Financial Statements and Report of Independent Certified Public Accountants        PSB Bancorp, Inc. and Subsidiaries        December 31, 2003, 2002 and 2001

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CONTENTS

|                                                   |                                                           | Page
|-------------------------------------------------- | --------------------------------------------------------- | ----
|REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS |                                                           | 3   
|FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS   |                                                           | 4   
|                                                   | CONSOLIDATED STATEMENTS OF INCOME                         |     
|                                                   | CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY |     
|                                                   | CONSOLIDATED STATEMENTS OF CASH FLOWS                     |     
|                                                   | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                |     

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Report of Independent Certified Public Accountants

Board
of Directors and Stockholders
PSB Bancorp, Inc. and Subsidiaries

We
have audited the accompanying consolidated balance sheets of PSB Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements
of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PSB Bancorp, Inc. and subsidiaries as
of December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

As
discussed in notes B to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
on January 1, 2002.

/s/
Grant Thornton LLP

Philadelphia,
Pennsylvania
February 13, 2004, except for Note S as to which
the date is March 31, 2004.

3

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PSB BANCORP, INC. AND SUBSIDIARIES        Consolidated Balance Sheets

|                                                                                                      |                                                                                                                                          | December 31,                                                                                                                       |                                           
|----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------
|
|
|ASSETS                                                                                                |                                                                                                                                          |                                                                                                                                    |                                           
|Cash and due from banks                                                                               |                                                                                                                                          | $                                                                                                                                  | 3,084                                     
|Interest earning deposits with banks                                                                  |                                                                                                                                          |                                                                                                                                    | 34,692                                    
|Federal funds sold                                                                                    |                                                                                                                                          |                                                                                                                                    | 14,632                                    
|                                                                                                      |                                                                                                                                          |                                                                                                                                    |                                           
|                                                                                                      |                                                                                                                                          |                                                                                                                                    | Total cash and cash equivalents           
|                                                                                                      |                                                                                                                                          |                                                                                                                                    |                                           
|Loans held-for-sale                                                                                   |                                                                                                                                          |                                                                                                                                    | 51,859                                    
|Investment securities available-for-sale, at fair value                                               |                                                                                                                                          |                                                                                                                                    | 102,882                                   
|Investment securities held-to-maturity (fair value of $790 and $6,524 in 2003 and 2002, respectively) |                                                                                                                                          |                                                                                                                                    | 775                                       
|Federal Home Loan Bank Stockat cost                                                                  |                                                                                                                                          |                                                                                                                                    | 1,021                                     
|Federal Reserve Bank Stockat cost                                                                    |                                                                                                                                          |                                                                                                                                    | 320                                       
|Loans                                                                                                 |                                                                                                                                          |                                                                                                                                    | 240,452                                   
|Less allowance for loan losses                                                                        |                                                                                                                                          |                                                                                                                                    | (3,069                                    
|                                                                                                      |                                                                                                                                          |                                                                                                                                    |                                           
|                                                                                                      |                                                                                                                                          |                                                                                                                                    | Net loans                                 
|Accrued interest receivable                                                                           |                                                                                                                                          |                                                                                                                                    | 2,225                                     
|Premises and equipment, net                                                                           |                                                                                                                                          |                                                                                                                                    | 2,855                                     
|Bank-owned life insurance                                                                             |                                                                                                                                          |                                                                                                                                    | 12,224                                    
|Other assets                                                                                          |                                                                                                                                          |                                                                                                                                    | 6,378                                     
|                                                                                                      |                                                                                                                                          |                                                                                                                                    |                                           
|                                                                                                      |                                                                                                                                          |                                                                                                                                    | Total assets                              
|                                                                                                      |                                                                                                                                          |                                                                                                                                    |                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                  |                                                                                                                                          |                                                                                                                                    |                                           
|Liabilities                                                                                           |                                                                                                                                          |                                                                                                                                    |                                           
|                                                                                                      | Deposits                                                                                                                                 |                                                                                                                                    |                                           
|                                                                                                      |                                                                                                                                          | Non-interest-bearing                                                                                                               |                                           
|                                                                                                      |                                                                                                                                          | Interest-bearing (including certificates of deposit over $100 of approximately $24,644 and $46,338 in 2003 and 2002, respectively) |                                           
|                                                                                                      |                                                                                                                                          |                                                                                                                                    |                                           
|                                                                                                      |                                                                                                                                          |                                                                                                                                    | Total deposits                            
|Securities sold under repurchase agreements                                                           |                                                                                                                                          |                                                                                                                                    | 1,099                                     
|                                                                                                      | Advances from borrowers for taxes and insurance                                                                                          |                                                                                                                                    |                                           
|                                                                                                      | Other liabilities                                                                                                                        |                                                                                                                                    |                                           
|                                                                                                      |                                                                                                                                          |                                                                                                                                    | Total liabilities                         
|Stockholders' equity                                                                                  |                                                                                                                                          |                                                                                                                                    |                                           
|                                                                                                      | Common stock, no par value; authorized 15,000,000 shares; issued and outstanding, 4,530,940 and 4,534,611 in 2003 and 2002, respectively |                                                                                                                                    |                                           
|                                                                                                      | Retained earnings                                                                                                                        |                                                                                                                                    |                                           
|                                                                                                      | Accumulated other comprehensive (loss) income                                                                                            |                                                                                                                                    |                                           
|                                                                                                      | Employee stock ownership plan                                                                                                            |                                                                                                                                    |                                           
|                                                                                                      | Treasury stock, at cost, 75,996 and 72,325 shares in 2003 and 2002, respectively                                                         |                                                                                                                                    |                                           
|                                                                                                      |                                                                                                                                          |                                                                                                                                    |                                           
|                                                                                                      |                                                                                                                                          |                                                                                                                                    | Total stockholders' equity                
|                                                                                                      |                                                                                                                                          |                                                                                                                                    |                                           
|                                                                                                      |                                                                                                                                          |                                                                                                                                    | Total liabilities and stockholders' equity
|                                                                                                      |                                                                                                                                          |                                                                                                                                    |                                           

The
accompanying notes are an integral part of these statements.

4

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PSB BANCORP, INC. AND SUBSIDIARIES        Consolidated Statements of Income

|                                       |                                                              | Year ended December 31,                                                     |      
|-------------------------------------- | ------------------------------------------------------------ | --------------------------------------------------------------------------- | -----
|
|
|INTEREST INCOME                        |                                                              |                                                                             |      
|                                       | Loans, including fees                                        |                                                                             | $    
|                                       | Investment securities                                        |                                                                             |      
|                                       | Deposits in banks                                            |                                                                             |      
|                                       |                                                              |                                                                             |      
|                                       |                                                              | Total interest income                                                       |      
|                                       |                                                              |                                                                             |      
|INTEREST EXPENSE                       |                                                              |                                                                             |      
|                                       | Deposits                                                     |                                                                             |      
|                                       | Borrowings                                                   |                                                                             |      
|                                       |                                                              |                                                                             |      
|                                       |                                                              | Total interest expense                                                      |      
|                                       |                                                              |                                                                             |      
|                                       |                                                              | Net interest income                                                         |      
|PROVISION FOR LOAN LOSSES              |                                                              |                                                                             | 45   
|                                       |                                                              |                                                                             |      
|                                       |                                                              | Net interest income after provision for loan losses                         |      
|                                       |                                                              |                                                                             |      
|NON-INTEREST INCOME                    |                                                              |                                                                             |      
|                                       | Service charges on deposit accounts                          |                                                                             |      
|                                       | Loss on sale of loans and real estate owned                  |                                                                             |      
|                                       | Loss on write down of equity investment                      |                                                                             |      
|                                       | Bank-owned life insurance                                    |                                                                             |      
|                                       | Other                                                        |                                                                             |      
|                                       |                                                              |                                                                             |      
|                                       |                                                              | Total non-interest income                                                   |      
|                                       |                                                              |                                                                             |      
|NON-INTEREST EXPENSE                   |                                                              |                                                                             |      
|                                       | Salaries and employee benefits                               |                                                                             |      
|                                       | Occupancy and equipment                                      |                                                                             |      
|                                       | Professional services                                        |                                                                             |      
|                                       | Data processing                                              |                                                                             |      
|                                       | Directors' fees                                              |                                                                             |      
|                                       | Adversising                                                  |                                                                             |      
|                                       | Other                                                        |                                                                             |      
|                                       |                                                              |                                                                             |      
|                                       |                                                              | Total non-interest expense                                                  |      
|                                       |                                                              |                                                                             |      
|                                       |                                                              | Income before income tax expense and cumulative effect of accounting change |      
|INCOME TAX EXPENSE                     |                                                              |                                                                             | 1,024
|                                       |                                                              |                                                                             |      
|                                       |                                                              | Income before cumulative effect of accounting change                        |      
|CUMULATIVE EFFECT OF ACCOUNTING CHANGE |                                                              |                                                                             |     
|                                       |                                                              |                                                                             |      
|                                       |                                                              | NET INCOME                                                                  |      
|                                       |                                                              |                                                                             |      
|PER SHARE DATA                         |                                                              |                                                                             |      
|                                       | Income before cumulative effect of accounting changebasic   |                                                                             | $    
|                                       |                                                              |                                                                             |      
|                                       | Income before cumulative effect of accounting changediluted |                                                                             | $    
|                                       |                                                              |                                                                             |      
|                                       | Cumulative effect of accounting changebasic                 |                                                                             | $    
|                                       |                                                              |                                                                             |      
|                                       | Cumulative effect of accounting changediluted               |                                                                             | $    
|                                       |                                                              |                                                                             |      
|                                       | Net incomebasic                                             |                                                                             | $    
|                                       |                                                              |                                                                             |      
|                                       | Net incomediluted                                           |                                                                             | $    
|                                       |                                                              |                                                                             |      

The accompanying notes are an integral part of these statements.

5

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PSB BANCORP, INC. AND SUBSIDIARIES        Consolidated Statement of Changes in Stockholders' Equity        Years ended December 31, 2003, 2002 and 2001        (Dollars in
Thousands)

|                                           |                                                                                   | Common
stock               |        | Retained
earnings
(accumulated)
deficit) |   | Accumulated
other
comprehensive
income (loss) |       | Unallocated
ESOP
shares |       | Treasury
stock |   | Total  |  
|------------------------------------------ | --------------------------------------------------------------------------------- | -------------------------- | ------ | ---------------------------------------- | - | --------------------------------------------- | ----- | ----------------------- | ----- | -------------- | - | ------ | -
|Balance at January 1, 2001                 |                                                                                   | $                          | 40,710 |                                          | $ | (971                                          | )     | $                       | (367  | )              | $ | (1,111 | )
|Allocation of ESOP shares                  |                                                                                   |                            | 3      |                                          |   |                                              |       |                         |      |                |   | (25    | )
|Allocation of MRP shares                   |                                                                                   |                            | 322    |                                          |   |                                              |       |                         |      |                |   |       |  
|Treasury shares issued in Jade acquisition |                                                                                   |                            | (41    | )                                        |   | (313                                          | )     |                         |      |                |   |       |  
|Comprehensive income                       |                                                                                   |                            |        |                                          |   |                                               |       |                         |       |                |   |        |  
|                                           | Net income                                                                        |                            |        |                                         |   |                                               | 3,052 |                         |       |               |   |        | 
|                                           | Change in net unrealized loss on securities available-for-sale, net of tax effect |                            |        |                                         |   |                                               |      |                         |       | 534            |   |        | 
|                                           |                                                                                   |                            |        |                                          |   |                                               |       |                         |       |                |   |        |  
|                                           |                                                                                   | Total comprehensive income |        |                                          |   |                                               |       |                         |       |                |   |        |  
|                                           |                                                                                   |                            |        |                                          |   |                                               |       |                         |       |                |   |        |  
|Balance at December 31, 2001               |                                                                                   |                            | 40,994 |                                          |   | 1,768                                         |       |                         | 167   |                |   | (1,136 | )
|Allocation of ESOP shares                  |                                                                                   |                            | 991    |                                          |   |                                              |       |                         |      |                |   | (495   | )
|Comprehensive income                       |                                                                                   |                            |        |                                          |   |                                               |       |                         |       |                |   |        |  
|                                           | Net Income                                                                        |                            |        |                                         |   |                                               | 3,146 |                         |       |               |   |        | 
|                                           | Change in net unrealized gain on securities available-for-sale, net of tax effect |                            |        |                                         |   |                                               |      |                         |       | 1,110          |   |        | 
|                                           |                                                                                   |                            |        |                                          |   |                                               |       |                         |       |                |   |        |  
|                                           |                                                                                   | Total comprehensive income |        |                                          |   |                                               |       |                         |       |                |   |        |  
|                                           |                                                                                   |                            |        |                                          |   |                                               |       |                         |       |                |   |        |  
|Balance at December 31, 2002               |                                                                                   |                            | 41,985 |                                          |   | 4,914                                         |       |                         | 1,277 |                |   | (1,631 | )
|Allocation of ESOP shares                  |                                                                                   |                            | 194    |                                          |   |                                               |       |                         |       |                |   | 262    |  
|Purchase of tresasury stock                |                                                                                   |                            |       |                                          |   |                                              |       |                         |      |                |   |       |  
|Comprehensive income                       |                                                                                   |                            |        |                                          |   |                                               |       |                         |       |                |   |        |  
|                                           | Net Income                                                                        |                            |        |                                          |   |                                               | 2,005 |                         |       |                |   |        |  
|                                           | Change in net unrealized loss on securities available-for-sale, net of tax effect |                            |        |                                          |   |                                               |       |                         |       | (1,476         | ) |        |  
|                                           |                                                                                   |                            |        |                                          |   |                                               |       |                         |       |                |   |        |  
|                                           |                                                                                   | Total comprehensive income |        |                                          |   |                                               |       |                         |       |                |   |        |  
|                                           |                                                                                   |                            |        |                                          |   |                                               |       |                         |       |                |   |        |  
|Balance at December 31, 2003               |                                                                                   | $                          | 42,179 |                                          | $ | 6,919                                         |       | $                       | (199  | )              | $ | (1,369 | )
|                                           |                                                                                   |                            |        |                                          |   |                                               |       |                         |       |                |   |        |  

The accompanying notes are an integral part of these statements.

6

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PSB BANCORP, INC. AND SUBSIDIARIES        Consolidated Statements of Cash Flows

|                                     |                                                                       | Year ended December 31,                                                        |                                                    
|------------------------------------ | --------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ---------------------------------------------------
|
|
|Cash flows from operating activities |                                                                       |                                                                                |                                                    
|                                     | Net income                                                            |                                                                                | $                                                  
|                                     | Adjustments to reconcile net income to net cash                       |                                                                                |                                                    
|                                     | provided by operating activities                                      |                                                                                |                                                    
|                                     |                                                                       | Provision for possible loan losses                                             |                                                    
|                                     |                                                                       | Depreciation and amortization                                                  |                                                    
|                                     |                                                                       | Amortization of (discounts) and accretion of premiums on investment securities |                                                    
|                                     |                                                                       | Amortization of negative goodwill                                              |                                                    
|                                     |                                                                       | Write-down of real estate owned                                                |                                                    
|                                     |                                                                       | Write-down of equity investments                                               |                                                    
|                                     |                                                                       | Proceeds from sale and amortization of loans held-for-sale                     |                                                    
|                                     |                                                                       | Origination of loans held-for-sale                                             |                                                    
|                                     |                                                                       | Deferred income taxes                                                          |                                                    
|                                     |                                                                       | ESOP expense (credit)                                                          |                                                    
|                                     |                                                                       | (Increase) decrease in accrued interest receivable                             |                                                    
|                                     |                                                                       | (Increase) decrease in other assets                                            |                                                    
|                                     |                                                                       | Decrease in accrued interest payable                                           |                                                    
|                                     |                                                                       | Increase change in accrued expenses                                            |                                                    
|                                     |                                                                       |                                                                                |                                                    
|                                     |                                                                       |                                                                                | Net cash (used in) provided by operating activities
|                                     |                                                                       |                                                                                |                                                    
|Cash flows from investing activities |                                                                       |                                                                                |                                                    
|                                     | Payment to acquire Jade, net of cash acquired and debt assumed        |                                                                                |                                                    
|                                     | Purchase of investment securities, available-for-sale                 |                                                                                |                                                    
|                                     | Proceeds from maturities and calls of investment securities           |                                                                                |                                                    
|                                     | Redemption (purchase) of Federal Home Loan Bank Stock                 |                                                                                |                                                    
|                                     | Net decrease (increase) in loans                                      |                                                                                |                                                    
|                                     | Proceeds from sale of real estate owned                               |                                                                                |                                                    
|                                     | Purchase of premises and equipment                                    |                                                                                |                                                    
|                                     |                                                                       |                                                                                |                                                    
|                                     |                                                                       |                                                                                | Net cash provided by investing activities          
|                                     |                                                                       |                                                                                |                                                    
|Cash flows from financing activities |                                                                       |                                                                                |                                                    
|                                     | Net increase in deposits                                              |                                                                                |                                                    
|                                     | (Decrease) increase in securities sold under agreements to repurchase |                                                                                |                                                    
|                                     | Treasury stock acquired                                               |                                                                                |                                                    
|                                     | Net decrease in borrowed funds                                        |                                                                                |                                                    
|                                     | Increase in advances for borrowers' taxes and insurance               |                                                                                |                                                    
|                                     |                                                                       |                                                                                |                                                    
|                                     |                                                                       |                                                                                | Net cash (used in) provided by financing activities
|                                     |                                                                       |                                                                                |                                                    
|                                     |                                                                       |                                                                                | Net increase in cash and cash equivalents          
|                                     | Cash and cash equivalents at beginning of year                        |                                                                                |                                                    
|                                     |                                                                       |                                                                                |                                                    
|                                     | Cash and cash equivalents at end of year                              |                                                                                | $                                                  
|                                     |                                                                       |                                                                                |                                                    

The accompanying notes are an integral part of these statements.

7

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PSB BANCORP, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements  December 31, 2003, 2002 and 2001

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PSB Bancorp, Inc. (the Company), primarily through its subsidiary, First Penn Bank (the Bank) operates twelve branch offices, makes residential,
construction, commercial, student and consumer loans to customers and provides community-banking services to individuals and corporate customers principally within Southeastern Pennsylvania and
Southern New Jersey. The Company's principal business is the ownership of the Bank.

The
Bank also conducts activities through its subsidiaries; Transnational Mortgage Company (TNMC), a wholly owned subsidiary, which originates residential loans. PSA Financial Corp.
(PSA), a wholly owned subsidiary, which originates residential and consumer loans. PSA Consumer Discount Company (PCD), a wholly owned subsidiary of PSA, which originates consumer loans, principally
within, but not limited to, the County of Philadelphia, Pennsylvania. PSA Service Corp. (PSC), a wholly owned subsidiary, processes all loans for the Bank and the other subsidiaries. Jade Abstract
Company, a wholly owned subsidiary, issuing title insurance for residential properties, and Jade Insurance Company, a wholly owned subsidiary, which sells insurance products in an agency status. First
Penn Bank Revocable Trust, a wholly owned trust, is the owner and beneficiary of life insurance policies purchased by the trust on a certain group of employees

The
Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own.
Commercial banks, savings banks, savings and loan associations, and credit unions actively compete for savings and time deposits, and for types of loans. Such institutions, as well as consumer
finance, insurance, and brokerage firms, may be considered competitors of the Bank with respect to one or more of the services it provides.

The
Bank is subject to regulations of certain state and federal agencies and, accordingly, is periodically examined by those regulatory authorities. As a consequence of the extensive
regulation of commercial banking activities, the Bank's business is particularly susceptible to being affected by state and federal legislation and regulations.

1.Basis of Financial Statement Presentation

The
accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the
banking industry. The accompanying consolidated financial statements include the accounts of the Company, and all its wholly owned subsidiaries. All intercompany balances and transactions have been
eliminated.

In
preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the balance sheets and the reported amounts of revenues and expenses during the reporting periods. Therefore, actual results could differ significantly
from those estimates.

The
principal estimates that are particularly susceptible to significant change in the near term relates to the allowance for loan losses and the valuation of goodwill impairment. The
evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into
consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral values. However, actual losses on
specific loans, which also are encompassed in the analysis, may vary from estimated losses.

(Continued)

8

---

The
Company has one operating segment and, accordingly, one reportable segment, "Community Banking." All of the Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the other. For example, commercial and industrial lending is dependent upon the ability of the Company to fund itself with retail
deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential and commercial mortgage lending. Accordingly all significant
operating decisions are based upon analysis of the Company as one operating segment.

In
May 2003, the Financial Accounting Standards Board 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 the Company's current business operations, the provisions of SFAS No. 150 did not impact
the Company's financial condition, results of operations, or disclosures.

2.Cash and Cash Equivalents

Cash
and cash equivalents include cash on hand, demand deposits maintained in depository institutions, and federal funds sold. Generally, federal funds are purchased and sold for
one-day periods.

At
December 31, 2003, the Company maintained a required reserve with the Federal Reserve Bank of approximately $320,000.

Cash
paid during the year for interest and income taxes are as follows (in thousands):

Year ended December 31,2003

2002

2001Interest

$
9,575

$
13,252

$
13,970Income taxes


1,024


875


755


3.Investment and Mortgage-Backed Securities

Investment
and mortgage-backed securities are classified in one of three categories: held-to-maturity, trading, or available-for-sale.
Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are reported at amortized cost. As the Company
does not engage in security trading, the balance of its debt securities and any equity securities are classified as available-for-sale. Net unrealized gains and losses for such
securities, net of tax, are required to be recognized as a separate component of shareholders' equity and excluded from the determination of net income. Gains or losses on the sales of securities
available-for-sale are recognized upon realization utilizing the specific identification method.

SFAS
No. 133, as amended by SFAS No. 138, "Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities," established accounting and reporting
standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the Statement of Financial Position and measure those instruments at fair value. The Company adopted SFAS No. 138 as amended, and the adoption did not have a material
impact on its financial position or results of operations.

The
Company adopted EITF (Emerging Issues Task Force) No. 03-1, "The Meaning of Other than Temporary Impairment and Its Application to Certain Investments", as of
December 31, 2003. 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

9

---

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.

4.Variable Interest Entity

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 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 SPE's. 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.

5.Loans and Allowance for Loan Losses

Loans
that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal adjusted for any
charge-offs, the allowance for loans losses and any deferred fees or costs on originated loans. Interest on loans is accrued and credited to operations based upon the principal amounts
outstanding.

Loan
fees and certain direct loan origination costs are deferred and the net fee or cost is recognized as an adjustment of the loan yield over the contractual life of the loan using the
interest method. When a loan is sold, unamortized net fees are recognized as income. Other loan fees and charges representing service costs for the prepayment of loans, for delinquent payments or for
miscellaneous loan services are recognized when collected. Commitment fees and costs relating to commitments whose likelihood of exercise is remote are recognized over the commitment period on a
straight-line basis. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life
of the loan as an adjustment of yield.

The
allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes
that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb loan losses on existing loans that may become uncollectible based
on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower's ability to pay.

(Continued)

10

---

Accrual
of interest is discontinued on a loan when principal and interest become 90 days or more past due and when management believes, after considering economic and business
conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Once a loan is placed on non-accrual status, interest previously
accrued and uncollected is charged to operations and interest is included in income thereafter only to the extent actually received in cash. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on changes in economic conditions or any of the other factors used in management's determination. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at the time of their examination.

The
Company accounts for its impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No 118, "Accounting by
Creditors for Impairment of a LoanIncome Recognition and Disclosures." This standard requires that a creditor measure impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that, as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that
foreclosure is probable.

On
July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and Documentation
Issues. SAB No. 102 provides guidance on the development, documentation, and application of a systematic methodology for determining the allowance for loan losses in accordance with US GAAP and
was effective upon issuance. The adoption of SAB No. 102 did not have an impact on the Company's financial position or results of operations.

11

---

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 the Company 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 the Company's financial condition or results of operations. While certain guarantees are only subject to the disclosure provisions of this interpretation, 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, the Company did not
record a liability when guaranteeing obligations unless it became probable that the Company would have to perform under the guarantee. The adoption of FIN No. 45 did not have a material impact
on the consolidated financial statements or results operation.

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 the Company will be unable to
collect all contractually required payments receivable. SOP No. 03-3 requires that the Company 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.

6.Loans Held-for-Sale

Loans
held-for-sale are carried at the lower of cost or fair value. Management has determined, using an aggregate asset basis, that the cost of loans held for
sale approximate fair value at December 31, 2003 and 2002. Accordingly, no loss has been recognized on loans held-for-sale. At December 31, 2003 and 2002, The
Company serviced $36,778,000 and $37,167,000 loans, respectively for others. The capitalized servicing asset was $178,000 and $253,000 at December 31, 2003 and 2002, respectively.

The
Company accounts for its transfers and servicing assets in accordance with SFAS No. 140, "Accounting for Transfers of Financial Assets and Extinguishments of Liabilities,"
which revised the accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities.

Mortgage
loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Gains and losses on the sales of loans are
also accounted for in accordance with SFAS No. 134, "Accounting for Mortgage Securities Retained after the Securitizations of Mortgage Loans Held-for-Sale by a Mortgage
Banking Enterprise." This statement requires that an entity engaged in mortgage banking activities classify the retained mortgage-backed security or other interest, which resulted from the
securitizations of a mortgage loan held-for-sale based upon its ability and intent to sell or hold these investments.

In
April 2003, the Financial Accounting Standards Board 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 the Company's current business operations, the

12

---

adoption
of the provisions of SFAS No. 149 did not materially impact the Company's financial condition, results of operations, or disclosures.

7.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.

8.Bank-Owned Life Insurance (BOLI)

BOLI
involves the purchasing of life insurance by the Company "s wholly owned trust First Penn Bank Revocable Trust on a chosen group of employees. The Company is the owner and
beneficiary of the policies. This pool of insurance, due to tax advantages to the Banks, is profitable to the Company. Bank deposits fund BOLI and the earnings from BOLI are recognized as
non-interest income.

9.Premises and Equipment

Premises
and equipment are stated at cost less accumulated depreciation. Depreciation is charged to operations on a straight-line basis over the estimated useful lives of the
assets.

On
January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued. SFAS No. 144 retains
the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. SFAS No. 144 also changes the requirements
relating to reporting the effects of a disposal or discontinuation of a segment of a business. The adoption of this statement did not have an impact on the financial condition or results of operations
of the Company.

10.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 as measured
by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.

The
Company and its subsidiaries file a consolidated federal income tax return and the amount of income tax expense or benefit is computed and allocated on a separate return
basis.

11.Earnings Per Share

The
Company follows the provisions of SFAS No. 128, "Earnings Per Share." Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the
weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock. EPS is computed based on the weighted-average number of shares of common stock outstanding.

In
May 2003, the Financial Accounting Standards Board 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 the Company's current business operations, the provisions of SFAS No. 150 did not
impact the Company's financial condition, results of operations, or disclosures

12.Advertising Costs

The
Company expenses advertising costs as incurred.

13

---

13.Accounting for Stock-Based Compensation

The
Company follows SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, which allows an entity to use a fair value-based method for valuing
stock-based compensation, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting
period. Alternatively, the statement permits entities to elect accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company's stock option plans are accounted for under APB Opinion No. 25. Entities that continue to account for stock options using APB Opinion No. 25
are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied.

At
December 31, 2002, the Company's four Option Plans provide for the grant of (i) options to purchase Common Stock intended to qualify as incentive stock options
(Incentive Stock Option) under Section No. 422 of the Code, and (ii) options that do not so qualify (Nonqualified Stock Options). Pursuant to the Option Plans, 1,653,315 shares of Common
Stock (subject to adjustment) are reserved for issuance by the Company upon exercise of stock options to be granted to certain officers and employees of the Company from time to time under the Option
Plans. As of December 31, 2003, 308,315 were granted. The purpose of the Option Plans is to give certain officers and employees an opportunity to acquire common stock and thereby help the
Company attract, retain and motivate key employees and officers. As of December 31, 2003, 2,143 options in connection with the First Bank acquisition remain outstanding. The following table
illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation:

|                           |                                                                                                 | Year Ended December 31, |  
|-------------------------- | ----------------------------------------------------------------------------------------------- | ----------------------- | -
|
|Net income                 |                                                                                                 |                         |  
|                           | As reported                                                                                     |                         | $
|                           | Less stock-based compensation costs determined under the fair value-based method for all awards |                         |  
|                           |                                                                                                 |                         |  
|                           | Pro forma                                                                                       |                         | $
|                           |                                                                                                 |                         |  
|Basic earnings per share   |                                                                                                 |                         |  
|                           | As reported                                                                                     |                         | $
|                           | Pro forma                                                                                       |                         | $
|Diluted earnings per share |                                                                                                 |                         |  
|                           | As reported                                                                                     |                         | $
|                           | Pro forma                                                                                       |                         | $

There
were no options granted in 2003, 2002 or 2001.

14.Employee Benefit Plans

The
Company has certain employee benefit plans covering substantially all employees. The Company accrues such costs as incurred.

The
Company follows the disclosure provisions of SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which was revised in December 2003. SFAS
No. 132, as revised, requires additional employers' disclosures about pension and other postretirement benefit plans as of December 31, 2003. Certain disclosures related to estimated
future benefit payments are effective for fiscal years ending after June 14, 2004. Net pension expense consists of service cost, interest cost,
return on pension assets and amortization of unrecognized initial net assets. The Company accrues its post retirement benefit costs and other benefit plan costs as incurred.

14

---

NOTE
ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIESContinued

The
Company reports comprehensive income, which includes net income, as well as certain other items, which result in a change to equity during the period. The income tax effects
allocated to comprehensive income are as follows:

|                              |                                                 | December 31, 2003 |       
|----------------------------- | ----------------------------------------------- | ----------------- | ------
|
|
|Unrealized loss on securities |                                                 |                   |       
|                              | Unrealized holding losses arising during period |                   | $     
|                              |                                                 |                   |       
|Other comprehensive loss, net |                                                 | $                 | (2,285
|                              |                                                 |                   |       

|                                |                                                | December 31, 2002
|------------------------------- | ---------------------------------------------- | -----------------
|
|
|Unrealized gains on securities  |                                                |                  
|                                |                                                |                  
|                                | Unrealized holding gains arising during period |                  
|                                |                                                |                  
|Other comprehensive income, net |                                                | $                
|                                |                                                |                  

|                                |                                                | December 31, 2001
|------------------------------- | ---------------------------------------------- | -----------------
|
|
|Unrealized gains on securities  |                                                |                  
|                                |                                                |                  
|                                | Unrealized holding gains arising during period |                  
|                                |                                                |                  
|Other comprehensive income, net |                                                | $                
|                                |                                                |                  

15

---

16.Reclassifications

Certain
2002 and 2001 amounts have been reclassified to conform to the 2003 presentation.

NOTE BACQUISITION

On June 29, 2001, the Company acquired JADE Financial Corp. (Jade) and its wholly owned subsidiary, IGA in a cash transaction valued at approximately
$25 million. The acquisition was accounted for using the purchase method. Each outstanding share of Jade common stock, other than those shares held by the JADE Employee Stock Ownership Plan
(the JADE ESOP), were automatically converted into the right to receive a cash payment equal to $13.55 per share of Company common stock, equal to an exchange ratio of 2.667 shares of Company common
stock for each share of Jade common Stock held by the JADE ESOP and the JADE ESOP Participants. The conversion of the JADE ESOP resulted in the issuance of 375,717 shares of Company common stock held
in treasury and the redemption of 8,127 shares for approximately $110,000 in cash.

The
acquisition of Jade resulted in the Company recording negative goodwill of approximately $1,752,000. The negative goodwill was being amortized over ten years on a
straight-line basis during the year ended December 31, 2001, and resulted in income of approximately $73,000. On January 1, 2002, after reducing the carrying value of the
acquired deferred tax asset of JADE by approximately $350,000, PSB recognized, as a cumulative effect of an accounting change, approximately $1.3 million of unamortized negative goodwill, in
conjunction with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets."

Results
of operations of Jade, subsequent to June 29, 2001, are included in the Company's results of operations for the year ended December 31, 2001. The unaudited proforma
combined historical results, as if Jade had been acquired at the beginning of fiscal 2001 are estimated to be:

2001Interest income

$
33,854Interest expense


17,690Net income


3,788Basic earnings per share


0.90Diluted earnings per share


0.89


The
proforma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each fiscal period presented, nor
are they necessarily indicative of future consolidated results.

(Continued)

16

---

NOTE CINVESTMENT SECURITIES

The following tables present the amortized cost, gross unrealized gains and losses and fair values of the Company's investment securities
available-for-sale and held-to-maturity as of December 31, 2003 and 2002 (in thousands):

|                                              |                                 | December 31, 2003
|--------------------------------------------- | ------------------------------- | -----------------
|
|Investment securities available-for-sale      |                                 |                  
|                                              | Mutual funds                    |                  
|                                              | State and municipal obligations |                  
|                                              | FHLB Notes                      |                  
|                                              |                                 |                  
|                                              |                                 |                  
|Mortgage-backed securities available-for-sale |                                 |                  
|                                              | FNMA certificates               |                  
|                                              | GNMA certificates               |                  
|                                              | FHLMC Certificates              |                  
|                                              |                                 |                  
|                                              |                                 |                  
|                                              |                                 |                  
|                                              |                                 | $                
|                                              |                                 |                  
|Mortgage-backed-securities held-to-maturity   |                                 |                  
|                                              | GNMA Certificates               |                  
|                                              |                                 |                  
|                                              |                                 | $                
|                                              |                                 |                  

(Continued)

17

---

|                                              |                                       | December 31, 2002
|--------------------------------------------- | ------------------------------------- | -----------------
|
|Investment securities available-for-sale      |                                       |                  
|                                              | Mutual funds                          |                  
|                                              | State and municipal obligations       |                  
|                                              |                                       |                  
|                                              |                                       |                  
|                                              |                                       |                  
|Mortgage-backed securities available-for-sale |                                       |                  
|                                              | FNMA certificates                     |                  
|                                              | GNMA certificates                     |                  
|                                              |                                       |                  
|                                              |                                       |                  
|                                              |                                       |                  
|                                              |                                       | $                
|                                              |                                       |                  
|Investment securities held-to-maturity        |                                       |                  
|                                              | U.S. Government and agency securities |                  
|                                              |                                       |                  
|                                              |                                       |                  
|                                              |                                       |                  
|Mortgage-backed-securities held-to-maturity   |                                       |                  
|                                              | GNMA Certificates                     |                  
|                                              | FHLMC Certificates                    |                  
|                                              | Other mortgage-backed securities      |                  
|                                              |                                       |                  
|                                              |                                       |                  
|                                              |                                       |                  
|                                              |                                       | $                
|                                              |                                       |                  

There
were no sales of investment securities in 2003, 2002 and 2001.

(Continued)

18

---



PSB BANCORP, INC. AND SUBSIDIARIES  Notes to Consolidated Financial StatementsContinued  December 31, 2003, 2002 and 2001

The amortized cost and fair value of the Company'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   |                 
|                                       |  |                    |         |                 
|                                       |  |                    | 54,851  |                 
|Due after ten years                    |  |                    |         |                 
|Mortgage-backed securities             |  |                    | 48,381  |                 
|                                       |  |                    |         |                 
|                                       |  | $                  | 103,232 |                 
|                                       |  |                    |         |                 

No
investment securities were pledged to secure public funds at December 31, 2003. The table below indicates the length of time individual securities have been in a continuous
unrealized loss position at December 31, 2003 (in thousands):

|                                                 |  |    |  | Less than 12 months |        | 12 months or longer |   | Total  |  
|------------------------------------------------ |  | -- |  | ------------------- | ------ | ------------------- | - | ------ | -
|
|
|U.S. FHLB notes                                  |  | 5  |  | $                   | 49,061 |                     | $ | (930   | )
|Mortgage- backed securities                      |  | 15 |  |                     | 32,225 |                     |   | (362   | )
|                                                 |  |    |  |                     |        |                     |   |        |  
|Total temporarily impaired investment securities |  | 20 |  | $                   | 81,286 |                     | $ | (1,292 | )
|                                                 |  |    |  |                     |        |                     |   |        |  

In
management's opinion, the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. There were 20 securities in the less than twelve
months category. The Company has the ability to hold these securities until maturity or market price recovery. Management believes that the unrealized losses represent temporary impairments of the
securities.

(Continued)

19

---

PSB BANCORP, INC. AND SUBSIDIARIES  Notes to Consolidated Financial StatementsContinued  December 31, 2003, 2002 and 2001

NOTE DLOANS

Loans
are as follows:

|                            |                    | December 31, |        
|--------------------------- | ------------------ | ------------ | -------
|
|
|Real estate loans           |                    |              |        
|                            | One-to-four family |              | $      
|                            | Multifamily        |              |        
|                            | Construction loans |              |        
|                            | Non-residential    |              |        
|Student loans               |                    |              | 4,655  
|Consumer loans              |                    |              | 19,407 
|SBA loans                   |                    |              | 7,352  
|Commercial loans            |                    |              | 14,502 
|                            |                    |              |        
|                            |                    |              | 240,811
|Unearned fees and discounts |                    |              | (359   
|Allowance for loan losses   |                    |              | (3069  
|                            |                    |              |        
|                            | Loans              |              | $      
|                            |                    |              |        

In
the ordinary course of business, the Company has granted loans to shareholders, officers, directors, and their affiliates. All loan transactions entered into between the Company and
such related parties were made on the same terms and conditions as transactions with all other parties. In management's opinion, such loans are consistent with sound banking practices and are within
applicable regulatory lending limitations. The aggregate approximate amount of these loans outstanding at December 31, 2003 and 2002 was $3,100,000 and $4,075,000, respectively. New loans and
repayments amounted to approximately $100,000 and $1,075,000, respectively, during the year ended December 31, 2003.

Non-performing
assets include loans past due 90 days or more, nonaccrual loans, impaired loans and other real estate owned. The aggregate amount of these assets at
December 31, 2003 and 2002 were approximately $0, $5,203,000, $0, $374,000 and $0, $4,480,000, $0, $382,000, respectively.

As
of December 31, 2003, 2002 and 2001, interest accrued on nonaccrual loans totaled $324,000, $346,000 and $275,000, respectively.

At
December 31, 2003, the Company's impaired loans consisted of 54 commercial real estate loans with a total recorded balance of approximately $3,700,000 for which specific
allowances of approximately $961,000 have been established. At December 31, 2002, the Company's impaired loans consisted of 44 commercial real estate loans with a total recorded balance of
approximately $3,090,000 for which specific allowances of approximately $674,000 have been established. The average investment in impaired loans for the years ended December 31, 2003, 2002 and
2001 was approximately $3,700,000, $3,500,000, and $3,500,000 respectively.

(Continued)

20

---

PSB BANCORP, INC. AND SUBSIDIARIES  Notes to Consolidated Financial StatementsContinued  December 31, 2003, 2002 and 2001

NOTE DLOANSContinued

Changes
in the allowance for loan losses were as follows:

|                                                |  | Year Ended December 31, |      
|----------------------------------------------- |  | ----------------------- | -----
|
|
|Balance at the beginning of the year            |  | $                       | 3,603
|Acquisition of Jade's allowance for loan losses |  |                         |      
|Provision for loan loss                         |  |                         | 45   
|Recoveries of loans previously charged off      |  |                         | 183  
|Charged off                                     |  |                         | (762 
|                                                |  |                         |      
|Balance at end of year                          |  | $                       | 3,069
|                                                |  |                         |      

NOTE EPREMISES AND EQUIPMENT

Premises
and equipment are as follows:

|                                  |  |            |  | December 31, |       
|--------------------------------- |  | ---------- |  | ------------ | ------
|
|
|
|Land                              |  | Indefinite |  | $            | 10    
|Buildings and improvements        |  | 25-50      |  |              | 2,007 
|Furniture, fixtures and equipment |  | 3-10       |  |              | 6,039 
|                                  |  |            |  |              |       
|                                  |  |            |  |              | 8,056 
|                                  |  |            |  |              |       
|Less accumulated depreciation     |  |            |  |              | (5,201
|                                  |  |            |  |              |       
|                                  |  |            |  | $            | 2,855 
|                                  |  |            |  |              |       

Depreciation
and amortization charged to operations amounted to approximately $928,000, $640,000 and $350,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Depreciation and amoritization charged to operations in the current year consisted of additions of approximately $346,000 and disposals of leasehold improvements of $582,000.

(Continued)

21

---

PSB BANCORP, INC. AND SUBSIDIARIES  Notes to Consolidated Financial StatementsContinued  December 31, 2003, 2002 and 2001

NOTE FVARIABLE INTEREST ENTITY

In January 1999, the Company purchased 1,600,000 shares of Series A convertible preferred stock, $0.01 par value per share (preferred stock) of
McGuire Performance Solutions, Inc. (MPS) in the amount of $1,125,000. In February 2000, the Company purchased another 500,000 additional shares of the preferred stock in the amount of
$500,000. In 2001, the Company purchased 375,000 additional shares in the amount of $375,000. In 2001, MPS changed its name to Iron Bridge Holdings, Inc. (Iron Bridge). In December 2002, the
Company sold 304,350 shares for approximately $268,000. The Company does
have the ability to exercise influence, but not control, over Iron Bridge. Accordingly, the investment in Iron Bridge is accounted for using the equity method of accounting. The Company includes its
investment in Iron Bridge on the consolidated balance sheet in other assets. The Company's ownership in Iron Bridge totaled 49.9% as of December 31, 2003 and 2002. At December 31, 2003
and 2002, the investment in Iron Bridge was $1,570,000 and $1,570,000, respectively. The Company records its share of Iron Bridge's earnings or losses in other net interest income. The Company
recorded its share of losses of approximately $0, $32,000 and $154,000 for the years ended December 31, 2003, 2002, and 2001, respectively. The Company did not record its share of Iron Bridge's
earnings in the current year, in doing so would increase the carrying value of the Company's investment in Iron Bridge's above its determined fair value.

NOTE GDEPOSITS

Deposits
are summarized as follows:

|                                   |  | December 31,
|---------------------------------- |  | ------------
|
|
|Demand                             |  | $           
|NOW                                |  |             
|Money Market and Statement Savings |  |             
|Passbook savings                   |  |             
|Certificates of deposit            |  |             
|                                   |  |             
|                                   |  | $           
|                                   |  |             

(continued)

22

---



At December 31, 2003, scheduled maturities of certificates of deposit are as follows (in thousands):

2004

$
138,5072005


36,1932006


4,5442007


10,1282008


6,768Thereafter


301$
196,441


NOTE HBORROWING

1.Federal Home Loan Bank Advances

Under
an agreement with the Federal Home Loan Bank of Pittsburgh (FHLB), the Company has a line of credit available in the amount of approximately $161,560,000. As of December 31,
2003 and 2002, there was no amount outstanding throughout the year on this line of credit, respectively. All FHLB advances are collateralized by a security agreement covering qualifying mortgage loans
and unpledged treasury, agency and mortgage-backed securities which at December 31, 2003, had a combined carrying value of approximately $158,598,000. In addition, all FHLB advances are secured
by the FHLB stock owned by the Company.

2.Securities sold under agreements to repurchase

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
%


23

---

NOTE IINCOME TAXES

The
components of the provision for income taxes are as follows (in thousands):

Year Ended December 31,2003

2002

2001CurrentFederal

$
695

$
100

$
204State and local


113


92


25808


192

$
229DeferredFederal


216


997


503State and local








23216


997


526Total income tax expense

$
1,024

$
1,189

$
755


A
reconciliation between the reported income tax expense and the amount computed by multiplying income before income tax by the Federal statutory income tax rate is as follows (in
thousands):

Year Ended December 31,2003

2002

2001Expected statutory income tax expense

$
1,068

$
1,022

$
1,294Increase (decrease) in taxes resulting from State and local taxes on income


76


61


32Non-taxable income


(222
)

(256
)

(197
)Non-deductible expenses


102


297


Non-capitalized expenses








(340
)Other





65


(34
)Total income tax expense

$
1,024

$
1,189

$
755


24

---

Net
deferred tax assets consist of the following (in thousands):

December 31,2003

2002Deferred tax assets (Liabilities)Allowance for loan losses

$
866

$
835Non-accrual interest


375


315Foundation charitable contribution carry over





46Depreciation


656


732Net operating loss carryforwards


507


692Unrealized losses (gains) on investment securities available-for-sale


151


(658
)Other


(39
)

(39
)Net deferred tax asset, included in other assets


2,516


1,923


The
Bank is not required to recapture approximately $2.5 million of its tax bad debt reserve, attributable to bad debt deductions taken by it prior to 1988, as long as the Bank
continues to operate as a bank under federal tax law and does not use the reserve for any other purpose. In accordance with SFAS No. 109, the Bank has not recorded any deferred tax liability on
this portion of its tax bad debt reserve. The tax that would be paid were the Bank ultimately required to recapture that portion of the reserve, would amount to approximately $800,000. At
December 31, 2003, the Bank has net operating loss carryover of about $1.3 million expiring in 2020.

NOTE JEARNINGS PER SHARE

The following table illustrates the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted EPS computation. The
computation of diluted earnings per share for all periods excludes 1,371,200 options issued in connection with the 1999 First Bank acquisition, which have been deemed invalid by management.

Year ended December 31, 2003Income
(numerator)

Weighted
average shares
(denominator)

Per share
amount(in thousands, except per share data)Basic earnings per shareIncome available to common stockholders

$
2,005

4,250

$
0.47Effect of dilutive securitiesStock options




100


(0.01
)Diluted earnings per shareIncome available to common stockholdersPlus effect of dilutive securities

$
2,005

4,350

$
0.46


No
options to purchase shares of common stock were anti-dilutive for the year ended December 31, 2003.

25

---

Year ended December 31, 2002Income
(numerator)

Weighted
average shares
(denominator)

Per share
amount(in thousands, except per share data)Basic earnings per shareIncome before cumulative effect of accounting change

$
1,817



$
0.43Cumulative effect of accounting change


1,329




0.32Income available to common stockholders

$
3,146

4,194

$
0.75Effect of dilutive securitiesStock options




75Diluted earnings per shareIncome before cumulative effect of accounting change

$
1,817




Cumulative effect of accounting change


1,329




(0.01
)Income available to common stockholdersPlus effect of dilutive securities

$
3,146

4,269

$
0.74


No
options to purchase shares of common stock were anti-dilutive for the year ended December 31, 2002.

Year ended December 31, 2001Income
(numerator)

Weighted
average shares
(denominator)

Per share
amount(in thousands, except per share data)Basic earnings per shareIncome available to common stockholders

$
3,052

4,203

$
0.73Effect of dilutive securitiesStock options




12


(0.01
)Diluted earnings per shareIncome available to common stockholders plus effect of dilutive securities

$
3,052

4,215

$
0.72


Options
to purchase 7,048 shares of common stock with exercise prices ranging from $5.35 to $5.38 per share were not included in the computation of diluted EPS for the year ended
December 31, 2001 because the exercise price was greater than the average market price of the common stock.

26

---

NOTE KFINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.

27

---



PSB BANCORP, INC. AND SUBSIDIARIES    Notes to Consolidated Financial Statements    December 31, 2003, 2002 and 2001

The Company had the following off-balance-sheet financial instruments whose approximate contract amounts represent credit risk at the dates indicated:

|                             |  | December 31,
|---------------------------- |  | ------------
|
|
|Commitments to extend credit |  | $           
|Unused lines of credit       |  |             
|Standby letters of credit    |  |             
|                             |  |             
|                             |  | $           
|                             |  |             

Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include Small Business Administration guarantees, deposit accounts at the Company, marketable securities, personal or commercial real estate, accounts receivable,
inventory, and equipment.

Standby
letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support
contracts entered into by customers. Most guarantees extend for one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to
customers. The Company holds collateral to support these commitments.

The
Company 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 the Company to assure the financial and performance obligations of a customer to a third party.
At December 31, 2003, and 2002, the Company was contingently liable on financial and performance standby letters of credit totaling $2.3 million and $1.6 million, respectively,
$1.6 million of which were originated during 2003. The Company'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 the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. The Company 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 98.0%.

The
Bank grants mortgage, consumer and construction loans primarily to customers in Southeastern Pennsylvania and Southern New Jersey. Although the Bank has a diversified loan portfolio,
a substantial portion of its customers' ability to honor their contracts is dependent upon the local economy. The Bank's net investment in loans is subject to a significant concentration of credit
risk given that the investment is primarily within a specific geographic area.

28

---

NOTE L- COMMITMENTS AND CONTINGENCIES

1.Lease obligations

The
Company has entered into several non-cancelable operating lease agreements for its facilities. Additionally, the Company is responsible for pro rata operating expense
escalations. The approximate minimum annual rental payments at December 31, 2003, under these leases are as follows:

|(in thousands)
|--------------
|2004          
|2005          
|2006          
|2007          
|2008          
|Thereafter    
|              
|              
|              

Lease
expense was approximately $887,000, $740,000 and $520,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

2.Litigation

In
the fourth quarter of 2001, the Company declared 1,371,200 options previously issued by First Bank of Philadelphia to be void because the Company 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.

Management
of the Company believes that the options are invalid and intends to vigorously defend the action. However, there can be no assurance regarding the eventual outcome of this
litigation.

Periodically,
there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds
security interests, claims involving the making and servicing of real property loans, and other issues incident to the Company's business. At this time, there are no such claims or proceedings that
are material to the operations of the Company.

NOTE MFAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS
No. 107 requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Company, as for most financial
institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange transaction. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure, as
required by SFAS No. 107. Accordingly, the information presented below does not purport to represent the aggregate net fair value of the Company.

Changes
in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable
comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence

29

---

of
active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

Estimated
fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial institutions. The estimation
methodologies used, the estimated fair values, and recorded book balances at December 31, 2003 and 2002, respectively, are outlined below.

For
cash and due from banks, federal funds sold, and interest earning deposits with banks, the recorded book value of $52,574,000 and $110,269,000 approximates fair value at
December 31, 2003 and 2002, respectively. The estimated fair values of investment securities are based on quoted market prices, if available. Estimated fair values are based on quoted market
prices of comparable instruments if quoted market prices are not available.

The
fair value of loans held-for-sale with recorded book values of approximately $51,859,000 and $18,855,000 at December 31, 2003 and 2002 are determined
using an aggregate asset basis method and are carried at fair value.

The
fair values of loans that management intends to hold for the foreseeable future are estimated based on a discounted cash flow analysis using interest rates currently offered for
loans with similar terms to borrowers of similar credit quality. The carrying value of accrued interest approximates fair value.

The
estimated fair values of demand deposits (i.e., interest and non-interest bearing checking accounts, passbook savings, and
certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).
The fair value of variable rate certificates of deposit approximate their carrying amounts at the reporting date. The fair values of fixed-rate certificates of deposit are estimated using
a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly time deposit maturities. The carrying amount of accrued interest
payable approximates its fair value.

|                      |                                          | 2003 |   | 2002   
|--------------------- | ---------------------------------------- | ---- | - | -------
|
|
|Financial assets      |                                          |      |   |        
|                      | Investment securities held-to-maturity   |      | $ | 775    
|                      | Investment securities available-for sale |      |   | 102,882
|                      | Loans                                    |      |   | 251,142
|Financial liabilities |                                          |      |   |        
|                      | Deposits with no stated maturities       |      |   | 219,718
|                      | Deposits with stated maturities          |      |   | 196,451

The
fair values of securities under agreements to repurchase totaling approximately $1,099,000 and $1,075,000 are estimated to approximate their recorded book balances at
December 31, 2003 and 2002, respectively.

The
fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount
of unearned fees plus the estimated costs to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of
credit are considered immaterial.

30

---

NOTE NSTOCK-BASED COMPENSATION

A summary of the status of the Company's fixed stock option plan for the years ended December 31, 2003, 2002 and 2001, and changes during the years ending
on those dates is presented below:

The
summary of stock options for all periods presented excludes 1,371,200 options issued in connection with the 1999 First Bank acquisition, which have been deemed invalid by management.

|                                            |  | 2003    |  | 2002 |      | 2001
|------------------------------------------- |  | ------- |  | ---- | ---- | ----
|
|Outstanding at beginning of year            |  | 280,458 |  | $    | 5.05 |     
|Options granted                             |  | 30,000  |  |      | 8.61 |     
|Options exercised                           |  |        |  |      |     |     
|Options forfeited                           |  |        |  |      |     |     
|                                            |  |         |  |      |      |     
|Outstanding and excercisable at end of year |  | 310,458 |  | $    | 5.40 |     
|                                            |  |         |  |      |      |     

31

---



The following table summarizes information concerning options outstanding at December 31, 2003:

|               |  | Options outstanding |  | Options exercisable
|-------------- |  | ------------------- |  | -------------------
|
|$3.36 to $5.04 |  | 123,669             |  | 4.80 years         
|$5.38          |  | 161,073             |  | 6.83 years         
|               |  |                     |  |                    
|               |  | 284,742             |  | 5.95 years         
|               |  |                     |  |                    

NOTE OEMPLOYEE BENEFIT PLANS

1.    Defined Benefit Pension Plan

The Company maintains a non-contributory defined benefit plan (the Pension Plan) covering all employees, as defined under the pension plan document.
The Pension Plan calls for benefits to be paid to eligible employees at retirement based upon years of service with the Bank and compensation rates near retirement. Contributions to the Pension Plan
reflect benefits attributed to employees' service. Pension Plan assets consist of common stock, investment grade corporate bonds and U.S. Government obligations. The Pension Plan was "frozen" in 1994
and benefits no longer accrue. No Pension Plan contributions were made in 2003, 2002, and 2001. No new employees will be eligible for participation.

The
following table sets forth the plans' required disclosures:

|                                    |                                                | December 31, |        
|----------------------------------- | ---------------------------------------------- | ------------ | -------
|
|Change in benefit obligation        |                                                |              |        
|                                    | Benefit obligation at beginning of year        |              | $      
|                                    | Interest cost                                  |              |        
|                                    | Actual (loss) gain                             |              |        
|                                    | Benefits paid                                  |              |        
|                                    |                                                |              |        
|                                    | Benefits obligation at end of year             |              | $      
|                                    |                                                |              |        
|Change in plan assets               |                                                |              |        
|                                    | Fair value of plan assets at beginning of year |              | $      
|                                    | Actual return on plan assets                   |              |        
|                                    | Benefits paid                                  |              |        
|                                    |                                                |              |        
|                                    | Fair value of plan assets at end of year       |              | $      
|                                    |                                                |              |        
|                                    | Funded status                                  |              | $      
|                                    | Unrecognized actuarial gain                    |              |        
|                                    | Unrecognized transition obligation             |              |        
|                                    |                                                |              |        
|Accrued pension cost at end of year |                                                | $            | (22,979
|                                    |                                                |              |        

|                                                |                                | 2003 |      | 2002 |      | 2001 |     
|----------------------------------------------- | ------------------------------ | ---- | ---- | ---- | ---- | ---- | ----
|Weighted-average assumptions as of December 31, |                                |      |      |      |      |      |     
|                                                | Discount rate                  |      | 7.00 | %    | 7.00 | %    | 7.00
|                                                | Expected return on plan assets |      | 7.00 |      | 7.00 |      | 7.00

32

---

|                                                  |                                     | 2003 |   | 2002    |   | 2001 |        
|------------------------------------------------- | ----------------------------------- | ---- | - | ------- | - | ---- | -------
|Components of net periodic benefit cost (benefit) |                                     |      |   |         |   |      |        
|                                                  | Interest cost                       |      | $ | 61,548  |   | $    | 54,378 
|                                                  | Expected return on plan assets      |      |   | (50,867 | ) |      | (55,793
|                                                  | Amortization of transition amount   |      |   | 6,174   |   |      | 6,174  
|                                                  | Amortization of gain                |      |   |        |   |      | (1,361 
|                                                  |                                     |      |   |         |   |      |        
|                                                  | Net periodic benefit cost (benefit) |      | $ | 16,855  |   | $    | 3,398  
|                                                  |                                     |      |   |         |   |      |        

The
asset allocation for the Bank's pension plans at the end of 2003 and 2002 and the larger allocation for 2004, by asset category, follows. The fair value of plan assets for those
plans is $844,038 and $751,387 million at the end of 2003 an 2002, respectively.

|               |                   | 2004  |       | 2003 |       | 2002 |      
|-------------- | ----------------- | ----- | ----- | ---- | ----- | ---- | -----
|Asset Category |                   |       |       |      |       |      |      
|               | Equity securities |       | 99.00 | %    | 99.00 | %    | 99.00
|               | Cash              |       | 1.00  | %    | 1.00  | %    | 1.00 
|               |                   |       |       |      |       |      |      
|               |                   | Total |       | 100  | %     | 100  | %    
|               |                   |       |       |      |       |      |      

The
Bank's pension plan assets are managed by Trustees of the Retirement Plan of the Bank. Assets are rebalanced at the end of each quarter. The Bank's investment strategy with respect
to pension assets is to maximize return while protecting principal. The Trustees have the flexibility to adjust the asset allocation and move funds to the asset class that offers the most opprotunity
for investment returns.

The
accumulated benefit obligation at December 31, 2003 and 2002 was $941,682 and $823,080 respectively.

Employer
contributions and benefits paid in the above table include only those amounts contributed directly to, or paid directly from, plan assets. The expected employer contribution for
2004 is $23,000.

The
long-term rate of return on assets was developed through analysis of historical market returns, current market conditions and the fund's past experience. Estimates of future market
returns by asset category are lower than actual long-term historical returns in order to reflect current market conditions.

Estimated
future benefits payments are as follows:

(in thousands)2004

$
12,0962005


12,0962006


12,0962007


12,0962008


40,6632009-2013


355,478


2.    Cash (Deferred) Profit-Sharing Plan

The Company has a profit-sharing plan (the 401(k) Plan) covering all employees, as defined under the plan document. Employees may contribute up to 15% of
compensation, as defined under the plan document. In 2002, the 401(k) Plan was amended to include the Company matching employee contributions up to 3% of compensation. Prior to 2002, the Company made
discretionary contributions. The Company contributed

33

---

approximately
$104,000 and $106,000 for the years ended December 31, 2003 and 2002, respectively; no contributions to the 401(k) Plan were made for the years ended December 31, 2001.

3.    Profit-Sharing Plan

The Company has a profit-sharing plan (the Profit Sharing Plan) covering all employees, as defined under the plan document. Discretionary contributions to the
profit sharing plan are determined annually by the Board of Trustees based upon net income, as defined under the plan document. Allocation of the contributions to employees is based upon annual
compensation. The Company made no contributions to the profit sharing plan in 2003, 2002 and 2001.

4.    Employee Stock Ownership Plan

The Company has an Employee Stock Ownership Plan (ESOP) covering all employees, as defined under the plan document. The ESOP is a tax-qualified plan
subject to the requirements of ERISA and the Code. The ESOP borrowed funds from an unrelated third party lender and used the funds to purchase 42,780 shares of the Company common stock, which was
later converted into 110,046 shares of Company common stock. The ESOP borrowed $1,288,540 from the Company to purchase an additional 128,854 shares of Company common stock.

The
Company acquired 145,000 ESOP shares through the acquisition of Jade Financial Corp. and its wholly-owned subsidiary, IGA Federal Savings Bank. These shares were converted into
398,025 ESOP shares in which 79,605 shares were already allocated prior to the acquisition. As of the acquisition date 8,126.50 IGA ESOP shares converted to 22,307 shares were cashed out. As of
December 31, 2003, 30,128 ESOP shares were paid out or rolled over to employees who are no longer with the Company. Of the 30,123 shares, the Company purchased 3,671 shares during 2003 and
transferred them to treasury stock.

Benefits
under the ESOP generally become 100% vested after the third year of service or upon normal retirement (as defined in the ESOP), disability or death of the participant. If a
participant terminates employment for any other reason prior to full vesting, his nonvested account balance will be forfeited. Forfeitures will be reallocated among remaining participating employees
in the same proportion as contributions. Benefits may be payable upon death, retirement, early retirement disability or separation from service. The Company accounts for it ESOP in accordance with
SOP 93-6. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the allocated shares are included in outstanding
shares for EPS purposes. The Bank's contributions to the ESOP recorded as compensation expense or (benefit) for the years ended December 31, 2003, 2002 and 2001 were approximately $456,000,
$496,000 and $(22,000), respectively. The benefit recorded expense in 2001, represents a correction made to ESOP shares allocated during prior periods.

Information
with respect to the ESOP at December 31, are is as follows:

| |                                 | 2003 |   | 2002     
| | ------------------------------- | ---- | - | ---------
| | Allocated shares                |      |   | 222,558  
| | Unreleased shares               |      |   | 282,327  
| |                                 |      |   |          
| | Total ESOP shares               |      |   | 504,885  
| |                                 |      |   |          
| | Fair value of unreleased shares |      | $ | 2,993,000
| |                                 |      |   |          

5.    Management Recognition Plan

The 1995 and 1998 Management Recognition Plans (the MRP Plans) provide certain senior executive officers of the Company with a propriety interest in the Company.
Benefits may be granted at the sole

34

---

discretion
of the Compensation Committee of the Company's Board of Trustees. The MRP Plans are managed by trustees who are directors of the Company and who have responsibility to invest all funds
contributed by the Company to the trust created for the MRP Plans. The Company contributed approximately $254,000 to the 1995 MRP, which enabled the 1995 MRP to purchase 21,390 shares of the Company
common stock in 1996 that were later converted into 55,023 shares of Company common stock. Under the 1998 MRP, the Company, contributed $322,500 to enable the MRP to purchase up to 181,384 shares of
the Company common stock. Unless the Compensation Committee of the Board specifies otherwise, shares granted to MRP Plan participants will be in the form of restricted stock that vest over a
five-year period at the rate of 20% of such shares per year. Compensation expense in the amount of the fair market value of the common stock at the date of grant to the employee will be
recognized pro rata over the five years during which the shares vest. At December 31, 2002, all shares under the MRP have been allocated. The Company recorded compensation expense of
approximately $64,500, $64,500 and $172,000 for the years ended December 31, 2003, 2002 and 2001, respectively, for the MRP.

35

---



NOTE PREGULATORY MATTERS

State
banking statutes restrict the amount of dividends on capital stock. Accordingly, no dividends shall be paid by the Company on its capital stock unless following the payment of such
dividends, the capital stock of the Company will be unimpaired, and (1) the Company will have a surplus of not less than 50% of its capital, or, if not, (2) the payment of such dividend
will not reduce the surplus of the Company.

The
Company and the Bank entered into a Memorandum of Understanding (MOU) with the Federal Reserve Bank of Philadelphia (Federal Reserve) during the second quarter of 2003. The terms of
the MOU the Company and the Bank cannot declare dividends, the Company may not redeem any of its own stock and the Company cannot incur any additional debt other than in the ordinary course of
business, in each case, without the prior written approval of the Federal Reserve. Other expected provisions will require the Company and the Bank to: (i) improve credit and operational risk
management practices, (ii) improve their multi-year strategic planning and budgeting processes, (iii) make periodic reports to the Federal Reserve regarding compliance with
the MOU, (iv) conduct a management study, and (v) appoint a committee of independent directors to monitor compliance with the MOU. The MOU required the Bank to increase its reserve for
loan losses, an action that the Bank took during the fourth quarter of 2002 and is reflected in the Company's consolidated financial statements for the year ended December 31, 2002. The Company
and the Bank do not believe that the existence of the MOU or its anticipated provisions will have a material adverse effect on their consolidated financial position or results of operations, and
management believes they have complied with all the provisions of the MOU.

The
Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatoryand possibly additional discretionaryactions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors.

Quantitative
measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 2003, management
believes that the Company meets all capital adequacy requirements to which it is subject.

As
of September 30, 2003, the most recent notification from the Reserve Bank of Philadelphia categorized the Bank adequately capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that management believes have changed the institution's category.

36

---

The
Company's and Bank's actual capital amounts and ratios are as follows:

|                         |                                          | 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                                                              | %

|                                         |                                         | 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                                                              | %

37

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NOTE QSELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

|                                 |         | Three months ended
|-------------------------------- | ------- | ------------------
|
|
|Interest income                  |         | $                 
|Interest expense                 |         |                   
|                                 |         |                   
|Net interest income              |         |                   
|                                 |         |                   
|Provision for loan losses        |         |                   
|Non-interest income              |         |                   
|Non-interest expenses            |         |                   
|                                 |         |                   
|Income before income tax expense |         |                   
|Income tax expense               |         |                   
|                                 |         |                   
|Net income                       |         | $                 
|                                 |         |                   
|Earnings per share               |         |                   
|                                 | Basic   |                   
|                                 | Diluted |                   

|                                                     |  | Three months ended
|---------------------------------------------------- |  | ------------------
|
|
|Interest income                                      |  | $                 
|Interest expense                                     |  |                   
|                                                     |  |                   
|Net interest income                                  |  |                   
|Provision for loan losses                            |  |                   
|                                                     |  |                   
|Non-interest income                                  |  |                   
|Non-interest expenses                                |  |                   
|                                                     |  |                   
|Income before income tax expense                     |  |                   
|and cumulative effect of accounting change           |  |                   
|Income tax expense                                   |  |                   
|                                                     |  |                   
|Income before cumulative effect of accounting change |  |                   
|Cumulative effect of accounting change               |  |                   
|                                                     |  |                   
|Net income                                           |  | $                 
|                                                     |  |                   

38

---

|                                                                 |         | Three months ended
|---------------------------------------------------------------- | ------- | ------------------
|
|
|Earnings per share before cumulative effect of accounting change |         |                   
|                                                                 | Basic   |                   
|                                                                 | Diluted |                   
|Cumulative effect of accounting change                           |         |                   
|                                                                 | Basic   |                   
|                                                                 | Diluted |                   
|Earnings per share                                               |         |                   
|                                                                 | Basic   |                   
|                                                                 | Diluted |                   

NOTE RCONDENSED FINANCIAL INFORMATIONPARENT COMPANY ONLY

Condensed
financial information for PSB Bancorp, Inc. (parent company only) follows:

BALANCE SHEET

|                                                  |                   | December 31,                              
|------------------------------------------------- | ----------------- | ------------------------------------------
|
|
|ASSETS                                            |                   |                                           
|Cash                                              |                   | $                                         
|Investment in subsidiaries                        |                   |                                           
|Equity investments in unconsolidated subsidiaries |                   |                                           
|Other assets                                      |                   |                                           
|                                                  |                   |                                           
|                                                  |                   | Total assets                              
|                                                  |                   |                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY              |                   |                                           
|Liabilities                                       |                   |                                           
|                                                  | Other liabilities |                                           
|Stockholders' equity                              |                   |                                           
|                                                  |                   |                                           
|                                                  |                   | Total liabilities and stockholders' equity
|                                                  |                   |                                           

39

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PSB BANCORP, INC. AND SUBSIDIARIES  Notes to Consolidated Financial StatementsContinued  December 31, 2003, 2002 and 2001

NOTE RCONDENSED FINANCIAL INFORMATIONPARENT COMPANY ONLYContinued

STATEMENT OF EARNINGS

|                                       |                                   | Year ended December 31,                                    
|-------------------------------------- | --------------------------------- | -----------------------------------------------------------
|
|
|INCOME                                 |                                   |                                                            
|                                       | Dividend income from subsidiaries |                                                            
|                                       | Interest income                   |                                                            
|                                       | Other income                      |                                                            
|                                       |                                   |                                                            
|                                       |                                   | Total income                                               
|                                       |                                   |                                                            
|EXPENSES                               |                                   |                                                            
|                                       | Interest                          |                                                            
|                                       | Other                             |                                                            
|                                       |                                   |                                                            
|                                       |                                   | Total expenses                                             
|                                       |                                   |                                                            
|                                       |                                   | Income (loss) before undistributed earnings of subsidiaries
|Undistributed earnings of subsidiaries |                                   |                                                            
|                                       |                                   |                                                            
|                                       |                                   |                                                            
|                                       |                                   |                                                            

(Continued)

40

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NOTE RCONDENSED FINANCIAL INFORMATIONPARENT COMPANY ONLYContinued

STATEMENT OF CASH FLOWS

|                                     |                                                                                            | Year ended December 31,                             |                                                    
|------------------------------------ | ------------------------------------------------------------------------------------------ | --------------------------------------------------- | ---------------------------------------------------
|
|
|Cash flows from operating activities |                                                                                            |                                                     |                                                    
|                                     | Net income                                                                                 |                                                     | $                                                  
|                                     | Adjustments to reconcile net income to net cash
(used in) provided by operating activities |                                                     |                                                    
|                                     |                                                                                            | Undistributed earnings from subsidiaries            |                                                    
|                                     |                                                                                            | Net change in other assets and liabilities          |                                                    
|                                     |                                                                                            |                                                     |                                                    
|                                     |                                                                                            | Net cash (used in) provided by operating activities |                                                    
|                                     |                                                                                            |                                                     |                                                    
|Cash flows from investing activities |                                                                                            |                                                     |                                                    
|                                     | Purchase of investment securities available-for-sale                                       |                                                     |                                                    
|                                     | Other, net                                                                                 |                                                     |                                                    
|                                     |                                                                                            |                                                     |                                                    
|                                     |                                                                                            | Net cash provided by investing activities           |                                                    
|                                     |                                                                                            |                                                     |                                                    
|Cash flows from financing activities |                                                                                            |                                                     |                                                    
|                                     | Repayment of long-term debt                                                                |                                                     |                                                    
|                                     | Treasury stock acquired                                                                    |                                                     |                                                    
|                                     | Advance from subsidiary                                                                    |                                                     |                                                    
|                                     |                                                                                            |                                                     |                                                    
|                                     |                                                                                            |                                                     | Net cash (used in) provided by financing activities
|                                     |                                                                                            |                                                     |                                                    
|                                     |                                                                                            |                                                     | NET (DECREASE) INCREASE IN CASH                    
|Cash at beginning of year            |                                                                                            |                                                     | 6,337                                              
|                                     |                                                                                            |                                                     |                                                    
|Cash at end of year                  |                                                                                            | $                                                   | 6,228                                              
|                                     |                                                                                            |                                                     |                                                    

Note SSubsequent Event

On March 31, 2004, the U.S. District Court for the Eastern District of Pennsylvania granted the plaintiffs' motion for summary judgment in an action in
which the plaintiffs seek to have certain stock
options, previously voided by PSB, to be declared valid and enforceable. PSB will appeal the court's decision. If, on appeal, the motion is upheld, the aggregate number of shares underlying
outstanding stock options wuold increase 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 PBS.

41

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