at
December 31, 2002. The majority of the Bank's mortgage-backed securities are issued or guaranteed by the United States Government or agencies thereof. At December 31, 2003,
mortgage-backed securities totaled $49.7 million compared to $45.3 million at December 31, 2002. The majority of this amount represents securities that were issued or guaranteed
by FNMA, FHLMC or the Government National Mortgage Association ("GNMA"). The Bank historically maintains high levels of interest-earning deposits as part of its strategy for meeting liquidity
requirements and improving interest sensitivity.

The
Bank is required under federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short-term securities and certain other
investments. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources." The Bank generally has maintained a portfolio of
liquid assets that exceeds regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields available in relation to other opportunities and its expectation of the yield that will be available in the future, as

21

---

well
as management's projections as to the short-term demand for funds to be used in the Bank's loan origination and other activities.

Pursuant
to SFAS No. 115, the Bank classifies its investment and mortgage-backed securities as held-to-maturity, available-for-sale
or trading. Available-for-sale and trading securities are carried at market value, while held-to-maturity securities are carried at amortized cost. At
December 31, 2003, $790,000 of the Bank's investment securities and mortgaged-backed securities were classified held-to-maturity and $102.9 million of the Bank's
investment securities and mortgaged-backed securities were classified
available-for-sale. The Bank did not carry any trading securities at December 31, 2003 or 2002.

The
Bank's Board of Directors has adopted an investment policy that identifies acceptable types of investments for the Bank and establishes criteria to guide management in classifying
investments as prescribed by SFAS No. 115. The policy also authorizes the Bank's investment officer to make investments of up to $1 million. Under the investment policy, the Bank may
invest in certain AAA rated derivative securities. As of December 31, 2003, the Bank had no collateralized mortgage obligations. The Bank may not invest in high-risk collateralized
mortgage obligations ("CMO") and the Bank's investment officer must periodically analyze the risk of any CMO held by Bank to determine that such securities are not within the high-risk
category.

CARRYING AND FAIR VALUE OF INVESTMENT AND MORTGAGE-BACKED SECURITIES

The following table sets forth certain information regarding the carrying and market values of the Bank's investment securities and mortgage-backed securities in
the Bank's held-to-maturity and available-for-sale portfolio at December 31, 2003, 2002 and 2001.

|                                               |  | At December 21, 2003
|---------------------------------------------- |  | --------------------
|
|
|AMORTIZED VALUE                                |  |                     
|INVESTMENT SECURITIES AVAILABLE-FOR-SALE:      |  |                     
|Mutual funds                                   |  | $                   
|State and municipal obligations                |  |                     
|U.S. Government and agency securities          |  |                     
|Mortgage-backed securities:                    |  |                     
|FNMA Certificates                              |  |                     
|GNMA Certificates                              |  |                     
|FHLMC Certificates                             |  |                     
|                                               |  |                     
|Total investment securities available-for-sale |  |                     
|INVESTMENT SECURITIES HELD TO MATURITY:        |  |                     
|U.S. Government and agency securities          |  |                     
|Mortgage-backed securities:                    |  |                     
|FHLMC Certificates                             |  |                     
|FNMA Certificates                              |  |                     
|GNMA Certificates                              |  |                     
|Other mortgage backed investment               |  |                     
|                                               |  |                     
|Total investment securities held-to-maturity   |  |                     
|                                               |  |                     
|                                               |  | $                   
|                                               |  |                     

22

---

|                                               |  | At December 31, 2003
|---------------------------------------------- |  | --------------------
|
|
|FAIR VALUE                                     |  |                     
|INVESTMENT SECURITIES AVAILABLE-FOR-SALE:      |  |                     
|Mutual funds:                                  |  | $                   
|State and municipal obligations                |  |                     
|U.S. Government and agency securities          |  |                     
|Mortgage-backed securities:                    |  |                     
|FNMA Certificates                              |  |                     
|GNMA Certificates                              |  |                     
|FHLMC Certificates                             |  |                     
|                                               |  |                     
|Total investment securities available-for-sale |  | $                   
|INVESTMENT SECURITIES HELD TO MATURITY:        |  |                     
|U.S. Government and agency securities          |  |                     
|Mortgage-backed securities:                    |  |                     
|FHLMC Certificates                             |  |                     
|FNMA                                           |  |                     
|GNMA                                           |  |                     
|Other mortgage backed investment               |  |                     
|                                               |  |                     
|Total investment securities held-to-maturity   |  |                     
|                                               |  |                     
|                                               |  | $                   
|                                               |  |                     

The
amortized cost and fair value of PSB's investment securities at December 31, 2003, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands)

|                                       |  | Available for Sale |         | Held to Maturity
|-------------------------------------- |  | ------------------ | ------- | ----------------
|
|Due in one year or less                |  | $                  | 2,001   |                 
|Due after one year through five years  |  |                    | 42,859  |                 
|Due after five years through ten years |  |                    | 9,991   |                 
|Due after ten years                    |  |                    |         |                 
|Mortgage-backed securities             |  |                    | 48,381  |                 
|                                       |  |                    |         |                 
|                                       |  | $                  | 103,232 |                 
|                                       |  |                    |         |                 

23

---



INVESTMENT PORTFOLIO MATURITIES

The following table sets forth by scheduled maturities, carrying values, and weighted-average yields and weighted average lives for the Bank's investment
securities and mortgage-backed securities portfolios. Adjustable-rate, mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust (in
thousands except for yields).

|                           |                          | At December 31, 2003
|-------------------------- | ------------------------ | --------------------
|
|
|Held to maturity:          |                          |                     
|Mortgage-backed securities |                          |                     
|                           |                          |                     
|                           | Total held to maturity   |                     
|                           |                          |                     
|Available for sale:        |                          |                     
|Investment securities      |                          |                     
|Mortgage-backed securities |                          |                     
|                           |                          |                     
|                           | Total available for sale |                     
|                           |                          |                     

|                           |                          | At December 31, 2003
|-------------------------- | ------------------------ | --------------------
|
|
|Held to maturity:          |                          |                     
|Mortgage-backed securities |                          |                     
|                           |                          |                     
|                           | Total held to maturity   |                     
|                           |                          |                     
|Available for sale:        |                          |                     
|Investment securities      |                          |                     
|Mortgage-backed securities |                          |                     
|                           |                          |                     
|                           | Total available for sale |                     
|                           |                          |                     

24

---

LOAN PORTFOLIO

The loan portfolios exhibited mixed results. Consumer/auto-related financing was adversely impacted by external macro-economic factors. Competition
for commercial business remains strong, and management continues to look for opportunities that leverage our strengths, particularly in small business lending. With the shifts in consumer behavior
away from auto-related financing activities, management has moved its efforts more towards the construction, and commercial real estate markets. We also look to enhance market share in the
credit card and home equity products. This would continue to add to the diversification of the loan portfolio and help boost growth toward budgeted levels. In general, credit risk is moderate and
slowly increasing.

Historically,
the principal lending activity of the Bank has been the origination, for retention in its portfolio, of fixed-rate and, to a much lesser extent,
adjustable-rate mortgage loans secured by one- to four-family residential real estate located in its market area. Because of a decrease in residential real estate
lending, the Bank is concentrating its efforts in the commercial loan area where demand is improving. The Bank and its subsidiaries also originate loans secured by multifamily residential and
commercial real estate, construction loans, commercial business loans and consumer loans.

Even
though growth across product lines remains challenging as national and global issues adversely impact our market place we still feel there is a large and very strong market within
our local surroundings. One- to four-family residential mortgage loans originated for resale in the secondary market are underwritten according to standards that conform to
Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. One- to four-family residential mortgage loans originated and
held in portfolio are generally underwritten to conform to secondary market standards but from time to time the Bank does originate nonconforming loans if, in the Bank's judgment, the borrower does
not present an unreasonable risk of default. The Bank and TNMC, its mortgage banking subsidiary, have sold in the secondary market a limited amount of fixed-rate residential mortgage
loans. The Bank has primarily been a portfolio lender and at any one time the Bank holds only a nominal amount of loans that may be sold.

Volume
for loans secured by one-to four-family residential properties continues to fluctuate. Volume variations will continue to be seen throughout the current
period as we manage the growth of the portfolio. In addition, a continued low rate environment should provide the ability to remain consistent with past performance. We continue to closely manage the
growth of the portfolio especially in this continued low rate environment. The Bank has adopted a current philosophy to place all originations as saleable in order to have an option for potential sale
of these lower rate loans to the secondary market. Risk in this sector remains in the low-to moderate-range.

Growth
in the commercial real estate portfolio continues. Interest rate reductions should spur activity in this sector in spite of other, less favorable, macro-economic factors. Just as
with the residential mortgage portfolio, commercial real estate is very interest rate sensitive. To achieve growth in this portfolio, pricing must be carefully formulated to both attract borrowers and
create a reasonable return for the Bank. Construction lending continues to provide opportunities. Due to the higher levels of inherent risk in construction lending, these credits are thoroughly
evaluated. Opportunities are more evident in this portfolio. A defensive stance on long-term fixed rate pricing is necessary to protect against margin compression.

Volume
for home equity loans continues to fluctuate. With a low rate environment, management will continue to pursue growth in this portion of the consumer loan portfolio but will
monitor the originations of lower interest rate loans as the market begins to recover.

To
help offset payoffs of current loans, management will be setting goals for new loan originations with branch managers, management will also become more aggressive in cross-selling the
consumer

25

---

loan
products, such as home equity loans, to the other subsidiaries of First Penn Bank such as TNMC. Finally, management will continue to develop loan referral business with outside mortgage brokers.

At
December 31, 2003, the Bank's net loan portfolio totaled $237.4 million, representing 50.47% of total assets at that date, compared to $288.6 million representing
58.10% of total assets at December 31, 2002.

The
following table summarizes the loan portfolio of the Bank by loan category and amount at December 31 for the past five years, including data regarding the portion of the
Bank's loans that bear fixed and adjustable interest rates, respectively. The loan categories correspond to the Bank's general classifications (in thousands, except for percentage):

|                                |  | At December 31, |        
|------------------------------- |  | --------------- | -------
|
|
|Real Estate Loans:              |  |                 |        
|One-to four-family*             |  | $               | 65,385 
|Construction loans              |  |                 | 18,444 
|Five or more family residential |  |                 | 14,055 
|Nonresidential                  |  |                 | 97,011 
|Commercial loans                |  |                 | 21,854 
|Consumer loans                  |  |                 | 24,062 
|                                |  |                 |        
|                                |  | $               | 240,811
|                                |  |                 |        
|Less:                           |  |                 |        
|Unearned fees and discounts     |  | $               | 359    
|Undisbursed loan Proceeds       |  |                 |       
|Allowance for loan losses       |  |                 | 3,069  
|                                |  |                 |        
|Net loans                       |  | $               | 237,383
|                                |  |                 |        

Loan balances segretated in terms of sensitivity to changes in interest rates at December 31, 2003, are summarized below:

|(In thousands)              |       | Less Than One Year to Five Years |         | After Five Years
|--------------------------- | ----- | -------------------------------- | ------- | ----------------
|Predetermined interest rate |       | $                                | 105,296 |                 
|Floating interest rate      |       |                                  | 72,286  |                 
|                            |       |                                  |         |                 
|                            | Total |                                  | $       | 177,582         
|                            |       |                                  |         |                 

---

LOAN MATURITIES

The following table sets forth the maturity or period of re-pricing of the Bank's loan portfolio at December 31, 2003. Demand loans and loans
having no stated schedule of repayments and no stated maturity are reported as due in one year or less. Adjustable and floating-rate loans are included in the period in which interest
rates are next scheduled to adjust rather than the period in which they

26

---

contractually
mature, and fixed-rate loans are included in the period in which the final contractual repayment is due (in thousands).

|                         |  | Amounts at December 31, 2003
|------------------------ |  | ----------------------------
|
|Amounts due              |  |                             
|Non-accrual loans        |  | $                           
|Within one year          |  |                             
|After one year:          |  |                             
|1-3 years                |  |                             
|3-5 years                |  |                             
|Over 5 years             |  |                             
|Total due after one year |  |                             
|                         |  |                             
|Total amounts due        |  | $                           
|                         |  |                             

DELINQUENT LOANS

When a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts are
generally made on the 15th day after a payment is due. In most cases, deficiencies are cured promptly. If a delinquency extends beyond 60 days, the loan and payment history is carefully
reviewed, additional notices are sent to the borrower and efforts are made to collect the loan. While the Bank generally prefers to work with borrowers to resolve such problems, when the account
becomes 90 days delinquent, the Bank institutes foreclosure or other proceedings, as necessary, to minimize any potential loss.

NON-PERFORMING ASSETS

In
2003, the Bank's level of non-performing assets increased $715,000 or 14.59% to $5.6 million compared to an increase of $184,000 to $4.9 million at
December 31, 2002 from $4.7 million at December 31, 2001. Non-accrual interest for 2003 and 2002 was $324,000 and $346,000, respectively. The increase in 2003 was
primarily due to a new risk rating system implemented in September of 2002 that caused certain items to be recategorized.

As
a matter of policy, the accrual of loan interest is discontinued if management believes that, after considering economic and business conditions and collection efforts, the borrower's
financial condition is such that collection of interest becomes doubtful. This is normally done when a loan reaches 90 days delinquent. At this time, all accrued but unpaid interest is reversed
out of interest income. There are occasional exceptions if the loans are well secured and in the process of collection. The Bank did not have any material restructured loans within the meaning of SFAS
No. 114 in 2003.

27

---

The following table sets forth information regarding loans 90 or more days delinquent and still accruing interest, non-accrual loans, and real estate owned held by the Bank
at the dates indicated (Dollars in thousands):

|                                                                                 |  | At December 31, 2003 |      
|-------------------------------------------------------------------------------- |  | -------------------- | -----
|
|Loans past due 90 days or more as to interest or principal and accruing interest |  | $                    |     
|Nonaccrual loans                                                                 |  |                      | 5,203
|                                                                                 |  |                      |      
|Total nonperforming loans                                                        |  |                      | 5,203
|Real estate owned (REO)                                                          |  |                      | 374  
|                                                                                 |  |                      |      
|Total nonperforming assets                                                       |  | $                    | 5,577
|                                                                                 |  |                      |      
|Nonperforming loans to total loans                                               |  |                      | 2.16 
|Nonperforming assets to total assets                                             |  |                      | 1.19 
|Allowance for loan losses to total loans                                         |  |                      | 1.28 
|Allowance for loan losses to nonperforming loans                                 |  |                      | 58.99
|Allowance for loan losses to nonperforming assets                                |  |                      | 55.03
|Net charge-offs as a percentage of total loans                                   |  |                      | .24  

OTHER REAL ESTATE OWNED

Real estate acquired by the Bank as a result of foreclosure is classified as other real estate owned ("REO") until it is sold. The REO is initially recorded at
the lower of the related loan balance or fair value of the property at the date acquired. If the value of the property is less than the loan, less any related specific loan loss provisions, the
difference is charged against the allowance for loan losses. Any
subsequent write-down of REO is charged against earnings. The Bank had $374,000 and $382,000 of property acquired as a result of foreclosure at December 31, 2003 and 2002.

CLASSIFIED ASSETS

As part of the Bank's loan review procedures which ultimately result in the establishment of the Bank's allowance for loan losses, the Bank identifies and
classifies its problem assets into three classifications: "substandard," "doubtful" and "loss." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility
that the Bank will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the Bank is not warranted. The Bank charges off that portion of an asset as soon as it is classified as a loss. Exclusive of the
Bank's $374,000 of REO, the Bank's classified assets at December 31, 2003 consisted of $5.2 million of loans classified as substandard, compared to $4.5 million classified as
substandard at December 31, 2002. Loans classified as doubtful were $0 for 2003 compared to $599,000 for 2002. Loans classified as loss were $501,000 in 2003 compared to $92,000 in 2002.

ALLOWANCE FOR LOAN LOSSES

PSB has an established process to determine the amount of the allowance for loan losses, which assesses the risks and losses inherent in its portfolio. This
process provides an allowance consisting of an allocated and an unallocated component. To determine the allocated component of the allowance, PSB combines estimates of the reserves needed for loans
evaluated on an individual basis with estimates of reserves needed for general pools of loans with similar risk characteristics

28

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The
methodology for determining the adequacy of the allowance for loan loss should consider both specific loan risk and general economic factors. The analysis includes all types of
loans, with the applied methodology commensurate to the risk assessment for the portfolio and present economic conditions. The risk rating of the loan portfolio is updated quarterly by management and
utilized for an overall assessment of the loan loss reserve adequacy, the results of which are being reported quarterly to the Board.

The
results of the assessment of the adequacy of the loan loss reserve, utilizing the risk ratings and economic factors, receives the close attention of management on an ongoing basis,
in accordance with regulatory standards, changes in lending policies, economic/business conditions, past due/classified loans, quality of loan review, concentration of credit, and examination input.
It is important to note that an effective internal loan review function is an essential element in satisfactorily implementing the Bank's methodology.

It
is the objective of the Bank's evaluation process to establish the following components of the allowance for loan losses. A specific allocation for certain identified loans, a general
allocation for pools of loans based on risk rating and a general allocation for inherent loan portfolio losses. Management performs current evaluations of its criticized and classified loan portfolios
and assigns specific reserves that reflects the current risk to the Bank. As a general rule, special mention assets will have a minimum reserve of 3%, substandard assets will have a minimum reserve of
15%, and doubtful assets will have a minimum reserve of 50%. Due to the fact that most of the Bank's problem loans are secured by real estate, management has allocated a majority of the allowance for
loan losses to these real estate collateralized loans. A general reserve allocation is applied for pools of loans based on risk rating for all loans not specifically reserved for as described
previously.

The
following table summarizes the changes in the Bank's allowance for loan losses for each of the past five years (Dollars in thousands):

|                                                |  | Year Ended December 31, |      
|----------------------------------------------- |  | ----------------------- | -----
|
|Balance at beginning of year                    |  | $                       | 3,603
|Acquisition of Jade's allowance for loan losses |  |                         |      
|Charge-offs:                                    |  |                         |      
|Real Estate: One-to four-family                 |  |                         | 93   
|Commercial                                      |  |                         | 13   
|Consumer                                        |  |                         | 656  
|                                                |  |                         |      
|Total Charge-offs                               |  |                         | 762  
|Recoveries:                                     |  |                         |      
|Consumer                                        |  |                         | 183  
|                                                |  |                         |      
|Total recoveries                                |  |                         | 183  
|Net charge-offs (recoveries)                    |  |                         | 579  
|Provision charged to operations                 |  |                         | 45   
|                                                |  |                         |      
|Allowance, end of period                        |  | $                       | 3,069
|                                                |  |                         |      
|Allowance for loan losses to total loans        |  |                         | 1.28 
|Allowance for loan losses to nonaccrual loans   |  |                         | 58.99
|Net charge-offs as a percentage of total loans  |  |                         | 0.24 

The
following table sets forth an allocation for the allowance for loan losses by category. The specific allocations in any particular category may be reallocated in the future to
reflect then current

29

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conditions.
Accordingly, management considers the entire allowance available to absorb losses in any category. (Dollars in thousands)

|            |  | Year Ended December 31, |      
|----------- |  | ----------------------- | -----
|
|
|Real Estate |  | $                       | 661  
|Commercial  |  |                         | 2,089
|Consumer    |  |                         | 120  
|Unallocated |  |                         | 199  
|            |  |                         |      
|Totals      |  | $                       | 3,069
|            |  |                         |      

DEPOSITS

Deposits are the primary source of the Bank's funds for lending and other investment purposes. The Bank's current deposit products include statement savings
accounts, passbook savings accounts, NOW accounts, personal and commercial demand deposit accounts, money market accounts, and certificates of deposit accounts. Included among these deposit products
are Individual Retirement Account certificates and Keogh retirement certificates. In addition to deposits, the Bank derives funds from the amortization and prepayment of loans and mortgage-backed
securities, the maturity of investment securities and, if needed, advances from the FHLB.

The
Bank's deposits are obtained primarily from residents in its primary market area. The principal methods used by the Bank to attract deposit accounts include offering a wide variety
of services and accounts, no service charges for maintaining minimum balance accounts, competitive interest rates and convenient office hours. The Bank operates in a highly competitive banking
environment competing against large regional banks as well as other community banks. The Bank relies upon certificates of deposit as its primary funding source, but it has instituted a program that
emphasizes garnering more stable, core deposits through traditional marketing methods to attract new customers and savings deposits.

The
following tables present the average balances and rates paid on deposits for each of the years ended December 31, 2003, 2002 and 2001 (Dollars in thousands):

|                        |  | Year Ended December 31, |        
|----------------------- |  | ----------------------- | -------
|
|
|Demand deposits         |  | $                       | 24,843 
|Now checking accounts   |  |                         | 22,680 
|Money market accounts   |  |                         | 72,356 
|Savings accounts        |  |                         | 93,453 
|Certificates of deposit |  |                         | 221,377
|                        |  |                         |        
|Total deposits          |  | $                       | 434,709
|                        |  |                         |        

30

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As of December 31, 2003, the Bank had total certificates of deposit of approximately $196.4 million. The following table summarizes the composition of these deposits
(Dollars in thousands):

|                                                |  | Amount |         | Percentage of total certificates
of deposits |      
|----------------------------------------------- |  | ------ | ------- | -------------------------------------------- | -----
|Certificates of deposit in excess of $100,000   |  | $      | 24,644  |                                              | 12.55
|Other certificates of deposit (including IRA's) |  |        | 171,797 |                                              | 87.45
|                                                |  |        |         |                                              |      
|                                                |  | $      | 196,441 |                                              |      
|                                                |  |        |         |                                              |      

The
Bank's certificates of deposit in excess of $100,000, which totaled $24.6 million at December 31, 2003, mature as follows: $10.8 million within three months,
$13.8 million between three and six months; $0 million between six and twelve months and $0 million after twelve months.

The
ability of the Bank to attract and maintain deposits and the Bank's cost of funds on these deposit accounts have been, and will continue to be, significantly affected by economic and
competitive conditions.

BORROWINGS

The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional FHLBs subject to supervision and regulation by the Federal Housing
Finance Board. The FHLBs provide a central credit facility primarily for member institutions. The Bank, as a member of the FHLB of Pittsburgh, is required to hold shares of common stock in that FHLB
in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 5% of
its advances (borrowings) from the FHLB of Pittsburgh, whichever is greater. The Bank had a $1.0 million investment in the stock of the FHLB at December 31, 2003, which was in compliance
with this requirement. At December 31, 2003 and 2002, the Bank had no outstanding borrowings from the FHLB of Pittsburgh. The Bank has a line of credit available in the amount of $161,560,000
as of December 31, 2003.

Additionally,
the Bank had securities sold under repurchase agreements are as follows:

Year Ended December 31,2003

2002

2001(Dollars in thousands, except percentages)Balance at year-end

$
1,099

$
1,075

$
13,298Average during the year


1,092


13,375


13,314Maximum month-end balance


1,099


13,577


13,695Weighted average rate during the year


2.47
%

2.42
%

4.22
%Rate at December 31


1.88
%

2.52
%

3.74
%


RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary if
the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated
financial

31

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support
from other parties. The consolidation requirements of FIN 46 apply immediately to interest entities created after January 31, 2003. We adopted the provisions of FIN 46
effective February 1, 2003 and such adoption did not have a material impact on our consolidated financial statements since we had no variable interest entities that were created after
January 31, 2003. In December 2003, the FASB issued FIN 46R with respect to variable interest entities created before January 31, 2003, which amoung other things revised the
implementation date to the first fiscal year or interim period ended after March 15, 2004, with the exception of Special Purpose Entities (SPE). The Company currently has no SPEs. The Company
anticipates it will be required to consolidate its investment in Iron Bridge Holdings, Inc. (Iron Bridge) for the first quarter of 2004. Prior to FIN 46 and 46R, the Company accounted for its
investment in Iron Bridge under the equity method of accounting. The company's investment in Iron Bridge is more fully discussed in Note F to the consolidated financial statements.

In
April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS
No. 149"). SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. All
provisions of this Statement shall be applied prospectively. Based on PSB's current business operations, the adoption of the provisions of SFAS No. 149 did not materially impact PSB's financial
condition, results of operations, or disclosures.

In
May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. Based
on PSB's current business operations, the provisions of SFAS No. 150 did not impact PSB's financial condition, results of operations, or disclosures.

In
October 2003, the AICPA issued SOP No. 03-3 "Accounting for Loans or Certain Debt Securities Acquired in a Transfer". SOP No. 03-3 applies
to a loan with the evidence of deterioration of credit quality since origination acquired by completion of a transfer for which it is probable at acquisition, that PSB will be unable to collect all
contractually required payments receivable. SOP No. 03-3 requires that PSB recognize the excess of all cash flows expected at acquisition over the investor's initial investment in
the loan as interest income on a level-yield basis over the life of the loan as the accretable yield. The loan's contractual required payments receivable in excess of the amount of its cash flows
excepted at acquisition (nonaccretable difference) should not be recognized as an adjustment to yield, a loss accrual or a valuation allowance for credit risk. SOP No. 03-3 is
effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. Management is currently evaluating the provisions of SOP
No. 03-3.

In
November 2003, the EITF (Emerging Issues Task Force) issued EITF No. 03-1, "The Meaning of Other than Temporary Impairment and Its Application to Certain
Investments". EITF No. 03-1 includes certain disclosures regarding quantitative and qualitative disclosures for investment securities accounted for under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", that are impaired at the balance sheet date, but an other-than-temporary impairment has not been recognized.
The disclosures under EITF No. 03-1 are required for financial statements for years ending after December 15, 2003 and are included in these financial statements.

In
November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45 ("FIN No. 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." On January 1, 2003 PSB adopted the disclosure provisions of FIN No. 45 for guarantees issued or
modified after December 31, 2002, and adopted the initial recognition and measurement provisions on January 1, 2003. Adoption of the initial recognition and measurement provisions did
not affect PSB's financial condition or results of operations. While certain guarantees are only subject to the disclosure provisions of this interpretation,

32

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others
are subject to both the disclosure and initial recognition and measurement provisions. For guarantees that fall within the scope of the initial recognition and measurement provisions, FIN
No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Under the previous accounting
rules, PSB did not record a liability when guaranteeing obligations unless it became probable that PSB would have to perform under the guarantee. The adoption of FIN No. 45 did not have
material imapact of the Consolidated Financial Statements of Results of Operations.

PSB
issues financial and performance standby letters of credit, both of which are subject to the disclosure and initial recognition and measurement provisions of FIN No. 45.
Financial and performance standby letters of credit are conditional commitments issued by PSB to assure the financial and performance obligations of a customer to a third party. At December 31,
2003, and December 31, 2002, PSB was contingently liable on financial and performance standby letters of credit totaling $3.48 million and $3.36 million, respectively,
$1.68 million of which were originated during 2003. PSB's commitments under standby letters of credit expire at various dates through 2005. Amounts due under these letters of credit would be
reduced by any proceeds that PSB would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. PSB generally holds collateral and /or obtains personal
guarantees supporting these commitments. Collateral held for these commitments at December 31, 2003 varied from 0 to 100% and averaged 98%.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding the market risk of PSB's financial instruments, see "Interest Rate Sensitivity" in the MD&A. PSB's principal market risk exposure is to
interest rate changes.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The audited financial statement of PSB Bancorp, Inc. as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002, and
2001, including the report of Grant Thornton LLP as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 which are included as
Exhibit 99.1 to this Annual Report on Form 10-K, are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

NONE

ITEM 9A. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this Annual Report on Form 10-K, our Chief Executive Officer and our Acting Chief Financial
Officer evaluated the effectiveness of PSB's disclosure
controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer have concluded that PSB's current disclosure controls and procedures are adequate and effective to ensure that information required to be disclosed in the
reports PSB files under the Exchange Act is recorded, processed, summarized and reported on a timely basis.. There were no significant changes to PSB's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation

33

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to the section entitled "Directors and Executive Officers of the Registrant" in the definitive
proxy statement to be used in connection with PSB's 2004 annual meeting of shareholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the section entitled "Executive Compensation" in the definitive proxy statement to be used
in connection with PSB's 2004 annual meeting of shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters" in the definitive proxy statement to be used in connection with PSB's 2004 annual meeting of shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the section entitled "Certain Relationships and Related Transactions" in the definitive
proxy statement to be used in connection with PSB's 2004 annual meeting of shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the section entitled "Principal Accountant Fees and Services" in the definitive proxy
statement to be used in connection with PSB's 2004 annual meeting of shareholders.

34

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

The consolidated financial statements listed below are from Exhibit 99.1 to the Registrant's 2003 Form 10-K.

PSB
Bancorp, Inc. and Subsidiaries Consolidated Balance Sheet Consolidated Statement of Income, Consolidated Statement of Cash Flow, and Notes to Consolidated Statements Reports
of Independent Public Accountants.

The
following reports on Form 8-K were filed in the last quarter of 2003:

None.

(a)   EXHIBITS:
The exhibits listed below are filed herewith or incorporated by reference to other filings.

|EXHIBIT
NO. |  | DOCUMENT                                                                                                                                                                                                                                                
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Agreement and Plan of Reorganization, dated as of March 19, 1999, between PSB Bancorp, Inc. and First Bank of Philadelphia (incorporated herein by reference to Exhibit 2.1 of the S-4 Registration Statement
of PSB Bancorp, Inc. filed June 25, 1999) 
|2.2         |  | Agreement and Plan of Reorganization, dated as of November 2, 2000, between PSB Bancorp, Inc., PSB Merger Sub, Inc. and Jade Financial Corp. (incorporated herein by reference to Registration Statement of PSB Bancorp, Inc. filed on
January 16, 2001)
|3.1         |  | Articles of Incorporation of PSB Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                          
|3.2         |  | Bylaws of PSB Bancorp, Inc. (incorporated herein by reference to Exhibit 3.2 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                                             
|10.1*       |  | First Penn Bank's Retirement Plan (incorporated herein by reference to Exhibit 10.1 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                                      
|10.2*       |  | First Penn Bank's Cash or Deferred Profit Sharing Plan (incorporated herein by reference to Exhibit 10.2 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                 
|10.3*       |  | First Penn Bank's Profit Sharing Plan (incorporated herein by reference to Exhibit 10.3 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997)                                                                                   
|10.4*       |  | Employment Agreement with Vincent J. Fumo (incorporated herein by reference to Exhibit 7.1 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997)                                                                                
|10.5*       |  | Employment Agreement with Anthony DiSandro (incorporated herein by reference to Exhibit 7.2 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997)                                                                               
|10.6*       |  | First Penn Bank's Employee Stock Ownership Plan (incorporated herein by reference to Exhibit 10.4 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed on October 9, 1997)                                                                     
|10.7        |  | Lease Agreement between Eleven Colonial Penn Plaza Associates and First Penn Bank, dated as of October 10, 1995 (incorporated herein by reference to Exhibit 10.7 of Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed
May 5, 1998)                  
|10.8        |  | Lease Agreement between Eleven Colonial Penn Plaza Associates and First Penn Bank, dated as of October 12, 1995 (incorporated herein by reference to Exhibit 10.8 of Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed on
May 5, 1998)               
|            |  |                                                                                                                                                                                                                                                         

35

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|10.9*  |  | First Penn Bank's Stock Option Plan (incorporated herein by reference to Exhibit 10.9 of the S-4 Registration Statement of PSB Bancorp, Inc. filed June 25, 1999)           
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.10* |  | First Penn Bank's Management Recognition Plan (incorporated herein by reference to Exhibit 10.10 of the S-4 Registration Statement of PSB Bancorp, Inc. filed June 25, 1999)
|10.11* |  | Employment Agreement for John J O'Connell. (incorporated herein by reference to Exhibit 10.11 of PSB's Annual Report on Form 10-K filed on April 1, 2002)                   
|10.12* |  | Employment Agreement for Mario L. Incollingo (incorporated herein by reference to Exhibit 10.12 of PSB's Annual Report on Form 10-K filed on April 1, 2002)                 
|10.13* |  | PSB Bancorp, Inc. 2001 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.13 of PSB's Annual Report on Form 10-K filed on April 1, 2002)                  
|10.14  |  | Severance Agreement for John J. O'Connell (filed herewith)                                                                                                                  
|10.15  |  | Severance Agreement for Mario L. Incollingo (filed herewith)                                                                                                                
|14     |  | Code of Ethics (filed herewith)                                                                                                                                             
|21     |  | Schedule of Subsidiaries (filed herewith)                                                                                                                                   
|31.1   |  | Certification of Report by Chief Executive Officer. (filed herewith)                                                                                                        
|31.2   |  | Certification of Report by Acting Chief Financial Officer. (filed herewith)                                                                                                 
|32     |  | Certification of Report by Chief Executive Officer and Acting Chief Financial Officer. (filed herewith)                                                                     
|99.1   |  | 2003 Financial Statements (filed herewith)                                                                                                                                  

---

(b)   Reports
on Form 8-K



36

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|April 5, 2003 |  | PSB BANCORP, INC.
|------------- |  | -----------------
|              |  | By               

In
accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.

|Signature                             |  | Title                                                                       |  | Date         
|------------------------------------- |  | --------------------------------------------------------------------------- |  | -------------
|                                      |  |                                                                             |  |              
|/s/VINCENT J. FUMOVincent J. Fumo     |  | Chairman, Director                                                          |  | April 5, 2003
|/s/ANTHONY DISANDROAnthony DiSandro   |  | President, Chief Executive Officer, Director                                |  | April 5, 2003
|/s/JOHN CARROZZAJohn Carrozza         |  | Acting Chief Financial Officer (Principal Accounting and Financial Officer) |  | April 5, 2003
|/s/JAMES W. EASTWOODJames W. Eastwood |  | Director                                                                    |  | April 5, 2003
|/s/ROSANNE PAUCIELLORosanne Pauciello |  | Corporate Secretary and Director                                            |  | April 5, 2003
|/s/STEPHEN MARCUSStephen Marcus       |  | Director                                                                    |  | April 5, 2003
|/s/DENNIS WESLEYDennis Wesley         |  | Director                                                                    |  | April 5, 2003
|/s/JAMES KENNEYJames Kenney           |  | Director                                                                    |  | April 5, 2003

37

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EXHIBIT INDEX

|EXHIBIT
NO. |  | DOCUMENT                                                                                                                                                                                                                                                
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Agreement and Plan of Reorganization, dated as of March 19, 1999, between PSB Bancorp, Inc. and First Bank of Philadelphia (incorporated herein by reference to Exhibit 2.1 of the S-4 Registration Statement
of PSB Bancorp, Inc. filed June 25, 1999) 
|2.2         |  | Agreement and Plan of Reorganization, dated as of November 2, 2000, between PSB Bancorp, Inc., PSB Merger Sub, Inc. and Jade Financial Corp. (incorporated herein by reference to Registration Statement of PSB Bancorp, Inc. filed on
January 16, 2001)
|3.1         |  | Articles of Incorporation of PSB Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                          
|3.2         |  | Bylaws of PSB Bancorp, Inc. (incorporated herein by reference to Exhibit 3.2 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                                             
|10.1*       |  | First Penn Bank's Retirement Plan (incorporated herein by reference to Exhibit 10.1 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                                      
|10.2*       |  | First Penn Bank's Cash or Deferred Profit Sharing Plan (incorporated herein by reference to Exhibit 10.2 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                 
|10.3*       |  | First Penn Bank's Profit Sharing Plan (incorporated herein by reference to Exhibit 10.3 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997)                                                                                   
|10.4*       |  | Employment Agreement with Vincent J. Fumo (incorporated herein by reference to Exhibit 7.1 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997)                                                                                
|10.5*       |  | Employment Agreement with Anthony DiSandro (incorporated herein by reference to Exhibit 7.2 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997)                                                                               
|10.6*       |  | First Penn Bank's Employee Stock Ownership Plan (incorporated herein by reference to Exhibit 10.4 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed on October 9, 1997)                                                                     
|10.7        |  | Lease Agreement between Eleven Colonial Penn Plaza Associates and First Penn Bank, dated as of October 10, 1995 (incorporated herein by reference to Exhibit 10.7 of Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed
May 5, 1998)                  
|10.8        |  | Lease Agreement between Eleven Colonial Penn Plaza Associates and First Penn Bank, dated as of October 12, 1995 (incorporated herein by reference to Exhibit 10.8 of Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed on
May 5, 1998)               
|10.9*       |  | First Penn Bank's Stock Option Plan (incorporated herein by reference to Exhibit 10.9 of the S-4 Registration Statement of PSB Bancorp, Inc. filed June 25, 1999)                                                                                       
|10.10*      |  | First Penn Bank's Management Recognition Plan (incorporated herein by reference to Exhibit 10.10 of the S-4 Registration Statement of PSB Bancorp, Inc. filed June 25, 1999)                                                                            
|10.11*      |  | Employment Agreement for John J O'Connell. (incorporated herein by reference to Exhibit 10.11 of PSB's Annual Report on Form 10-K filed on April 1, 2002)                                                                                               
|10.12*      |  | Employment Agreement for Mario L. Incollingo (incorporated herein by reference to Exhibit 10.12 of PSB's Annual Report on Form 10-K filed on April 1, 2002)                                                                                             
|10.13*      |  | PSB Bancorp, Inc. 2001 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.13 of PSB's Annual Report on Form 10-K filed on April 1, 2002)                                                                                              
|            |  |                                                                                                                                                                                                                                                         

38

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|10.14 |  | Severance Agreement for John J. O'Connell (filed herewith)                                             
|----- |  | -------------------------------------------------------------------------------------------------------
|10.15 |  | Severance Agreement for Mario L. Incollingo (filed herewith)                                           
|14    |  | Code of Ethics                                                                                         
|21    |  | Schedule of Subsidiaries (filed herewith)                                                              
|31.1  |  | Certification of Report by Chief Executive Officer. (filed herewith)                                   
|31.2  |  | Certification of Report by Acting Chief Financial Officer. (filed herewith)                            
|32    |  | Certification of Report by Chief Executive Officer and Acting Chief Financial Officer. (filed herewith)
|99.1  |  | 2003 Financial Statements (filed herewith)                                                             

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39

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