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U.S. SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|           |  |                                                                                                                
|---------- |  | ---------------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                                
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934,                      
|          
|           |  | For the fiscal year ended December 31, 2005,                                                                   
|           |  | or                                                                                                             
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( )
    OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required),
|          
|           |  | For the transition period
    from          to                                                                 

Commission file number: 000-24601





PSB BANCORP, INC.


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Pennsylvania                                                       |  | 23-2930740                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

1835 Market Street


Philadelphia, PA 19103


(Address of principal executive offices)


(215) 979-7900


Registrants telephone number, including area code:


SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT:


None


SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT:


Common Stock (no par value)





þ o


þ o


þ o


S-K 10-K 10-K. o


12b-2


o o þ


12b-2 o þ




Documents Incorporated by reference: None










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PSB BANCORP, INC.


FORM 10-K


For the Year Ended December 31, 2005


TABLE OF CONTENTS




---

TABLE OF CONTENTS



|                                                                               |                                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                        
|                                                                               | ITEM 1. BUSINESS                                                                                                       
|                                                                               | ITEM 1A. RISK FACTORS.                                                                                                 
|                                                                               | ITEM 1B. UNRESOLVED STAFF COMMENTS.                                                                                    
|                                                                               | ITEM 2. PROPERTIES                                                                                                     
|                                                                               | ITEM 3. LEGAL PROCEEDINGS                                                                                              
|                                                                               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS                                                          
|PART II                                                                       
|                                                                               | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|                                                                               | ITEM 6. SELECTED FINANCIAL DATA                                                                                        
|                                                                               | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                          
|                                                                               | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                                                   
|                                                                               | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                    
|                                                                               | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                           
|                                                                               | ITEM 9A. CONTROLS AND PROCEDURES                                                                                       
|                                                                               | ITEM 9B. Other Information                                                                                             
|PART III                                                                      
|                                                                               | ITEM 10. Directors and Executive Officers of the Registrant                                                            
|                                                                               | ITEM 11. EXECUTIVE COMPENSATION                                                                                        
|Performance Graph                                                             
|                                                                               | ITEM 12. Security Ownership of Certain Beneficial Owners and Management                                                
|                                                                               | ITEM 13. Certain Relationships and Related Transactions                                                                
|                                                                               | ITEM 14. Principal Accounting Fees & Services                                                                          
|PART IV                                                                       
|                                                                               | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                                              
|EXHIBIT INDEX                                                                 
|Schedule of Subsidiaries                                                      
|Certification of Report by Chief Executive Officer                            
|Certification of Report by Chief Financial Officer                            
|Certification of Report by Chief Executive Officer and Chief Financial Officer
|2005 Financial Statements                                                     



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PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS



















1



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BUSINESS STRATEGY








SUBSIDIARIES




PERSONNEL




COMPETITION




2



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REGULATION OF FIRST PENN BANK






REGULATION OF PSB






3



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SARBANES-OXLEY ACT OF 2002








| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. We must state that we accept the responsibility for
    maintaining an adequate internal control structure and
    procedures for financial reporting;                                                                                                      
|
| | 2. We must present an assessment, as of the end of the
    December 31, 2006 fiscal year, of the effectiveness of the
    internal control structure and procedure for our financial
    reporting; and                                                        
|
| | 3. We must have our auditors attest to, and report on, the
    assessment made by management. The attestation must be made in
    accordance with standards for attestation engagements issued or
    adopted by the Public Company Accounting Oversight Board.



NATIONAL MONETARY POLICY




4



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DIVIDEND LIMITATIONS






TRANSACTIONS WITH AFFILIATES




5



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|         |              
|-------- | -------------
|ITEM 1A. | RISK FACTORS.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Changes in interest rates could reduce our income, cash
    flows and asset values.





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Economic conditions either nationally or locally in areas
    in which our operations are concentrated may adversely affect
    our business.





| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our financial condition and results of operations would be
    adversely affected if our allowance for loan losses is not
    sufficient to absorb actual losses or if we are required to
    increase our allowance.





| |                                                
| | -----------------------------------------------
| | Competition may decrease our growth or profits.



6



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| |                                                           
| | ----------------------------------------------------------
| | We may be adversely affected by government
    regulation.





| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | We rely on our management and other key personnel, and the
    loss of any of them may adversely affect our operations.





| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Environmental liability associated with lending activities
    could result in losses.





| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Failure to implement new technologies in our operations
    may adversely affect our growth or profits.





| |                                                                 
| | ----------------------------------------------------------------
| | An investment in our common stock is not an insured
    deposit.



7



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| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | Federal and state banking laws, our articles of
    incorporation and our by-laws may have an anti-takeover
    effect.





| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Our legal lending limits are relatively low and restrict
    our ability to compete for larger customers.





| |                                                           
| | ----------------------------------------------------------
| | The market price for our common stock may be
    volatile.





| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | A court decision in favor of the purported option-holders
    could have an effect on our stock price.



8



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| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | A court decision in favor of the shareholders with respect
    to the shareholder derivative suit could have an effect on our
    stock price.








|         |                           
|-------- | --------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS.








|        |           
|------- | ----------
|ITEM 2. | PROPERTIES








|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS







9



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10



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10-K.







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



Matter No. 1  Election of Class I
Directors


|                                           |  |                  |           |  |          |  |         | 
|------------------------------------------ |  | ---------------- | --------- |  | -------- |  | ------- | 
|                                           |  | Election Results |          
|                                           |  |                  |          
|Nominees                                   |  | For              |           |  | Withheld | 
|                                           |  |                  |           |  |          | 
|Anthony DiSandro, President & CEO of PSB   |  |                  | 4,494,681 |  |          |  | 352,259 | 
|Rosanne Pauciello, PSB Corporate Secretary |  |                  | 4,495,801 |  |          |  | 351,139 | 

Continuing Directors


Class II directors


|                               |  |  |  | 
|------------------------------ |  |  |  | 
|Name/Position                  |  | 
|                               |  | 
|James W. Eastwood, Director    |  |  |  | 
|Edward J. Reitmeyer, Director* |  |  |  | 
|Dennis P. Wesley, Director     |  |  |  | 






|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|* | Appointed to fill a vacancy on the Board of Directors created by
    the death of a director

11



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Class III directors


|                                       |  |  |  | 
|-------------------------------------- |  |  |  | 
|Name/Position                          |  | 
|                                       |  | 
|Vincent J. Fumo, Chairman of the Board |  |  |  | 
|James F. Kenney, Director              |  |  |  | 

Matter No. 2  Shareholder Proposal




Voting Results:


|    |         |  |         |  |           |         |  |  |        | 
|--- | ------- |  | ------- |  | --------- | ------- |  |  | ------ | 
|For |         |  | Against |  |           | Abstain | 
|    |         |  |         |  |           |         | 
|    | 923,316 |  |         |  | 2,302,502 |         |  |  | 15,933 | 




PART II







|        |                                                                                                                        
|------- | -----------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES








|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA



|                                         |  |                                     |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|---------------------------------------- |  | ----------------------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                         |  | As for the Years Ended December 31, |        
|                                         |  |                                     |        
|                                         |  | 2005                                |         |  | 2004 |   |         | 2003 |  |   | 2002    |  |  | 2001 |        
|                                         |  |                                     |         |  |      |   |         |      |  |   |         |  |  |      |        
|BALANCE SHEET DATA                       |  |                                     |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|Total assets                             |  | $                                   | 560,682 |  |      | $ | 533,077 |      |  | $ | 470,330 |  |  | $    | 496,780 |  |  | $ | 467,644 | 
|Cash and cash equivalents                |  |                                     | 37,797  |  |      |   | 54,650  |      |  |   | 52,408  |  |  |      | 110,269 |  |  |   | 54,756  | 
|Loans receivable, net                    |  |                                     | 366,534 |  |      |   | 352,985 |      |  |   | 237,383 |  |  |      | 288,630 |  |  |   | 297,180 | 
|Loans held-for-sale                      |  |                                     | 3,280   |  |      |   | 3,792   |      |  |   | 51,859  |  |  |      | 18,855  |  |  |   | 17,142  | 
|Investment securities available for sale |  |                                     | 123,994 |  |      |   | 94,112  |      |  |   | 102,882 |  |  |      | 49,730  |  |  |   | 69,934  | 
|Investment securities held to maturity   |  |                                     | 1,325   |  |      |   | 1,533   |      |  |   | 775     |  |  |      | 6,468   |  |  |   | 2,310   | 
|Deposits                                 |  |                                     | 501,111 |  |      |   | 475,280 |      |  |   | 416,160 |  |  |      | 442,224 |  |  |   | 404,560 | 
|Shareholders equity                     |  |                                     | 53,221  |  |      |   | 52,157  |      |  |   | 47,123  |  |  |      | 46,167  |  |  |   | 41,415  | 
|Book value per share                     |  | $                                   | 10.35   |  |      | $ | 10.83   |      |  | $ | 10.39   |  |  | $    | 9.81    |  |  | $ | 9.13    | 

12



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|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |        |      |  |   |        |      | 
|------------------------------------------------------------------ | ----- | ----------------------------------- | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- | 
|                                                                   |       | As for the Years Ended December 31, |       
|                                                                   |       |                                     |       
|                                                                   |       | 2005                                |        |      | 2004 |   |        | 2003 |  |   | 2002   |      |  | 2001 |       
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|SUMMARY STATEMENT OF OPERATIONS                                    |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |        |      |  |   |        |     
|Interest income                                                    |       | $                                   | 30,489 |      |      | $ | 27,989 |      |  | $ | 28,327 |      |  | $    | 31,698 |      |  | $ | 26,928 |     
|Interest expense                                                   |       |                                     | 11,922 |      |      |   | 8,481  |      |  |   | 9,575  |      |  |      | 13,252 |      |  |   | 14,011 |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|Net interest income                                                |       |                                     | 18,567 |      |      |   | 19,508 |      |  |   | 18,752 |      |  |      | 18,446 |      |  |   | 12,917 |     
|Provision for loan losses                                          |       |                                     | 405    |      |      |   | 235    |      |  |   | 45     |      |  |      | 1,437  |      |  |   | 270    |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|Net interest income after provision for loan losses                |       |                                     | 18,162 |      |      |   | 19,273 |      |  |   | 18,707 |      |  |      | 17,009 |      |  |   | 12,647 |     
|Non-interest income                                                |       |                                     | 2,819  |      |      |   | 2,117  |      |  |   | 2,168  |      |  |      | 3,081  |      |  |   | 1,554  |     
|Non-interest expense                                               |       |                                     | 19,144 |      |      |   | 18,282 |      |  |   | 17,846 |      |  |      | 17,052 |      |  |   | 10,240 |     
|Loss on investment in Iron Bridge Holdings, Inc.(1)                |       |                                     |       |      |      |   |       |      |  |   |       |      |  |      | 32     |      |  |   | 154    |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|Income before income taxes                                         |       |                                     | 1,837  |      |      |   | 3,108  |      |  |   | 3,029  |      |  |      | 3,006  |      |  |   | 3,807  |     
|Income tax provision                                               |       |                                     | 702    |      |      |   | 1,038  |      |  |   | 1,024  |      |  |      | 1,189  |      |  |   | 755    |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|Income before cumulative effect of accounting change               |       |                                     | 1,135  |      |      |   | 2,070  |      |  |   | 2,005  |      |  |      | 1,817  |      |  |   | 3,052  |     
|Cumulative effect of accounting change                             |       |                                     |       |      |      |   |       |      |  |   |       |      |  |      | 1,329  |      |  |   |       |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|Net income                                                         |       | $                                   | 1,135  |      |      | $ | 2,070  |      |  | $ | 2,005  |      |  | $    | 3,146  |      |  | $ | 3,052  |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|PER SHARE DATA                                                     |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |        |      |  |   |        |     
|Income before cumulative effect of accounting change               |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |        |      |  |   |        |     
|                                                                   | Basic |                                     | $      | 0.24 |      |   | $      | 0.47 |  |   | $      | 0.47 |  |      | $      | 0.43 |  |   | $      | 0.73 | 
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|Income before cumulative effect of accounting change 
    diluted |       | $                                   | 0.20   |      |      | $ | 0.40   |      |  | $ | 0.46   |      |  | $    | 0.42   |      |  | $ | 0.72   |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|Cumulative effect of accounting change  basic                     |       | $                                   |       |      |      | $ |       |      |  | $ |       |      |  | $    | 0.32   |      |  | $ |       |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|Cumulative effect of accounting change  diluted                   |       | $                                   |       |      |      | $ |       |      |  | $ |       |      |  | $    | 0.32   |      |  | $ |       |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|Net income  basic                                                 |       | $                                   | 0.24   |      |      | $ | 0.47   |      |  | $ | 0.47   |      |  | $    | 0.75   |      |  | $ | 0.73   |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|Net income  diluted                                               |       | $                                   | 0.20   |      |      | $ | 0.40   |      |  | $ | 0.46   |      |  | $    | 0.74   |      |  | $ | 0.72   |     
|                                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |       
|PERFORMANCE DATA                                                   |       |                                     |        |      |      |   |        |      |  |   |        |      |  |      |        |      |  |   |        |     
|Return on average assets                                           |       |                                     | 0.21   | %    |      |   | 0.43   | %    |  |   | 0.41   | %    |  |      | 0.65   | %    |  |   | 0.73   | %   
|Return on average equity                                           |       |                                     | 2.15   | %    |      |   | 4.42   | %    |  |   | 4.28   | %    |  |      | 7.07   | %    |  |   | 7.75   | %   
|Equity to assets                                                   |       |                                     | 9.49   | %    |      |   | 9.78   | %    |  |   | 9.66   | %    |  |      | 9.14   | %    |  |   | 9.36   | %   
|Interest rate spread                                               |       |                                     | 3.25   | %    |      |   | 3.78   | %    |  |   | 3.83   | %    |  |      | 3.80   | %    |  |   | 2.80   | %   






|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|(1) | The financial results of Iron Bridge Holdings were consolidated
    with PSBs financial results effective January 1, 2004.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS





13



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10-K 8-K


GENERAL




IMPACT OF INFLATION




CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES






14



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PERFORMANCE OVERVIEW




| |                      
| | ---------------------
| | Results of Operations





| |                    
| | -------------------
| | Net Interest Income







15



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| |                                      
| | -------------------------------------
| | Average Balances, Rates and Net Yield



|                                                                 |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |         |         |         |   |        |        |  |  |      |      |   | 
|---------------------------------------------------------------- | ---------------------------------- | ----------------------- | ------- | ------- | -------- | - | ------ | ------ |  | ------- | ------- | ---- | - | -------- | ------- | ------- | ------- | ------- | ------ | ------- |  |  | -------- | ---- | - | ---- | ------- | ------- | ------- | - | ------ | ------ |  |  | ---- | ---- | - | 
|                                                                 |                                    | Year Ended December 31, |        
|                                                                 |                                    |                         |        
|                                                                 |                                    | 2005                    |         |         | 2004     |   |        | 2003   | 
|                                                                 |                                    |                         |         |         |          |   |        |        | 
|                                                                 |                                    | Average                 |         |         |          |   | Yield/ |        |  | Average |         |      |   |          | Yield/  |         |         | Average |        |         |  |  | Yield/   |     
|                                                                 |                                    | Balance                 |         |         | Interest |   |        | Rate   |  |         | Balance |      |   | Interest |         |         | Rate    |         |        | Balance |  |  | Interest |      |   | Rate |        
|                                                                 |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |        
|                                                                 |                                    | (Dollars in thousands)  |        
|ASSETS                                                           |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |         |         |         |   |        |        |  |  |      |     
|Interest-earning assets:                                         |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |         |         |         |   |        |        |  |  |      |     
|                                                                 | Interest-earning deposits          |                         | $       | 54,067  |          |   | $      | 1,436  |  |         |         | 2.65 | % |          | $       | 65,664  |         |         | $      | 812     |  |  |          | 1.24 | % |      | $       | 94,454  |         |   | $      | 990    |  |  |      | 1.05 | %
|                                                                 | Investment securities              |                         |         | 74,705  |          |   |        | 2,617  |  |         |         | 3.50 | % |          |         | 50,583  |         |         |        | 1,442   |  |  |          | 2.85 | % |      |         | 39,127  |         |   |        | 1,270  |  |  |      | 3.25 | %
|                                                                 | Mortgage-backed securities         |                         |         | 33,574  |          |   |        | 1,366  |  |         |         | 4.07 | % |          |         | 45,296  |         |         |        | 1,928   |  |  |          | 4.26 | % |      |         | 36,620  |         |   |        | 2,082  |  |  |      | 5.69 | %
|                                                                 | Loans(1)                           |                         |         | 360,949 |          |   |        | 25,070 |  |         |         | 6.95 | % |          |         | 323,523 |         |         |        | 23,807  |  |  |          | 7.36 | % |      |         | 289,690 |         |   |        | 23,985 |  |  |      | 8.28 | %
|                                                                 |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |        
|                                                                 | Total interest-earning assets      |                         |         | 523,295 |          |   | $      | 30,489 |  |         |         | 5.83 | % |          | $       | 485,066 |         |         | $      | 27,989  |  |  |          | 5.77 | % |      | $       | 459,891 |         |   | $      | 28,327 |  |  |      | 6.16 | %
|                                                                 | Noninterest-earning assets         |                         |         | 27,785  |          |   |        |        |  |         |         |      |   |          |         | 32,519  |         |         |        |         |  |  |          |      |   |      |         | 24,736  |         |   |        |        |  |  |      |      |  
|                                                                 |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |        
|                                                                 |                                    | Total assets            |         | $       | 551,080  |   |        |        |  |         |         |      |   |          |         | $       | 517,585 |         |        |         |  |  |          |      |   |      |         | $       | 484,627 |   |        |        |  |  |      |      |   | 
|                                                                 |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |        
|                                                                
|LIABILITIES                                                      |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |         |         |         |   |        |        |  |  |      |     
|Interest-bearing liabilities:                                    |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |         |         |         |   |        |        |  |  |      |     
|                                                                 | Now checking accounts              |                         | $       | 25,024  |          |   | $      | 124    |  |         |         | 0.50 | % |          | $       | 25,946  |         |         | $      | 132     |  |  |          | 0.51 | % |      | $       | 22,680  |         |   | $      | 191    |  |  |      | 0.84 | %
|                                                                 | Money market accounts              |                         |         | 50,379  |          |   |        | 695    |  |         |         | 1.38 | % |          |         | 67,759  |         |         |        | 720     |  |  |          | 1.06 | % |      |         | 72,356  |         |   |        | 1,083  |  |  |      | 1.50 | %
|                                                                 | Savings deposits                   |                         |         | 81,526  |          |   |        | 981    |  |         |         | 1.20 | % |          |         | 90,592  |         |         |        | 1,097   |  |  |          | 1.21 | % |      |         | 93,453  |         |   |        | 1,345  |  |  |      | 1.44 | %
|                                                                 | Certificates                       |                         |         | 304,531 |          |   |        | 10,097 |  |         |         | 3.32 | % |          |         | 240,968 |         |         |        | 6,509   |  |  |          | 2.70 | % |      |         | 221,377 |         |   |        | 6,929  |  |  |      | 3.13 | %
|                                                                 |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |        
|                                                                 | Total deposits                     |                         |         | 461,460 |          |   |        | 11,897 |  |         |         | 2.58 | % |          | $       | 425,265 |         |         | $      | 8,458   |  |  |          | 1.99 | % |      | $       | 409,866 |         |   | $      | 9,548  |  |  |      | 2.33 | %
|                                                                 | Borrowed money                     |                         |         | 1,120   |          |   |        | 25     |  |         |         | 2.23 | % |          |         | 1,106   |         |         |        | 23      |  |  |          | 2.08 | % |      |         | 1,092   |         |   |        | 27     |  |  |      | 2.47 | %
|                                                                 |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |        
|                                                                 | Total interest-bearing liabilities |                         |         | 462,580 |          |   |        | 11,922 |  |         |         | 2.58 | % |          | $       | 426,371 |         |         |        | 8,481   |  |  |          | 1.99 | % |      | $       | 410,958 |         |   |        | 9,575  |  |  |      | 2.30 | %
|                                                                 | Noninterest-bearing liabilities    |                         |         | 35,734  |          |   |        |        |  |         |         |      |   |          |         | 41,245  |         |         |        |         |  |  |          |      |   |      |         | 26,843  |         |   |        |        |  |  |      |      |  
|                                                                 |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |        
|                                                                 |                                    | Total liabilities       |         |         | 498,314  |   |        |        |  |         |         |      |   |          |         |         | 467,616 |         |        |         |  |  |          |      |   |      |         |         | 437,801 |   |        |        |  |  |      |      |   | 
|Shareholders equity                                             |                                    |                         | 52,766  |         |          |   |        |        |  |         |         |      |   |          | 49,969  |         |         |         |        |         |  |  |          |      |   |      | 46,826  |         |         |   |        |        |  |  |      |     
|                                                                 |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |        
|Total liabilities and shareholders equity                       |                                    | $                       | 551,080 |         |          |   |        |        |  |         |         |      |   | $        | 517,585 |         |         |         |        |         |  |  |          |      |   | $    | 484,627 |         |         |   |        |        |  |  |      |     
|                                                                 |                                    |                         |         |         |          |   |        |        |  |         |         |      |   |          |         |         |         |         |        |         |  |  |          |      |   |      |        
|Net interest income                                              |                                    |                         |         |         |          | $ | 18,567 |        |  |         |         |      |   |          |         |         |         | $       | 19,508 |         |  |  |          |      |   |      |         |         |         | $ | 18,752 |        |  |  |      |     
|Interest rate spread                                             |                                    |                         |         |         |          |   |        |        |  |         | 3.25    | %    |   |          |         |         |         |         |        |         |  |  | 3.78     | %    |   |      |         |         |         |   |        |        |  |  | 3.83 | %   
|Net yield on interest-earning assets                             |                                    |                         |         |         |          |   |        |        |  |         | 3.55    | %    |   |          |         |         |         |         |        |         |  |  | 4.02     | %    |   |      |         |         |         |   |        |        |  |  | 4.08 | %   
|Ratio of interest-earning assets to interest-bearing liabilities |                                    |                         |         |         |          |   |        |        |  |         | 1.13    | x    |   |          |         |         |         |         |        |         |  |  | 1.14     | x    |   |      |         |         |         |   |        |        |  |  | 1.09 | x   






|    |                             
|--- | ----------------------------
|(1) | Includes Loans Held for Sale

16



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##### Table of Contents





| |                                                
| | -----------------------------------------------
| | Changes in Interest Income and Interest Expense





| |                                       
| | --------------------------------------
| | Analysis of Changes in Interest Income

|                                     |  |                     |       |   |                     |   |        |            |  |   |        |   |  |      |       |   |            |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------- | ----- | - | ------------------- | - | ------ | ---------- |  | - | ------ | - |  | ---- | ----- | - | ---------- | - | ------ | - |  | - | ------ | -
|                                     |  | 2005 Versus 2004    |       |   | 2004 Versus 2003    |  
|                                     |  |                     |       |   |                     |  
|                                     |  | Increase (Decrease) |       |   | Increase (Decrease) |  
|                                     |  |                     |       |   |                     |  
|                                     |  | Volume              |       |   | Rate                |   |        | Net Change |  |   | Volume |   |  | Rate |       |   | Net Change |  
|                                     |  |                     |       |   |                     |   |        |            |  |   |        |   |  |      |       |   |            |  
|Interest Income:                     |  |                     |       |   |                     |   |        |            |  |   |        |   |  |      |       |   |            |   |        |   |  |   |        |  
|Interest bearing deposits with banks |  | $                   | (307  | ) |                     | $ | 925    |            |  | $ | 618    |   |  | $    | (356  | ) |            | $ | 180    |   |  | $ | (176   | )
|Investment securities                |  |                     | 844   |   |                     |   | 329    |            |  |   | 1,173  |   |  |      | 327   |   |            |   | (156   | ) |  |   | 171    |  
|Mortgage-backed securities           |  |                     | (477  | ) |                     |   | (86    | )          |  |   | (563   | ) |  |      | 370   |   |            |   | (523   | ) |  |   | (153   | )
|Loans                                |  |                     | 2,601 |   |                     |   | (1,327 | )          |  |   | 1,274  |   |  |      | 2,490 |   |            |   | (2,665 | ) |  |   | (175   | )
|                                     |  |                     |       |   |                     |   |        |            |  |   |        |   |  |      |       |   |            |  
|Total interest income                |  |                     | 2,661 |   |                     |   | (159   | )          |  |   | 2,502  |   |  |      | 2,831 |   |            |   | (3,164 | ) |  |   | (333   | )
|Interest Expense:                    |  |                     |       |   |                     |   |        |            |  |   |        |   |  |      |       |   |            |   |        |   |  |   |        |  
|Now checking accounts                |  |                     | (5    | ) |                     |   | (3     | )          |  |   | (8     | ) |  |      | 17    |   |            |   | (75    | ) |  |   | (58    | )
|Money market accounts                |  |                     | (240  | ) |                     |   | 217    |            |  |   | (23    | ) |  |      | (49   | ) |            |   | (318   | ) |  |   | (367   | )
|Savings accounts                     |  |                     | (109  | ) |                     |   | (9     | )          |  |   | (118   | ) |  |      | (35   | ) |            |   | (215   | ) |  |   | (250   | )
|Certificates of deposit              |  |                     | 2,111 |   |                     |   | 1,494  |            |  |   | 3,605  |   |  |      | 529   |   |            |   | (952   | ) |  |   | (423   | )
|Borrowings                           |  |                     | 0     |   |                     |   | 2      |            |  |   | 2      |   |  |      | 0     |   |            |   | 4      |   |  |   | 4      |  
|                                     |  |                     |       |   |                     |   |        |            |  |   |        |   |  |      |       |   |            |  
|Total interest expense               |  |                     | 1,757 |   |                     |   | 1,701  |            |  |   | 3,458  |   |  |      | 462   |   |            |   | (1,556 | ) |  |   | (1,094 | )
|                                     |  |                     |       |   |                     |   |        |            |  |   |        |   |  |      |       |   |            |  
|Net change in net interest income    |  | $                   | 904   |   |                     | $ | (1,860 | )          |  | $ | (956   | ) |  | $    | 2,369 |   |            | $ | (1,608 | ) |  | $ | 761    |  
|                                     |  |                     |       |   |                     |   |        |            |  |   |        |   |  |      |       |   |            |  



| |             
| | ------------
| | Other Income



|                                        |  |                         |       |   |      |   |       |      |  |   |       |  
|--------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                        |  | Year Ended December 31, |      
|                                        |  |                         |      
|                                        |  | 2005                    |       |   | 2004 |   |       | 2003 | 
|                                        |  |                         |       |   |      |   |       |      | 
|Service fees on deposit accounts        |  | $                       | 1,185 |   |      | $ | 1,004 |      |  | $ | 1,105 |  
|Loss on write down of equity investment |  |                         |      |   |      |   | (51   | )    |  |   | (37   | )
|Loss on sale of real estate owned       |  |                         | (49   | ) |      |   | (48   | )    |  |   | (14   | )
|Bank owned life insurance               |  |                         | 485   |   |      |   | 433   |      |  |   | 504   |  
|Gain on sales of investments securities |  |                         | 440   |   |      |   |      |      |  |   |      |  
|Other                                   |  |                         | 758   |   |      |   | 779   |      |  |   | 610   |  
|                                        |  |                         |       |   |      |   |       |      | 
|Total                                   |  | $                       | 2,819 |   |      | $ | 2,117 |      |  | $ | 2,168 |  
|                                        |  |                         |       |   |      |   |       |      | 



17



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##### Table of Contents





| |               
| | --------------
| | Other Expenses



|                                |  |                         |        |  |      |   |        |      |  |   |        | 
|------------------------------- |  | ----------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                |  | Year Ended December 31, |       
|                                |  |                         |       
|                                |  | 2005                    |        |  | 2004 |   |        | 2003 | 
|                                |  |                         |        |  |      |   |        |      | 
|Salaries and employee benefits  |  | $                       | 10,074 |  |      | $ | 9,795  |      |  | $ | 9,543  | 
|Occupancy and equipment expense |  |                         | 2,569  |  |      |   | 2,380  |      |  |   | 2,086  | 
|Professional services           |  |                         | 1,698  |  |      |   | 918    |      |  |   | 1,046  | 
|General insurance               |  |                         | 289    |  |      |   | 306    |      |  |   | 256    | 
|Advertising                     |  |                         | 233    |  |      |   | 296    |      |  |   | 309    | 
|Data processing                 |  |                         | 768    |  |      |   | 792    |      |  |   | 640    | 
|Director fees                   |  |                         | 133    |  |      |   | 338    |      |  |   | 447    | 
|Other operating expense         |  |                         | 3,380  |  |      |   | 3,457  |      |  |   | 3,519  | 
|                                |  |                         |        |  |      |   |        |      | 
|Total                           |  | $                       | 19,144 |  |      | $ | 18,282 |      |  | $ | 17,846 | 
|                                |  |                         |        |  |      |   |        |      | 











| |             
| | ------------
| | Income Taxes





| |                    
| | -------------------
| | Financial Condition



18



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##### Table of Contents





| |                                         
| | ----------------------------------------
| | Cash and Investment Securities Portfolio









| |                                                           
| | ----------------------------------------------------------
| | Carrying Value and Fair Value of Investment
    Securities



|                                               |  |                 |         |  |           |   |        |           |  |   |         | 
|---------------------------------------------- |  | --------------- | ------- |  | --------- | - | ------ | --------- |  | - | ------- | 
|                                               |  | At December 31, |        
|                                               |  |                 |        
|                                               |  | 2005            |         |  | 2004      |   |        | 2003      | 
|                                               |  |                 |         |  |           |   |        |           | 
|                                               |  | Amortized       |         |  | Amortized |   |        | Amortized | 
|                                               |  | Cost            |         |  | Cost      |   |        | Cost      | 
|                                               |  |                 |         |  |           |   |        |           | 
|                                               |  | (In thousands)  |        
|INVESTMENT SECURITIES AVAILABLE-FOR-SALE:      |  |                 |         |  |           |   |        |           |  |   |         | 
|Mutual funds                                   |  | $               | 2,354   |  |           | $ | 2,354  |           |  | $ | 2,354   | 
|State and municipal obligations                |  |                 |        |  |           |   | 500    |           |  |   | 2,506   | 
|U.S. Government and agency securities          |  |                 | 94,662  |  |           |   | 54,984 |           |  |   | 49,991  | 
|Mortgage-backed securities:                    |  |                 |         |  |           |   |        |           |  |   |         | 
|FNMA Certificates                              |  |                 | 16,220  |  |           |   | 22,716 |           |  |   | 25,995  | 
|GNMA Certificates                              |  |                 | 940     |  |           |   | 1,921  |           |  |   | 3,791   | 
|FHLMC Certificates                             |  |                 | 12,183  |  |           |   | 12,300 |           |  |   | 18,595  | 
|                                               |  |                 |         |  |           |   |        |           | 
|Total investment securities available-for-sale |  |                 | 126,359 |  |           |   | 94,775 |           |  |   | 103,232 | 
|INVESTMENT SECURITIES HELD TO MATURITY:        |  |                 |         |  |           |   |        |           |  |   |         | 
|Mortgage-backed securities:                    |  |                 |         |  |           |   |        |           |  |   |         | 
|GNMA Certificates                              |  |                 | 482     |  |           |   | 562    |           |  |   | 775     | 
|FHLMC Certificates                             |  |                 | 843     |  |           |   | 971    |           |  |   |        | 
|                                               |  |                 |         |  |           |   |        |           | 
|Total investment securities held-to-maturity   |  |                 | 1,325   |  |           |   | 1,533  |           |  |   | 775     | 
|                                               |  |                 |         |  |           |   |        |           | 
|                                               |  | $               | 127,684 |  |           | $ | 96,308 |           |  | $ | 104,007 | 
|                                               |  |                 |         |  |           |   |        |           | 

19



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##### Table of Contents



|                                               |  |                 |         |  |       |   |        |       |  |   |         | 
|---------------------------------------------- |  | --------------- | ------- |  | ----- | - | ------ | ----- |  | - | ------- | 
|                                               |  | At December 31, |        
|                                               |  |                 |        
|                                               |  | 2005            |         |  | 2004  |   |        | 2003  | 
|                                               |  |                 |         |  |       |   |        |       | 
|                                               |  | Fair            |         |  | Fair  |   |        | Fair  | 
|                                               |  | Value           |         |  | Value |   |        | Value | 
|                                               |  |                 |         |  |       |   |        |       | 
|                                               |  | (In thousands)  |        
|INVESTMENT SECURITIES AVAILABLE-FOR-SALE:      |  |                 |         |  |       |   |        |       |  |   |         | 
|Mutual funds:                                  |  | $               | 2,288   |  |       | $ | 2,323  |       |  | $ | 2,341   | 
|State and municipal obligations                |  |                 |        |  |       |   | 502    |       |  |   | 2,570   | 
|U.S. Government and agency securities          |  |                 | 92,976  |  |       |   | 54,225 |       |  |   | 49,061  | 
|Mortgage-backed securities:                    |  |                 |         |  |       |   |        |       |  |   |         | 
|FNMA Certificates                              |  |                 | 15,865  |  |       |   | 22,787 |       |  |   | 26,420  | 
|GNMA Certificates                              |  |                 | 965     |  |       |   | 2,004  |       |  |   | 3,908   | 
|FHLMC Certificates                             |  |                 | 11,900  |  |       |   | 12,271 |       |  |   | 18,582  | 
|                                               |  |                 |         |  |       |   |        |       | 
|Total investment securities available-for-sale |  | $               | 123,994 |  |       | $ | 94,112 |       |  | $ | 102,882 | 
|INVESTMENT SECURITIES HELD TO MATURITY:        |  |                 |         |  |       |   |        |       |  |   |         | 
|Mortgage-backed securities:                    |  |                 |         |  |       |   |        |       |  |   |         | 
|GNMA                                           |  |                 | 484     |  |       |   | 573    |       |  |   | 790     | 
|FHLMC Certificates                             |  |                 | 826     |  |       |   | 971    |       |  |   |        | 
|                                               |  |                 |         |  |       |   |        |       | 
|Total investment securities held-to-maturity   |  |                 | 1,310   |  |       |   | 1,544  |       |  |   | 790     | 
|                                               |  |                 |         |  |       |   |        |       | 
|                                               |  | $               | 125,304 |  |       | $ | 95,656 |       |  | $ | 103,672 | 
|                                               |  |                 |         |  |       |   |        |       | 



| |      
| | -----
| | Loans





de-emphasizing


20



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##### Table of Contents





|                            |  |                 |         |   |         |  |        |        |  |   |         |   |  |        |        |   |         |   |         |        |  |  |         |   |  |        |         |   |         |  |        |   |  |   |         |   |  |  |         |  
|--------------------------- |  | --------------- | ------- | - | ------- |  | ------ | ------ |  | - | ------- | - |  | ------ | ------ | - | ------- | - | ------- | ------ |  |  | ------- | - |  | ------ | ------- | - | ------- |  | ------ | - |  | - | ------- | - |  |  | ------- | -
|                            |  | At December 31, |        
|                            |  |                 |        
|                            |  | 2005            |         |   | 2004    |  |        | 2003   |  |   | 2002    |   |  | 2001   |       
|                            |  |                 |         |   |         |  |        |        |  |   |         |   |  |        |       
|                            |  | Amount          |         |   | Percent |  |        | Amount |  |   | Percent |   |  | Amount |        |   | Percent |   |         | Amount |  |  | Percent |   |  | Amount |         |   | Percent | 
|                            |  |                 |         |   |         |  |        |        |  |   |         |   |  |        |        |   |         |   |         |        |  |  |         |   |  |        |         |   |         | 
|Commercial loans            |  | $               | 171,555 |   |         |  | 46.43  | %      |  | $ | 189,181 |   |  |        | 53.11  | % |         | $ | 148,761 |        |  |  | 61.78   | % |  | $      | 143,685 |   |         |  | 49.11  | % |  | $ | 53,260  |   |  |  | 17.72   | %
|Construction loans          |  |                 | 48,309  |   |         |  | 13.08  | %      |  |   | 21,763  |   |  |        | 6.11   | % |         |   | 17,278  |        |  |  | 7.17    | % |  |        | 29,709  |   |         |  | 10.15  | % |  |   | 21,651  |   |  |  | 7.20    | %
|Mortgage loans              |  |                 | 79,856  |   |         |  | 21.61  | %      |  |   | 90,654  |   |  |        | 25.45  | % |         |   | 26,676  |        |  |  | 11.08   | % |  |        | 60,099  |   |         |  | 20.54  | % |  |   | 150,358 |   |  |  | 50.02   | %
|Consumer loans              |  |                 | 69,736  |   |         |  | 18.88  | %      |  |   | 54,624  |   |  |        | 15.33  | % |         |   | 48,096  |        |  |  | 19.97   | % |  |        | 59,063  |   |         |  | 20.19  | % |  |   | 75,334  |   |  |  | 25.06   | %
|                            |  |                 |         |   |         |  |        |        |  |   |         |   |  |        |        |   |         |   |         |        |  |  |         |   |  |        |         |   |         | 
|                            |  | $               | 369,456 |   |         |  | 100.00 | %      |  | $ | 356,222 |   |  |        | 100.00 | % |         | $ | 240,811 |        |  |  | 100.00  | % |  | $      | 292,556 |   |         |  | 100.00 | % |  | $ | 300,603 |   |  |  | 100..00 | %
|                            |  |                 |         |   |         |  |        |        |  |   |         |   |  |        |        |   |         |   |         |        |  |  |         |   |  |        |         |   |         | 
|Unearned fees and discounts |  | $               | 378     |   |         |  |        |        |  | $ | (80     | ) |  |        |        |   |         | $ | (359    | )      |  |  |         |   |  | $      | (323    | ) |         |  |        |   |  | $ | (552    | ) |  |  |         |  
|Allowance for loan losses   |  |                 | (3,300  | ) |         |  |        |        |  |   | (3,157  | ) |  |        |        |   |         |   | (3,069  | )      |  |  |         |   |  |        | (3,603  | ) |         |  |        |   |  |   | (2,871  | ) |  |  |         |  
|                            |  |                 |         |   |         |  |        |        |  |   |         |   |  |        |        |   |         |   |         |        |  |  |         |   |  |        |         |   |         | 
|Net loans                   |  | $               | 366,534 |   |         |  |        |        |  | $ | 352,985 |   |  |        |        |   |         | $ | 237,383 |        |  |  |         |   |  | $      | 288,630 |   |         |  |        |   |  | $ | 297,180 |   |  |  |         |  
|                            |  |                 |         |   |         |  |        |        |  |   |         |   |  |        |        |   |         |   |         |        |  |  |         |   |  |        |         |   |         | 



|                            |       |                       |         |         |                  |   |         |         | 
|--------------------------- | ----- | --------------------- | ------- | ------- | ---------------- | - | ------- | ------- | 
|                            |       | Less Than One Year to |         |         |                 
|                            |       | Five Years            |         |         | After Five Years |  
|                            |       |                       |         |         |                  |  
|Predetermined interest rate |       | $                     | 143,892 |         |                  | $ | 141,992 |        
|Floating interest rate      |       |                       | 79,482  |         |                  |   | 4,090   |        
|                            |       |                       |         |         |                  |  
|                            | Total |                       | $       | 223,374 |                  |   | $       | 146,082 | 
|                            |       |                       |         |         |                  |  



| |                
| | ---------------
| | Loan Maturities



|                          |  |                              |         |  |             |   |        |              |  |   |          |  |  |             |        |  |  |   |         | 
|------------------------- |  | ---------------------------- | ------- |  | ----------- | - | ------ | ------------ |  | - | -------- |  |  | ----------- | ------ |  |  | - | ------- | 
|                          |  | Amounts at December 31, 2005 |        
|                          |  |                              |        
|                          |  | Commercial                   |         |  | Residential |   |        | Construction |  |   | Consumer |  |  | Total Loans |       
|                          |  |                              |         |  |             |   |        |              |  |   |          |  |  |             |       
|Amounts due               |  |                              |         |  |             |   |        |              |  |   |          |  |  |             |        |  |  |   |         | 
|Non-accrual loans         |  | $                            | 1,512   |  |             | $ | 773    |              |  | $ | 225      |  |  | $           |       |  |  | $ | 2,510   | 
|Within one year           |  |                              | 37,848  |  |             |   | 30     |              |  |   | 25,425   |  |  |             | 6,451  |  |  |   | 69,754  | 
|                          |  |                              |         |  |             |   |        |              |  |   |          |  |  |             |       
|Total due within one year |  |                              | 39,360  |  |             |   | 803    |              |  |   | 25,650   |  |  |             | 6,451  |  |  |   | 72,264  | 
|After one year:           |  |                              |         |  |             |   |        |              |  |   |          |  |  |             |        |  |  |   |         | 
|1-3 years                 |  |                              | 32,740  |  |             |   | 804    |              |  |   | 22,659   |  |  |             | 7,973  |  |  |   | 64,176  | 
|3-5 years                 |  |                              | 65,538  |  |             |   | 94     |              |  |   |         |  |  |             | 10,856 |  |  |   | 76,488  | 
|Over 5 years              |  |                              | 33,917  |  |             |   | 78,155 |              |  |   |         |  |  |             | 44,456 |  |  |   | 156,528 | 
|                          |  |                              |         |  |             |   |        |              |  |   |          |  |  |             |       
|Total due after one year  |  |                              | 132,195 |  |             |   | 79,053 |              |  |   | 22,659   |  |  |             | 63,285 |  |  |   | 297,192 | 
|                          |  |                              |         |  |             |   |        |              |  |   |          |  |  |             |       
|Total amounts due         |  | $                            | 171,555 |  |             | $ | 79,856 |              |  | $ | 48,309   |  |  | $           | 69,736 |  |  | $ | 369,456 | 
|                          |  |                              |         |  |             |   |        |              |  |   |          |  |  |             |       

21



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| |                                        
| | ---------------------------------------
| | Provision and Allowance for Loan Losses







|                       |  |                         |       |         |          |  |       |        |         |   |          |  |  |         |       |   |          |   |         |       |  |  |          |         |  |       |       |  |          |  |       |   |  |   |       |  |  |  |       |  
|---------------------- |  | ----------------------- | ----- | ------- | -------- |  | ----- | ------ | ------- | - | -------- |  |  | ------- | ----- | - | -------- | - | ------- | ----- |  |  | -------- | ------- |  | ----- | ----- |  | -------- |  | ----- | - |  | - | ----- |  |  |  | ----- | -
|                       |  | Year Ended December 31, |      
|                       |  |                         |      
|                       |  | 2005                    |       |         | 2004     |  |       | 2003   |         |   | 2002     |  |  | 2001    |      
|                       |  |                         |       |         |          |  |       |        |         |   |          |  |  |         |      
|                       |  |                         |       | Percent |          |  |       |        | Percent |   |          |  |  | Percent |       |   |          |   | Percent |       |  |  |          | Percent | 
|                       |  | Amount                  |       |         | of Loans |  |       | Amount |         |   | of Loans |  |  | Amount  |       |   | of Loans |   |         | Amout |  |  | of Loans |         |  | Amout |       |  | of Loans | 
|                       |  |                         |       |         |          |  |       |        |         |   |          |  |  |         |       |   |          |   |         |       |  |  |          |         |  |       |       |  |          | 
|Real estate            |  | $                       | 571   |         |          |  | 20.23 | %      |         | $ | 947      |  |  |         | 34.29 | % |          | $ | 661     |       |  |  | 80.93    | %       |  | $     | 510   |  |          |  | 82.77 | % |  | $ | 400   |  |  |  | 70.45 | %
|Commercial real estate |  |                         | 1,894 |         |          |  | 67.12 | %      |         |   | 1,775    |  |  |         | 64.26 | % |          |   | 2,089   |       |  |  | 9.08     | %       |  |       | 2,088 |  |          |  | 5.72  | % |  |   | 2,325 |  |  |  | 11.26 | %
|Consumer               |  |                         | 357   |         |          |  | 12.65 | %      |         |   | 40       |  |  |         | 1.45  | % |          |   | 120     |       |  |  | 9.99     | %       |  |       | 179   |  |          |  | 11.51 | % |  |   | 146   |  |  |  | 18.29 | %
|Unallocated            |  |                         | 478   |         |          |  |      |        |         |   | 395      |  |  |         |      |   |          |   | 199     |       |  |  |         |         |  |       | 826   |  |          |  |      |   |  |   |      |  |  |  |      |  
|                       |  |                         |       |         |          |  |       |        |         |   |          |  |  |         |       |   |          |   |         |       |  |  |          |         |  |       |       |  |          | 
|Totals                 |  | $                       | 3,300 |         |          |  | 100   | %      |         | $ | 3,157    |  |  |         | 100   | % |          | $ | 3,069   |       |  |  | 100      | %       |  | $     | 3,603 |  |          |  | 100   | % |  | $ | 2,871 |  |  |  | 100   | %
|                       |  |                         |       |         |          |  |       |        |         |   |          |  |  |         |       |   |          |   |         |       |  |  |          |         |  |       |       |  |          | 

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|                                                |  |      |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|----------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                |  | 2005 |        |   | 2004 |   |       | 2003 |  |   | 2002  |   |  | 2001 |      
|                                                |  |      |        |   |      |   |       |      |  |   |       |   |  |      |      
|Balance at beginning of year                    |  | $    | 3,157  |   |      | $ | 3,069 |      |  | $ | 3,603 |   |  | $    | 2,871 |   |  | $ | 1,349 |  
|Acquisition of Jades allowance for loan losses |  |      |       |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   | 1,874 |  
|Charge-offs:                                    |  |      |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Real Estate: one-to four-family                 |  |      | 93     |   |      |   | 17    |      |  |   | 93    |   |  |      | 474   |   |  |   | 262   |  
|Commercial                                      |  |      | 41     |   |      |   |      |      |  |   | 13    |   |  |      |      |   |  |   |      |  
|Consumer                                        |  |      | 284    |   |      |   | 345   |      |  |   | 656   |   |  |      | 382   |   |  |   | 526   |  
|                                                |  |      |        |   |      |   |       |      |  |   |       |   |  |      |      
|Total charge-offs                               |  |      | 418    |   |      |   | 362   |      |  |   | 762   |   |  |      | 856   |   |  |   | 788   |  
|Recoveries:                                     |  |      |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Consumer                                        |  |      | 156    |   |      |   | 215   |      |  |   | 183   |   |  |      | 151   |   |  |   | 166   |  
|                                                |  |      |        |   |      |   |       |      |  |   |       |   |  |      |      
|Total recoveries                                |  |      | 156    |   |      |   | 215   |      |  |   | 183   |   |  |      | 151   |   |  |   | 166   |  
|                                                |  |      |        |   |      |   |       |      |  |   |       |   |  |      |      
|Net charge-offs                                 |  |      | 262    |   |      |   | 147   |      |  |   | 579   |   |  |      | 705   |   |  |   | 622   |  
|Provision charged to operations                 |  |      | 405    |   |      |   | 235   |      |  |   | 45    |   |  |      | 1,437 |   |  |   | 270   |  
|                                                |  |      |        |   |      |   |       |      |  |   |       |   |  |      |      
|Allowance, end of period                        |  | $    | 3,300  |   |      | $ | 3,157 |      |  | $ | 3,069 |   |  | $    | 3,603 |   |  | $ | 2,871 |  
|                                                |  |      |        |   |      |   |       |      |  |   |       |   |  |      |      
|Allowance for loan losses to total loans        |  |      | 0.89   | % |      |   | 0.90  | %    |  |   | 1.28  | % |  |      | 1.23  | % |  |   | 0.95  | %
|Allowance for loan losses to non accrual loans  |  |      | 131.47 | % |      |   | 86.90 | %    |  |   | 58.99 | % |  |      | 80.42 | % |  |   | 69.52 | %
|Net charge-offs as a percentage of total loans  |  |      | 0.11   | % |      |   | 0.04  | %    |  |   | 0.24  | % |  |      | 0.24  | % |  |   | 0.21  | %



| |                      
| | ---------------------
| | Non-Performing Assets





23



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|                                                                                           |  |                      |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|------------------------------------------------------------------------------------------ |  | -------------------- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                                           |  | At December 31, 2005 |       
|                                                                                           |  |                      |       
|                                                                                           |  | 2005                 |        |   | 2004 |   |       | 2003 |  |   | 2002  |   |  | 2001 |      
|                                                                                           |  |                      |        |   |      |   |       |      |  |   |       |   |  |      |      
|Loans past due 90 days or more as to interest or principal
    and still accruing interest |  | $                    |       |   |      | $ |      |      |  | $ |      |   |  | $    |      |   |  | $ |      |  
|Nonaccrual loans                                                                           |  |                      | 2,510  |   |      |   | 3,633 |      |  |   | 5,203 |   |  |      | 4,480 |   |  |   | 4,130 |  
|                                                                                           |  |                      |        |   |      |   |       |      |  |   |       |   |  |      |      
|Total nonperforming loans                                                                  |  |                      | 2,510  |   |      |   | 3,633 |      |  |   | 5,203 |   |  |      | 4,480 |   |  |   | 4,130 |  
|Real estate owned (REO)                                                                    |  |                      | 1,109  |   |      |   | 422   |      |  |   | 374   |   |  |      | 382   |   |  |   | 548   |  
|                                                                                           |  |                      |        |   |      |   |       |      |  |   |       |   |  |      |      
|Total nonperforming assets                                                                 |  | $                    | 3,619  |   |      | $ | 4,055 |      |  | $ | 5,577 |   |  | $    | 4,862 |   |  | $ | 4,678 |  
|                                                                                           |  |                      |        |   |      |   |       |      |  |   |       |   |  |      |      
|Nonperforming loans to total loans                                                         |  |                      | 0.68   | % |      |   | 1.02  | %    |  |   | 2.16  | % |  |      | 1.53  | % |  |   | 1.37  | %
|Nonperforming assets to total assets                                                       |  |                      | 0.65   | % |      |   | 0.76  | %    |  |   | 1.19  | % |  |      | 0.98  | % |  |   | 1.00  | %
|Allowance for loan losses to total loans                                                   |  |                      | 0.89   | % |      |   | 0.90  | %    |  |   | 1.28  | % |  |      | 1.23  | % |  |   | 0.95  | %
|Allowance for loan losses to nonperforming loans                                           |  |                      | 131.47 | % |      |   | 86.90 | %    |  |   | 58.99 | % |  |      | 80.42 | % |  |   | 69.52 | %
|Allowance for loan losses to nonperforming assets                                          |  |                      | 91.19  | % |      |   | 77.85 | %    |  |   | 55.03 | % |  |      | 74.11 | % |  |   | 61.37 | %
|Net charge-offs as a percentage of total loans                                             |  |                      | 0.11   | % |      |   | 0.04  | %    |  |   | 0.24  | % |  |      | 0.24  | % |  |   | 0.21  | %





| |         
| | --------
| | Deposits



|                        |  |                         |         |  |         |  |      |         |  |   |         |  |  |         |      |   |         |   |         |  |  |  |      |  
|----------------------- |  | ----------------------- | ------- |  | ------- |  | ---- | ------- |  | - | ------- |  |  | ------- | ---- | - | ------- | - | ------- |  |  |  | ---- | -
|                        |  | Year Ended December 31, |        
|                        |  |                         |        
|                        |  | 2005                    |         |  | 2004    |  |      | 2003    | 
|                        |  |                         |         |  |         |  |      |         | 
|                        |  | Average                 |         |  | Average |  |      | Average |  |   | Average |  |  | Average |      |   | Average |  
|                        |  | Balance                 |         |  | Rate    |  |      | Balance |  |   | Rate    |  |  | Balance |      |   | Rate    |  
|                        |  |                         |         |  |         |  |      |         |  |   |         |  |  |         |      |   |         |  
|Demand deposits         |  | $                       | 32,889  |  |         |  |     |         |  | $ | 37,827  |  |  |         |     |   |         | $ | 24,843  |  |  |  |     |  
|Now checking accounts   |  |                         | 25,024  |  |         |  | 0.50 | %       |  |   | 25,946  |  |  |         | 0.51 | % |         |   | 22,680  |  |  |  | 0.84 | %
|Money market accounts   |  |                         | 50,379  |  |         |  | 1.38 | %       |  |   | 67,759  |  |  |         | 1.06 | % |         |   | 72,356  |  |  |  | 1.50 | %
|Savings accounts        |  |                         | 81,526  |  |         |  | 1.20 | %       |  |   | 90,592  |  |  |         | 1.21 | % |         |   | 93,453  |  |  |  | 1.44 | %
|Certificates of deposit |  |                         | 304,531 |  |         |  | 3.32 | %       |  |   | 240,968 |  |  |         | 2.70 | % |         |   | 221,377 |  |  |  | 3.13 | %
|                        |  |                         |         |  |         |  |      |         |  |   |         |  |  |         |      |   |         |  
|Total deposits          |  | $                       | 494,349 |  |         |  | 2.58 | %       |  | $ | 463,092 |  |  |         | 1.99 | % |         | $ | 434,709 |  |  |  | 2.20 | %
|                        |  |                         |         |  |         |  |      |         |  |   |         |  |  |         |      |   |         |  





24



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##### Table of Contents





| |                                                            
| | -----------------------------------------------------------
| | Maturity of Certificates of Deposit of $100,000 or
    More



|             |                                       |                         |   |        |        | 
|------------ | ------------------------------------- | ----------------------- | - | ------ | ------ | 
|             |                                       | Certificates of Deposit |  
|             |                                       | 2005                    |  
|             |                                       |                         |  
|             |                                       | (Dollars in thousands)  |  
|Maturing in: |                                       |                         |   |       
|             | Three months or less                  |                         | $ | 14,175 |       
|             | Over three months through six months  |                         |   | 9,741  |       
|             | Over six months through twelve months |                         |   | 42,560 |       
|             | Over twelve months                    |                         |   | 15,540 |       
|             |                                       |                         |  
|             |                                       | Total                   |   | $      | 82,016 | 
|             |                                       |                         |  



|                             |  |                        |         |  |      |   |        |      |  |   |       |  |  |      |       |  |            |   |       |        |  |   |     |  |  |   |         | 
|---------------------------- |  | ---------------------- | ------- |  | ---- | - | ------ | ---- |  | - | ----- |  |  | ---- | ----- |  | ---------- | - | ----- | ------ |  | - | --- |  |  | - | ------- | 
|                             |  | 2006                   |         |  | 2007 |   |        | 2008 |  |   | 2009  |  |  | 2010 |       |  | Thereafter |   |       | Totals | 
|                             |  |                        |         |  |      |   |        |      |  |   |       |  |  |      |       |  |            |   |       |        | 
|                             |  | (Dollars in thousands) |        
|Time certificates of deposit |  | $                      | 261,961 |  |      | $ | 42,313 |      |  | $ | 7,414 |  |  | $    | 2,335 |  |            | $ | 6,052 |        |  | $ | 155 |  |  | $ | 320,230 | 
|                             |  |                        |         |  |      |   |        |      |  |   |       |  |  |      |       |  |            |   |       |        | 







| |               
| | --------------
| | Borrowed Funds







|                                      |  |                         |       |   |      |   |       |      |  |   |       |  
|------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                      |  | Year Ended December 31, |      
|                                      |  |                         |      
|                                      |  | 2005                    |       |   | 2004 |   |       | 2003 | 
|                                      |  |                         |       |   |      |   |       |      | 
|                                      |  | (Dollars in thousands,  |      
|                                      |  | except percentages)     |      
|Balance at year-end                   |  | $                       | 1,127 |   |      | $ | 1,105 |      |  | $ | 1,099 |  
|Average during the year               |  |                         | 1,120 |   |      |   | 1,109 |      |  |   | 1,092 |  
|Maximum month-end balance             |  |                         | 1,127 |   |      |   | 1,111 |      |  |   | 1,099 |  
|Weighted average rate during the year |  |                         | 2.12  | % |      |   | 1.92  | %    |  |   | 2.47  | %
|Rate at December 31                   |  |                         | 2.44  | % |      |   | 2.14  | %    |  |   | 1.88  | %

25



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##### Table of Contents





| |                     
| | --------------------
| | Shareholders Equity





| |                          
| | -------------------------
| | Interest Rate Sensitivity













26



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##### Table of Contents



Interest Sensitivity Gap at December 31, 2005


|                                           |  |        |         |   |        |   |          |          |  |           |         |  |           |          |        |            |          |   |         |   |  |   |         |  
|------------------------------------------ |  | ------ | ------- | - | ------ | - | -------- | -------- |  | --------- | ------- |  | --------- | -------- | ------ | ---------- | -------- | - | ------- | - |  | - | ------- | -
|                                           |  | 0-3    |         |   | 4-12   |   |          |          |  | More Than |         |  | No Stated |          |        | Balance at |         
|Gap Table at December 31, 2005             |  | Months |         |   | Months |   |          | 1-5 Yrs. |  |           | 5 Yrs.  |  |           | Maturity |        |            | 12/31/05 |  
|                                           |  |        |         |   |        |   |          |          |  |           |         |  |           |          |        |            |          |  
|Cash due and from banks                    |  |        |        |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   | 6,454   |   |  |   | 6,454   |  
|Interest bearing deposits with banks       |  |        | 29,762  |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   |        |   |  |   | 29,762  |  
|Fed Funds Sold                             |  |        | 1,581   |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   |        |   |  |   | 1,581   |  
|Investment securities                      |  |        | 573     |   |        |   | 48,345   |          |  |           | 74,104  |  |           |          | 2,297  |            |          |   |         |   |  |   | 125,319 |  
|Loans held for sale                        |  |        | 3,280   |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   |        |   |  |   | 3,280   |  
|Mortgage loans                             |  |        | 1,420   |   |        |   | 13,874   |          |  |           | 35,820  |  |           |          | 28,742 |            |          |   | 378     |   |  |   | 80,234  |  
|Commercial loans                           |  |        | 35,239  |   |        |   | 50,963   |          |  |           | 64,327  |  |           |          | 21,026 |            |          |   |        |   |  |   | 171,555 |  
|Consumer loans                             |  |        | 11,583  |   |        |   | 12,689   |          |  |           | 39,453  |  |           |          | 6,011  |            |          |   |        |   |  |   | 69,736  |  
|Construction loans                         |  |        | 742     |   |        |   | 28,306   |          |  |           | 19,099  |  |           |          | 162    |            |          |   |        |   |  |   | 48,309  |  
|Allowance for loan losses                  |  |        |        |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   | (3,300  | ) |  |   | (3,300  | )
|Other assets                               |  |        |        |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   | 27,752  |   |  |   | 27,752  |  
|                                           |  |        |         |   |        |   |          |          |  |           |         |  |           |          |        |            |          |  
|Total assets                               |  | $      | 84,180  |   |        | $ | 154,177  |          |  |           | 232,803 |  |           | $        | 58,238 |            |          | $ | 31,284  |   |  | $ | 560,682 |  
|                                           |  |        |         |   |        |   |          |          |  |           |         |  |           |          |        |            |          |  
|Noninterest bearing deposits               |  |        |        |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   | 42,136  |   |  |   | 42,136  |  
|NOW accounts                               |  |        | 24,444  |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   |        |   |  |   | 24,444  |  
|Money market accounts                      |  |        | 41,835  |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   |        |   |  |   | 41,835  |  
|Savings accounts                           |  |        | 74,924  |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   |        |   |  |   | 74,924  |  
|Time deposits                              |  |        | 14,484  |   |        |   | 247,726  |          |  |           | 58,020  |  |           |          |        |            |          |   |        |   |  |   | 320,230 |  
|Borrowed funds                             |  |        | 233     |   |        |   | 673      |          |  |           | 222     |  |           |          |       |            |          |   |        |   |  |   | 1,128   |  
|Other liabilities                          |  |        |        |   |        |   |         |          |  |           |        |  |           |          |       |            |          |   | 2,764   |   |  |   | 2,764   |  
|                                           |  |        |         |   |        |   |          |          |  |           |         |  |           |          |        |            |          |  
|Total liabilities                          |  |        | 155,920 |   |        |   | 248,399  |          |  |           | 58,242  |  |           |          |       |            |          |   | 44,900  |   |  |   | 507,461 |  
|                                           |  |        |         |   |        |   |          |          |  |           |         |  |           |          |        |            |          |  
|Shareholders equity                       |  |        |         |   |        |   |          |          |  |           |         |  |           |          |        |            |          |   | 53,221  |   |  |   | 53,221  |  
|                                           |  |        |         |   |        |   |          |          |  |           |         |  |           |          |        |            |          |  
|Total liabilities and shareholders equity |  | $      | 155,920 |   |        | $ | 248,399  |          |  | $         | 58,242  |  |           | $        |       |            |          | $ | 98,121  |   |  | $ | 560,682 |  
|                                           |  |        |         |   |        |   |          |          |  |           |         |  |           |          |        |            |          |  
|GAP                                        |  |        | (71,740 | ) |        |   | (94,222  | )        |  |           | 174,561 |  |           |          | 58,238 |            |          |   | (66,837 | ) |  |   |        |  
|Gap Ratio                                  |  |        | 0.54    |   |        |   | 0.62     |          |  |           | 4.00    |  |           |          | 582.38 |            |          |   | 0.32    |   |  |   | 1.00    |  
|Cumulative Gap                             |  |        | (71,740 | ) |        |   | (165,962 | )        |  |           | 8,599   |  |           |          | 66,837 |            |          |   |        |   |  |   |        |  
|Cumulative Gap Ratio                       |  |        | 0.54    |   |        |   | 0.59     |          |  |           | 1.02    |  |           |          | 1.14   |            |          |   | 1.00    |   |  |   | 1.00    |  





27



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|                  |  |              |        |  |                  |  |        |            |  |  |        |   
|----------------- |  | ------------ | ------ |  | ---------------- |  | ------ | ---------- |  |  | ------ | --
|                  |  | Market Value |        |  | Change in Market |  |        | Percentage | 
|                  |  | of Equity    |        |  | Value of Equity  |  |        | Change     | 
|                  |  |              |        |  |                  |  |        |            | 
|+300 Basis Points |  |              | 66,260 |  |                  |  | 2,914  |            |  |  | 4.60   | % 
|+200 Basis Points |  |              | 65,610 |  |                  |  | 2,264  |            |  |  | 3.57   | % 
|+100 Basis Points |  |              | 64,649 |  |                  |  | 1,303  |            |  |  | 2.06   | % 
|Flat Rate         |  |              | 63,346 |  |                  |  |       |            |  |  |       |   
|-300 Basis Points |  |              | 56,267 |  |                  |  | (7,079 | )          |  |  | (11.18 | )%
|-200 Basis Points |  |              | 59,505 |  |                  |  | (3,841 | )          |  |  | (6.06  | )%
|-100 Basis Points |  |              | 61,840 |  |                  |  | (1,506 | )          |  |  | (2.38  | )%



| |        
| | -------
| | Capital











|                                                 |         |                        |        |             |                   |  |                   |                   |   |             |        |        |  |        |       |       |       |  |     |        |  |  |     |        |  
|------------------------------------------------ | ------- | ---------------------- | ------ | ----------- | ----------------- |  | ----------------- | ----------------- | - | ----------- | ------ | ------ |  | ------ | ----- | ----- | ----- |  | --- | ------ |  |  | --- | ------ | -
|                                                 |         |                        |        |             |                   |  |                   |                   |   | To be Well- |       
|                                                 |         |                        |        |             |                   |  |                   | Capitalized Under |  
|                                                 |         |                        |        | For Capital |                   |  | Prompt Corrective |                  
|                                                 |         | Actual                 |        |             | Adequacy Purposes |  |                   | Action Provisions |  
|                                                 |         |                        |        |             |                   |  |                   |                   |  
|                                                 |         | Amount                 |        |             | Ratio             |  |                   | Amount            |   |             | Ratio  |        |  | Amount |       |       | Ratio | 
|                                                 |         |                        |        |             |                   |  |                   |                   |   |             |        |        |  |        |       |       |       | 
|                                                 |         | (Dollars in thousands) |       
|As of December 31, 2005:                         |         |                        |        |             |                   |  |                   |                   |   |             |        |        |  |        |       |       |       |  |     |        |  |  |     |       
|Total capital (to risk-weighted assets)          |         |                        |        |             |                   |  |                   |                   |   |             |        |        |  |        |       |       |       |  |     |        |  |  |     |       
|                                                 | Company |                        | $      | 56,737      |                   |  |                   | 14.88             | % |             | $      | 30,500 |  |        |       | 38.00 | %     |  |     | N/A    |  |  |     | N/A    |  
|                                                 | Bank    |                        | $      | 45,185      |                   |  |                   | 11.96             | % |             | $      | 30,221 |  |        |       | 38.00 | %     |  | $   | 37,776 |  |  |     | 310.00 | %
|Tier I capital (to risk-weighted assets) Company |         | $                      | 53,437 |             |                   |  | 14.02             | %                 |   | $           | 15,250 |        |  |        | 34.00 | %     |       |  | N/A |        |  |  | N/A |       
|                                                 | Bank    |                        | $      | 41,885      |                   |  |                   | 11.09             | % |             | $      | 15,110 |  |        |       | 34.00 | %     |  | $   | 22,666 |  |  |     | 36.00  | %
|Tier I capital (to average assets)               |         |                        |        |             |                   |  |                   |                   |   |             |        |        |  |        |       |       |       |  |     |        |  |  |     |       
|                                                 | Company |                        | $      | 53,437      |                   |  |                   | 9.53              | % |             | $      | 22,426 |  |        |       | 34.00 | %     |  |     | N/A    |  |  |     | N/A    |  
|                                                 | Bank    |                        | $      | 41,885      |                   |  |                   | 7.50              | % |             | $      | 22,327 |  |        |       | 34.00 | %     |  | $   | 27,908 |  |  |     | 35.00  | %

28



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|                                           |         |                        |        |             |                   |  |                   |                   |   |             |        |        |  |        |       |       |       |  |     |        |  |  |     |        |  
|------------------------------------------ | ------- | ---------------------- | ------ | ----------- | ----------------- |  | ----------------- | ----------------- | - | ----------- | ------ | ------ |  | ------ | ----- | ----- | ----- |  | --- | ------ |  |  | --- | ------ | -
|                                           |         |                        |        |             |                   |  |                   |                   |   | To be Well- |       
|                                           |         |                        |        |             |                   |  |                   | Capitalized Under |  
|                                           |         |                        |        | For Capital |                   |  | Prompt Corrective |                  
|                                           |         | Actual                 |        |             | Adequacy Purposes |  |                   | Action Provisions |  
|                                           |         |                        |        |             |                   |  |                   |                   |  
|                                           |         | Amount                 |        |             | Ratio             |  |                   | Amount            |   |             | Ratio  |        |  | Amount |       |       | Ratio | 
|                                           |         |                        |        |             |                   |  |                   |                   |   |             |        |        |  |        |       |       |       | 
|                                           |         | (Dollars in thousands) |       
|As of December 31, 2004:                   |         |                        |        |             |                   |  |                   |                   |   |             |        |        |  |        |       |       |       |  |     |        |  |  |     |       
|Total capital (to risk-weighted assets)    |         |                        |        |             |                   |  |                   |                   |   |             |        |        |  |        |       |       |       |  |     |        |  |  |     |       
|                                           | Company |                        | $      | 54,364      |                   |  |                   | 15.49             | % |             | $      | 28,082 |  |        |       | 38.00 | %     |  |     | N/A    |  |  |     | N/A    |  
|                                           | Bank    |                        | $      | 43,095      |                   |  |                   | 12.34             | % |             | $      | 27,930 |  |        |       | 38.00 | %     |  | $   | 34,912 |  |  |     | 310.00 | %
|Tier I capital (to risk-weighted assets)   |         |                        |        |             |                   |  |                   |                   |   |             |        |        |  |        |       |       |       |  |     |        |  |  |     |       
|                                           | Company |                        | $      | 51,207      |                   |  |                   | 14.59             | % |             | $      | 14,041 |  |        |       | 34.00 | %     |  |     | N/A    |  |  |     | N/A    |  
|                                           | Bank    |                        | $      | 39,938      |                   |  |                   | 11.44             | % |             | $      | 13,965 |  |        |       | 34.00 | %     |  | $   | 20,947 |  |  |     | 36.00  | %
|Tier I capital (to average assets) Company |         | $                      | 51,207 |             |                   |  | 9.53              | %                 |   | $           | 21,489 |        |  |        | 34.00 | %     |       |  | N/A |        |  |  | N/A |       
|                                           | Bank    |                        | $      | 39,938      |                   |  |                   | 7.48              | % |             | $      | 21,361 |  |        |       | 34.00 | %     |  | $   | 26,701 |  |  |     | 35.00  | %





| |                               
| | ------------------------------
| | Liquidity and Funds Management









29



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##### Table of Contents





| |                                              
| | ---------------------------------------------
| | Contractual Obligations and Other Commitments



|                                                          |                  |                        |       |  |      |   |       |      |  |   |       |  |  |      |        |  |  |   |         |        | 
|--------------------------------------------------------- | ---------------- | ---------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | ---- | ------ |  |  | - | ------- | ------ | 
|                                                          |                  | 2010                   |       |  | 2009 |   |       | 2008 |  |   | 2007  |  |  | 2006 |       
|                                                          |                  |                        |       |  |      |   |       |      |  |   |       |  |  |      |       
|                                                          |                  | (Dollars in thousands) |      
|Minimum annual rentals on non cancelable operating leases |                  | $                      | 233   |  |      | $ | 363   |      |  | $ | 387   |  |  | $    | 586    |  |  | $ | 874     |       
|Remaining Contractual maturities of time deposits         |                  |                        | 6,202 |  |      |   | 2,335 |      |  |   | 7,414 |  |  |      | 42,313 |  |  |   | 261,961 |       
|                                                          | Loan commitments |                        |       |  |      |   |       |      |  |   |       |  |  |      |        |  |  |   |         | 80,628 | 
|Standby letter of credit                                  |                  |                        |       |  |      |   |       |      |  |   |       |  |  |      |        |  |  |   | 3,539   |       
|                                                          |                  |                        |       |  |      |   |       |      |  |   |       |  |  |      |       
|Total                                                     |                  | $                      | 6,435 |  |      | $ | 2,698 |      |  | $ | 7,801 |  |  | $    | 42,899 |  |  | $ | 347,002 |       
|                                                          |                  |                        |       |  |      |   |       |      |  |   |       |  |  |      |       

RECENT ACCOUNTING PRONOUNCEMENTS


Share-Based
Payment. Accounting for Stock
Issued to Employees








30



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##### Table of Contents





Accounting for Certain Investments in Debt and Equity
Securities


60-day







|         |                                                                
|-------- | ---------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK.








|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

10-K,







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








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

10-K,


31



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##### Table of Contents



13a-15(e)







|         |                  
|-------- | -----------------
|ITEM 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | Directors and Executive Officers of the Registrant





| |                                        
| | ---------------------------------------
| | Class I directors (Term expiring 2008).

|                   |                                  |     |    |            |          |  |      |                                             |  |                                           |                                                |          | 
|------------------ | -------------------------------- | --- | -- | ---------- | -------- |  | ---- | ------------------------------------------- |  | ----------------------------------------- | ---------------------------------------------- | -------- | 
|                   |                                  |     |    | Year First |          |  |     
|                   |                                  |     |    | Elected    |          |  |     
|Name/Position      |                                  | Age |    |            | Director |  |      | Principal Occupation During Past Five Years | 
|                   |                                  |     |    |            |          |  |      |                                             | 
|Anthony DiSandro,  |                                  |     | 59 |            |          |  | 1997 |                                             |  | President, Chief Executive Officer of PSB
|                   | Director, President and Chief    |     |    |            |          |  |      |                                             |  |                                           |                                                | Bancorp, | 
|                   | Executive Officer Inc.           |     |    |            |          |  |      |                                             |  |                                           |                                                |          | 
|Rosanne Pauciello, |                                  |     | 62 |            |          |  | 1997 |                                             |  | Corporate Secretary of PSB Bancorp, Inc; 
|                   | Director and Corporate Secretary |     |    |            |          |  |      |                                             |  |                                           | Pennsylvania State Senate Office Administrator



| |                                         
| | ----------------------------------------
| | Class II directors (Term expiring 2006).

|                     |           |     |    |            |          |  |      |                                             |  |                                       |                                                                                                                                                        
|-------------------- | --------- | --- | -- | ---------- | -------- |  | ---- | ------------------------------------------- |  | ------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|                     |           |     |    | Year First |          |  |     
|                     |           |     |    | Elected    |          |  |     
|Name/Position        |           | Age |    |            | Director |  |      | Principal Occupation During Past Five Years
|                     |           |     |    |            |          |  |      |                                            
|James W. Eastwood,   |           |     | 60 |            |          |  | 1997 |                                             |  | President of Granary Associates, Inc.
|                     | Director  |     |    |            |          |  |      |                                             |  |                                       | (architectural design and consulting firm)                                                                                                             
|Edward J. Reitmeyer, |           |     | 42 |            |          |  | 2005 |                                             |  | Managing Member, Wynnewood           
|                     | Director* |     |    |            |          |  |      |                                             |  |                                       | Financial Partners, LLC, Consulting Firm for Real Estate
    Developers and Investors; Former Partner, Drucker &
    Scaccetti, CPA and Consulting Firm
|Dennis P. Wesley,    |           |     | 53 |            |          |  | 2003 |                                             |  | Manager, Business Processes,         
|                     | Director  |     |    |            |          |  |      |                                             |  |                                       | PECO Energy                                                                                                                                            



| |                                          
| | -----------------------------------------
| | Class III directors (Term expiring 2007).

|                 |                       |     |    |            |          |  |      |                                             |  |                                     |                                                                                                   
|---------------- | --------------------- | --- | -- | ---------- | -------- |  | ---- | ------------------------------------------- |  | ----------------------------------- | --------------------------------------------------------------------------------------------------
|                 |                       |     |    | Year First |          |  |     
|                 |                       |     |    | Elected    |          |  |     
|Name/Position    |                       | Age |    |            | Director |  |      | Principal Occupation During Past Five Years
|                 |                       |     |    |            |          |  |      |                                            
|Vincent J. Fumo, |                       |     | 62 |            |          |  | 1997 |                                             |  | Chairman of the Board of PSB       
|                 | Chairman of the Board |     |    |            |          |  |      |                                             |  |                                     | Bancorp, Inc. and Pennsylvania State Senator                                                      
|James F. Kenney, |                       |     | 47 |            |          |  | 2003 |                                             |  | Councilman-at-Large for the City of
|                 | Director              |     |    |            |          |  |      |                                             |  |                                     | Philadelphia, Pennsylvania; Director of Business Development,
    Vitetta Architects and Engineers

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##### Table of Contents



Executive Officers Who Are Not Directors


|                   |                                                                                 |     |    |                        |                      |                                                       |                                                   
|------------------ | ------------------------------------------------------------------------------- | --- | -- | ---------------------- | -------------------- | ----------------------------------------------------- | --------------------------------------------------
|                   |                                                                                 |     |    | During Past Five Years
|Name/Position      |                                                                                 | Age |    |                        | Principal Occupation
|                   |                                                                                 |     |    |                        |                     
|Frank V. Borrelli, |                                                                                 |     | 62 |                        |                      | Founder and CEO of B Systems Development Corp. Chief 
|                   | Chief Operating Officer of                                                      |     |    |                        |                      |                                                       | Operating Officer of First Penn Bank.             
|                   | First Penn Bank                                                                 |     |    |                        |                      |                                                       |                                                   
|Gary Polimeno,     |                                                                                 |     | 53 |                        |                      | Vice President and Treasurer of PSB Bancorp, Inc. and
|                   | Vice President and Treasurer                                                    |     |    |                        |                      |                                                       | Corporate Vice President & Treasurer of First Penn
|                   | of PSB Bancorp, Inc. and Corporate Vice President &
    Treasurer of First Penn |     |    |                        |                      |                                                       |                                                   






|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|* | Appointed to fill a vacancy on the Board of Directors due to the
    death of a director.

AUDIT COMMITTEE FINANCIAL EXPERT




AUDIT COMMITTEE


10-K 10-Q.


SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE




CODE OF ETHICS


www.firstpennbank.com


33



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##### Table of Contents










|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION



|                            |                       |      |      |      |           |   |         |            |  |   |            |         |  |           |   |           |                 |  |  |         |  |   |        |        | 
|--------------------------- | --------------------- | ---- | ---- | ---- | --------- | - | ------- | ---------- |  | - | ---------- | ------- |  | --------- | - | --------- | --------------- |  |  | ------- |  | - | ------ | ------ | 
|                            |                       |      |      |      |           |   |         | Restricted |  |   | Securities |         |  |          
|                            |                       |      |      |      |           |   |         | Stock      |  |   | Underlying |         |  | All Other |  
|Name and Principal Position |                       | Year |      |      | Salary(1) |   |         | Bonus(2)   |  |   | Awards(3)  |         |  | Options   |   |           | Compensation(4) | 
|                            |                       |      |      |      |           |   |         |            |  |   |            |         |  |           |   |           |                 | 
|Vincent J. Fumo,            |                       |      | 2005 |      |           | $ | 270,000 |            |  | $ | 100,000    |         |  |           |   |           |                 |  |  |         |  | $ | 39,804 |       
|                            | Chairman of the Board |      |      | 2004 |           |   | $       | 240,000    |  |   | $          | 450,000 |  |           |   |           |                 |  |  |         |  |   | $      | 39,804 | 
|                            |                       |      |      | 2003 |           |   | $       | 223,000    |  |   | $          | 0       |  |           | $ | 1,000,000 |                 |  |  | 500,000 |  |   | $      | 22,800 | 
|Anthony DiSandro,           |                       |      | 2005 |      |           | $ | 290,000 |            |  | $ | 100,000    |         |  |           |   |           |                 |  |  |         |  | $ | 52,961 |       
|                            | President and Chief   |      |      | 2004 |           |   | $       | 265,000    |  |   | $          | 375,000 |  |           |   |           |                 |  |  |         |  |   | $      | 52,961 | 
|                            | Executive Officer     |      |      | 2003 |           |   | $       | 247,000    |  |   | $          | 0       |  |           | $ | 1,000,000 |                 |  |  | 300,000 |  |   | $      | 50,357 | 
|Gary Polimeno,              |                       |      | 2005 |      |           | $ | 126,450 |            |  | $ | 15,000     |         |  |           |   |           |                 |  |  |         |  | $ | 10,272 |       
|                            | Vice President and    |      |      | 2004 |           |   | $       | 120,428    |  |   | $          | 30,000  |  |           |   |           |                 |  |  |         |  |   | $      | 10,272 | 
|                            | Treasurer             |      |      | 2003 |           |   | $       | 116,920    |  |   | $          | 30,000  |  |           |   |           |                 |  |  |         |  |   | $      | 10,272 | 
|Frank Borrelli,             |                       |      | 2005 |      |           | $ | 190,000 |            |  | $ | 9,427      |         |  |           |   |           |                 |  |  |         |  | $ | 0      |       
|                            | Chief Operating       |      |      | 2004 |           |   | $       | 190,000    |  |   | $          | 18,853  |  |           |   |           |                 |  |  |         |  |   | $      | 0      | 
|                            | Officer*              |      |      | 2003 |           |   | $       | 0          |  |   | $          | 0       |  |           |   |           |                 |  |  |         |  |   | $      | 0      | 
|Stephen Gaulberti,          |                       |      | 2005 |      |           | $ | 127,900 |            |  | $ | 20,000     |         |  |           |   |           |                 |  |  |         |  | $ | 0      |       
|                            | Vice-President of     |      |      | 2004 |           |   | $       | 106,640    |  |   | $          | 10,000  |  |           |   |           |                 |  |  |         |  |   | $      | 0      | 
|                            | Construction Lending  |      |      | 2003 |           |   | $       | 100,538    |  |   | $          | 3,000   |  |           |   |           |                 |  |  |         |  |   | $      | 0      | 






| |   |                                                     
| | - | ----------------------------------------------------
| | * | Hired in 2004 as Chief Operating Officer of the Bank



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the portion of salary deferred by the executive
    pursuant to the 401(k) Plan.                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | Pending resolution of the Banks Memorandum of
    Understanding, at the direction of the Board, bonuses accrued
    for Messrs. Fumo and DiSandro in 2003 were not paid until
    2004. As a result the table reflects no 2003 bonus and the
    payment of two bonuses in 2004.                                                                                                                                                                                                                                   
|   
|(3) | Restricted stock award consisted of 100,000 shares of
    common stock at a price of $10.00 per share vesting over a
    five year period, which were granted on June 17, 2004. On
    December 31, 2005, the market value of each 100,000 award
    was $1,150,000.                                                                                                                                                                                                                                                
|   
|(4) | Includes directors fees of $39,804, $39,804, and $4,800 paid to
    Mr. Fumo, Mr. DiSandro and Mr. Polimeno,
    respectively, for the year ended December 31, 2005.
    Includes directors fees of $39,804, $39,804, and $4,800 paid to
    Mr. Fumo, Mr. DiSandro and Mr. Polimeno
    respectively, for the year ended December 31, 2004.
    Includes directors fees of $22,800, $37,200, and $4,800 paid to
    Mr. Fumo, Mr. DiSandro and Mr. Polimeno
    respectively, for the year ended December 31, 2003.



34



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Aggregated Option/SAR Exercises in Last Fiscal Year


and FY-End Option/SAR Values


|                                                           |  |                 |   |  |                |            |             |              |              |              |           |  |  |   |         | 
|---------------------------------------------------------- |  | --------------- | - |  | -------------- | ---------- | ----------- | ------------ | ------------ | ------------ | --------- |  |  | - | ------- | 
|                                                           |  |                 |   |  |                | Number of  |             |              | Value of     |             
|                                                           |  |                 |   |  |                | Securities |             |              | Unexercised  |             
|                                                           |  |                 |   |  |                | Underlying |             |              | In-the-Money |             
|                                                           |  | Shares Acquired |   |  |                |            | Unexercised |              |              | Options/SARs |          
|Name                                                       |  | on Exercise     |   |  | Value Realized |            |             | Options/SARs |              |              | at FY-End | 
|                                                           |  |                 |   |  |                |            |             |              |              |              |           | 
|Vincent J. Fumo
    Chairman of the Board                  |  |                 | 0 |  |                | $          | 0           |              |              |              | 485,720   |  |  | $ | 758,580 | 
|Anthony DiSandro
    President and Chief Executive Officer |  |                 | 0 |  |                | $          | 0           |              |              |              | 260,000   |  |  | $ | 390,000 | 
|Gary Polimeno
    Vice President & Treasurer               |  |                 | 0 |  |                | $          | 0           |              |              |              | 6,876     |  |  |   | 48,132  | 

COMPENSATION OF OFFICERS THROUGH DEFINED BENEFIT PLANS






Years of Service and Benefits Payable at Retirement


|                           |  |    |        |  |    |   |        |    |  |   |        |  |  |    |        |  |    |   |        |  |  |   |        | 
|-------------------------- |  | -- | ------ |  | -- | - | ------ | -- |  | - | ------ |  |  | -- | ------ |  | -- | - | ------ |  |  | - | ------ | 
|Final Average Compensation |  | 15 |        |  | 20 |   |        | 25 |  |   | 30     |  |  | 35 |        |  | 40 |  
|                           |  |    |        |  |    |   |        |    |  |   |        |  |  |    |        |  |    |  
|$ 50,000                   |  | $  | 13,000 |  |    | $ | 17,400 |    |  | $ | 21,700 |  |  | $  | 26,000 |  |    | $ | 26,000 |  |  | $ | 26,000 | 
|$ 75,000                   |  | $  | 20,900 |  |    | $ | 27,900 |    |  | $ | 34,800 |  |  | $  | 41,800 |  |    | $ | 41,800 |  |  | $ | 41,800 | 
|$100,000                   |  | $  | 28,800 |  |    | $ | 38,400 |    |  | $ | 47,900 |  |  | $  | 57,500 |  |    | $ | 57,500 |  |  | $ | 57,500 | 
|$125,000                   |  | $  | 36,600 |  |    | $ | 48,900 |    |  | $ | 61,100 |  |  | $  | 73,300 |  |    | $ | 73,300 |  |  | $ | 73,300 | 
|$150,000*                  |  | $  | 44,500 |  |    | $ | 44,500 |    |  | $ | 74,200 |  |  | $  | 89,000 |  |    | $ | 89,000 |  |  | $ | 89,000 | 






|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Effective for retirements on or after January 1, 1994,
    annual compensation for Bank Plan purposes could not exceed
    $150,000 plus any increases indexed to cost of living
    adjustments. Employees with compensation exceeding $150,000 in
    years before 1994 may have larger preserved
    benefits. Due to the Economic Growth and Tax Relief
    Reconciliation Act of 2001, the annual compensation limit
    increased to $200,000 plus any increases indexed to cost of
    living adjustments.



35



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##### Table of Contents





| |                      
| | ---------------------
| | Director Compensation





| |                      
| | ---------------------
| | Employment Agreements









| |                             
| | ----------------------------
| | Supplemental Retirement Plan



36



---



##### Table of Contents





| |                                                                
| | ---------------------------------------------------------------
| | Compensation Committee Interlocks and Insider
    Participation





| |                                                             
| | ------------------------------------------------------------
| | Compensation Committee Report on Executive
    Compensation.















| |   |                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Compensation Committee recommended no stock based
    compensation for Mr. Fumo or Mr. DiSandro for 2005.                                                                                                                                                                    
|
| |  | The Compensation Committee recommended that the bonus amounts
    paid to executive management be reduced by 56% and 50% from 2004
    levels for Mr. Fumo and Mr. DiSandro, respectively.
    This recommendation was made based upon the Committees
    opinion that until the

37



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##### Table of Contents



| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Bank reestablished satisfactory earning levels, bonus amounts
    should be reduced for all levels of management.                                                                                                 
|
| |  | The Compensation Committee recommended an immediate salary
    freeze for senior management (includes all Vice Presidents and
    above) until such time that earning levels are satisfactorily
    reestablished.



| |                                            
| | -------------------------------------------
| | Respectfully submitted,                    
|
| | James W. Eastwood, Chairman of Compensation
| | Committee                                  
| | James F. Kenney                            
| | Edward J. Reitmeyer                        

38



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##### Table of Contents






Performance Graph




Total Return Performance





|     |  |  |            |     |  |            |  |  |            |  |  |            |  |        |            |  |  |            |        |  |  |  |  |        |  |  |  |  |        |  | 
|---- |  |  | ---------- | --- |  | ---------- |  |  | ---------- |  |  | ---------- |  | ------ | ---------- |  |  | ---------- | ------ |  |  |  |  | ------ |  |  |  |  | ------ |  | 
|     |  |  |            |     |  |            |  |  |            |  |  |            |  |        |            |  |  |            |        |  |  |  |  |        | 
|     |  |  | 12/31/2000 |     |  | 12/31/2001 |  |  | 12/31/2002 |  |  | 12/31/2003 |  |        | 12/31/2004 |  |  | 12/31/2005 |       
|     |  |  |            |     |  |            |  |  |            |  |  |            |  |        |            |  |  |            |        |  |  |  |  |        | 
|PSBI |  |  |            | 100 |  |            |  |  | 147.88     |  |  |            |  | 180.86 |            |  |  |            | 256.98 |  |  |  |  | 334.54 |  |  |  |  | 269.74 |  | 
|     |  |  |            |     |  |            |  |  |            |  |  |            |  |        |            |  |  |            |        |  |  |  |  |        | 
|CCMP |  |  |            | 100 |  |            |  |  | 79.18      |  |  |            |  | 54.44  |            |  |  |            | 82.09  |  |  |  |  | 89.57  |  |  |  |  | 91.48  |  | 
|     |  |  |            |     |  |            |  |  |            |  |  |            |  |        |            |  |  |            |        |  |  |  |  |        | 
|CBNK |  |  |            | 100 |  |            |  |  | 112.54     |  |  |            |  | 120.36 |            |  |  |            | 160.13 |  |  |  |  | 181.94 |  |  |  |  | 178.41 |  | 
|     |  |  |            |     |  |            |  |  |            |  |  |            |  |        |            |  |  |            |        |  |  |  |  |        | 





|   |  |                                                                                                              
|-- |  | -------------------------------------------------------------------------------------------------------------
|A. |  | The lines represent annual index levels derived from compounded
    daily returns that include all dividends.
|  
|B. |  | The indexes are reweighed daily, using the market capitalization
    on the previous trading day.            
|  
|C. |  | If the fiscal year-end is not a trading day, the preceding
    trading day is used.                          
|  
|D. |  | The index level for all the series was set to 100.00 on
    December 31, 2000.                               

39



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##### Table of Contents








|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 12. | Security Ownership of Certain Beneficial Owners and
    Management



| |                           
| | --------------------------
| | Equity Compensation Plans.



Equity Compensation Plan Information


|                                                           |  |                      |         |  |                  |                      |      |                         |  |  |         | 
|---------------------------------------------------------- |  | -------------------- | ------- |  | ---------------- | -------------------- | ---- | ----------------------- |  |  | ------- | 
|                                                           |  |                      |         |  |                  | Number of Securities |     
|                                                           |  | Number of Securities |         |  | Wtd Avg Exercise |                      |      | Remaining Available for | 
|                                                           |  | to be Issued Upon    |         |  | Price of o/s     |                      |      | Future Issuance Under   | 
|                                                           |  | Exercise of o/s      |         |  | Options,         |                      |      | Equity Compensation     | 
|                                                           |  | Options, Warrants &  |         |  | Warrants &       |                      |      | Plan (Excluding Sec in  | 
|Plan Category                                              |  | Rights               |         |  | Rights           |                      |      | Column(a)               | 
|                                                           |  |                      |         |  |                  |                      |      |                         | 
|Equity compensation plans approved by security holders     |  |                      | 909,739 |  |                  | $                    | 9.92 |                         |  |  | 246,384 | 
|Equity compensation plans not approved by security holders |  |                      | 8,571   |  |                  | $                    | 4.75 |                         |  |  | 0       | 
|                                                           |  |                      |         |  |                  |                      |      |                         | 
|Total                                                      |  |                      | 918,310 |  |                  | $                    | 9.87 |                         |  |  | 246,384 | 
|                                                           |  |                      |         |  |                  |                      |      |                         | 





| |                                                                
| | ---------------------------------------------------------------
| | Security Ownership of Management/ Certain Beneficial
    Owners



|                                                             |                               |            |           |         |                    |  |      |     |  
|------------------------------------------------------------ | ----------------------------- | ---------- | --------- | ------- | ------------------ |  | ---- | --- | -
|                                                             |                               | Amount and |           |         |                   
|                                                             |                               | Nature of  |           |         | Percent of         | 
|                                                             |                               | Beneficial |           |         | Outstanding Shares | 
|Name of Beneficial Owner                                     |                               | Ownership  |           |         | of Common Stock    | 
|                                                             |                               |            |           |         |                    | 
|5% Shareholders                                              |                               |            |           |         |                    |  |      |    
|American Bank Incorporated                                   |                               |            |           |         |                    |  |      |    
|                                                             | 4029 West Tilghman Street,    |            |           |         |                    |  |      |     |  
|                                                             | Allentown, Pennsylvania 18104 |            |           | 347,643 |                    |  |      | 6.8 | %
|Directors                                                    |                               |            |           |         |                    |  |      |    
|Vincent J. Fumo                                              |                               |            | 982,938   | (1)     |                    |  | 17.5 | %  
|Rosanne Pauciello                                            |                               |            | 42,799    | (2)     |                    |  | *    |    
|Anthony DiSandro                                             |                               |            | 455,752   | (3)     |                    |  | 8.4  | %  
|James W. Eastwood                                            |                               |            | 58,805    |         |                    |  | 1.1  | %  
|James F. Kenney                                              |                               |            | 30,404    | (2)     |                    |  | *    |    
|Edward J. Reitmeyer                                          |                               |            | 0         |         |                    |  | *    |    
|Dennis P. Wesley                                             |                               |            | 40,000    | (2)     |                    |  | *    |    
|Named Executive Officers                                     |                               |            |           |         |                    |  |      |    
|Frank V. Borrelli                                            |                               |            | 0         |         |                    |  |      |    
|Gary Polimeno                                                |                               |            | 51,362    |         |                    |  | *    |    
|Stephen Gaulberti                                            |                               |            | 0         |         |                    |  | *    |    
|All executive officers and directors as a group (10 persons) |                               |            | 1,662,060 |         |                    |  | 27.8 | %  

40



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##### Table of Contents








|  |                                      
|- | -------------------------------------
|* | Ownership percentage is less than 1%.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amount includes 73,284 shares held through the First Penn
    Bank 401(k) Plan, 399,827 shares directly held by
    Mr. Fumo, 24,107 shares held in the ESOP, and
    485,720 shares subject to immediately exercisable options.
    Amount does not include all shares held by the ESOP.
    Mr. Fumo is a trustee of the ESOP and as such votes shares
    held by the ESOP. The ESOP voting provisions require the holders
    of allocated shares to direct the trustee as to how to vote
    their shares on all matters presented to the shareholders of
    PSB. The trustee is required to vote the unallocated shares in
    proportion to the direction received from the holders of the
    allocated shares.                                                                        
|   
|(2) | Rosanne Pauciello, Dennis Wesley and James Kenney, hold
    immediately exercisable options to acquire 25,000, 40,000 and
    27,857 shares, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) | Amount includes 76,426 shares held indirectly through the
    First Penn Bank 401(k) Plan, 94,583 shares directly held by
    Mr. DiSandro, 24,743 shares held in the First Penn
    Bank Employee Stock Ownership Plan (ESOP), and
    260,000 shares subject to immediately exercisable options.
    Amount does not include all shares held by the ESOP.
    Mr. DiSandro is a trustee of the ESOP and as such
    votes shares held by the ESOP. The ESOP voting provisions
    require the holders of allocated shares to direct the trustee as
    to how to vote their shares on all matters presented to the
    shareholders of PSB. The trustee is required to vote the
    unallocated shares in proportion to the direction received from
    the holders of the allocated shares.






|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | Certain Relationships and Related Transactions



| |                                       
| | --------------------------------------
| | Transactions with Management & Others.








|         |                                     
|-------- | ------------------------------------
|ITEM 14. | Principal Accounting Fees & Services



| |                                              
| | ---------------------------------------------
| | Independent Registered Public Accounting Firm





|                   |  |      |         |  |      |   |         | 
|------------------ |  | ---- | ------- |  | ---- | - | ------- | 
|                   |  | 2005 |         |  | 2004 |  
|                   |  |      |         |  |      |  
|Audit Fees         |  | $    | 176,105 |  |      | $ | 128,655 | 
|Audit-Related Fees |  | $    | 6,373   |  |      |   | 23,655  | 
|Tax Fees           |  | $    | 26,865  |  |      |   | 37,230  | 
|All other fees     |  | $    | 44,403  |  |      |   | 45,339  | 
|                   |  |      |         |  |      |  
|Total              |  | $    | 253,746 |  |      | $ | 234,879 | 
|                   |  |      |         |  |      |  



41



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##### Table of Contents











| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Audit Committee Pre-Approval of Audit and Permissible
    Non-Audit Services by Independent Auditors






PART IV







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

10-K.




The following reports on
Form 8-K were
filed in the last quarter of 2005:




| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | On October 26, 2005, PSB filed a
    form 8-K
    announcing the appointment of Edward J. Reitmeyer to the Board
    of Directors.

EXHIBITS:


|        |   |          |  |                                                                                                                                                                                                                                                                         
|------- | - | -------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |         
|No.     |   | Document
|        |   |         
|        | 2 | .1       |  | Agreement and Plan of Reorganization, dated as of March 19,
    1999, between PSB Bancorp, Inc. and First Bank of Philadelphia
    (incorporated herein by reference to Exhibit 2.1 of the
    S-4 Registration Statement of PSB Bancorp, Inc. filed
    June 25, 1999) 
|       
|        | 2 | .2       |  | Agreement and Plan of Reorganization, dated as of
    November 2, 2000, between PSB Bancorp, Inc., PSB Merger
    Sub, Inc. and Jade Financial Corp. (incorporated herein by
    reference to Registration Statement of PSB Bancorp, Inc. filed
    on January 16, 2001)
|       
|        | 3 | .1       |  | Articles of Incorporation of PSB Bancorp, Inc. (incorporated
    herein by reference to Exhibit 3.1 of the SB-2 Registration
    Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                                  
|       
|        | 3 | .2       |  | Bylaws of PSB Bancorp, Inc. (incorporated herein by reference to
    Exhibit 3.2 of the SB-2 Registration Statement of PSB
    Bancorp, Inc. filed October 9, 1997)                                                                                                     

42



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##### Table of Contents



|        |    |          |  |                                                                                                                                                                                                                                                          
|------- | -- | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         
|No.     |    | Document
|        |    |         
|       
|        | 10 | .1*      |  | First Penn Banks Retirement Plan (incorporated herein by
    reference to Exhibit 10.1 of the SB-2 Registration
    Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                               
|       
|        | 10 | .2*      |  | First Penn Banks Cash or Deferred Profit Sharing Plan
    (incorporated herein by reference to Exhibit 10.2 of the
    SB-2 Registration Statement of PSB Bancorp, Inc. filed
    October 9, 1997)                                                      
|       
|        | 10 | .3*      |  | First Penn Banks Profit Sharing Plan (incorporated herein
    by reference to Exhibit 10.3 of the SB-2 Registration
    Statement of PSB Bancorp, Inc filed October 9, 1997)                                                                            
|       
|        | 10 | .4*      |  | Employment Agreement with Vincent J. Fumo (incorporated herein
    by reference to Exhibit 7.1 of the SB-2 Registration
    Statement of PSB Bancorp, Inc. filed October 9, 1997.)                                                                       
|       
|        | 10 | .5*      |  | Employment Agreement with Anthony DiSandro (incorporated herein
    by reference to Exhibit 7.1 of the SB-2 Registration
    Statement of PSB Bancorp, Inc. filed October 9, 1997.)                                                                      
|       
|        | 10 | .6*      |  | First Penn Banks Employee Stock Ownership Plan
    (incorporated herein by reference to Exhibit 10.4 of the
    SB-2 Registration Statement of PSB Bancorp, Inc. filed on
    October 9, 1997)                                                          
|       
|        | 10 | .7       |  | Lease Agreement between Eleven Colonial Penn Plaza Associates
    and First Penn Bank, dated as of October 10, 1995
    (incorporated herein by reference to Exhibit 10.7 of
    Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed
    May 5, 1998)   
|       
|        | 10 | .8       |  | Lease Agreement between Eleven Colonial Penn Plaza Associates
    and First Penn Bank, dated as of October 12, 1995
    (incorporated herein by reference to Exhibit 10.8 of
    Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed
    on May 5, 1998)
|       
|        | 10 | .9*      |  | First Penn Banks Stock Option Plan (incorporated herein by
    reference to Exhibit 10.9 of the S-4 Registration Statement
    of PSB Bancorp, Inc. filed June 25, 1999)                                                                                
|       
|        | 10 | .10*     |  | First Penn Banks Management Recognition Plan (incorporated
    herein by reference to Exhibit 10.10 of the S-4
    Registration Statement of PSB Bancorp, Inc. filed June 25,
    1999)                                                                 
|       
|        | 10 | .11*     |  | PSB Bancorp, Inc. 2001 Stock Incentive Plan (incorporated herein
    by reference to Exhibit 10.13 of PSBs Annual Report
    on Form 10-K filed on April 1, 2002)                                                                                       
|       
|        | 10 | .12*     |  | Employment Agreement for Frank Borrelli (incorporated by
    reference to Exhibit 10.12 of PSBs Annual Report on
    Form 10-K filed on March 31, 2005)                                                                                                 
|       
|        | 10 | .13      |  | Supplemental Employee Retirement Plan  Mr. Fumo
    (incorporated by reference to Exhibit 10.1 of PSBs
    Quarterly Report on Form 10-Q filed on November 15,
    2004                                                                                
|       
|        | 10 | .14      |  | Supplemental Employee Retirement Plan 
    Mr. DiSandro (incorporated by reference to
    Exhibit 10.1 of PSBs Quarterly Report on
    Form 10-Q filed on November 15, 2004                                                                            
|       
|        | 14 |          |  | Code of Ethics (incorporated by reference to Exhibit 14 of
    PSBs Annual Report on Form 10-K filed on
    April 5, 2004)                                                                                                                              
|        | 21 |          |  | Schedule of Subsidiaries. (filed herewith)                                                                                                                                                                                                               
|       
|        | 31 | .1       |  | Certification of Report by Chief Executive Officer. (filed
    herewith)                                                                                                                                                                                 
|       
|        | 31 | .2       |  | Certification of Report by Chief Financial Officer. (filed
    herewith)                                                                                                                                                                                 
|       
|        | 32 |          |  | Certification of Report by Chief Executive Officer and Chief
    Financial Officer. (filed herewith)                                                                                                                                                     
|       
|        | 99 | .1       |  | 2005 Financial Statements (filed herewith)                                                                                                                                                                                                               






|  |                                                                       
|- | ----------------------------------------------------------------------
|* | Denotes a management contract or compensatory plan or
    arrangement.

43



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##### Table of Contents



SIGNATURES






| |                  
| | -----------------
| | PSB BANCORP, INC.



| |    |                     
| | -- | --------------------
| | By | /s/ Anthony DiSandro

| |                                      
| | -------------------------------------
| |                                      
| | Anthony DiSandro                     
| | President and Chief Executive Officer





|                                       |  |                                                                          |  |                |  | 
|-------------------------------------- |  | ------------------------------------------------------------------------ |  | -------------- |  | 
|Signature                              |  | Title                                                                    |  | Date          
|                                       |  |                                                                          |  |               
|                                      
|/s/ Vincent J. FumoVincent J. Fumo     |  | Chairman, Director                                                       |  | March 28, 2006
|                                      
|/s/ Anthony DiSandroAnthony DiSandro   |  | President, Chief Executive Officer, Director                             |  | March 28, 2006
|                                      
|/s/ John CarrozzaJohn Carrozza         |  | Chief Financial Officer (Principal Accounting and Financial
    Officer) |  | March 28, 2006
|                                      
|/s/ James W. EastwoodJames W. Eastwood |  | Director                                                                 |  | March 28, 2006
|                                      
|/s/ Rosanne PaucielloRosanne Pauciello |  | Corporate Secretary and Director                                         |  | March 28, 2006
|                                      
|/s/ Edward ReitmeyerEdward Reitmeyer   |  | Director                                                                 |  | March 28, 2006
|                                      
|/s/ Dennis WesleyDennis Wesley         |  | Director                                                                 |  | March 28, 2006
|                                      
|/s/ James KenneyJames Kenney           |  | Director                                                                 |  | March 28, 2006

44



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##### Table of Contents






EXHIBIT INDEX


|        |    |          |  |                                                                                                                                                                                                                                                                         
|------- | -- | -------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         
|No.     |    | Document
|        |    |         
|        | 2  | .1       |  | Agreement and Plan of Reorganization, dated as of March 19,
    1999, between PSB Bancorp, Inc. and First Bank of Philadelphia
    (incorporated herein by reference to Exhibit 2.1 of the S-4
    Registration Statement of PSB Bancorp, Inc. filed June 25,
    1999) 
|       
|        | 2  | .2       |  | Agreement and Plan of Reorganization, dated as of
    November 2, 2000, between PSB Bancorp, Inc., PSB Merger
    Sub, Inc. and Jade Financial Corp. (incorporated herein by
    reference to Registration Statement of PSB Bancorp, Inc. filed
    on January 16, 2001)
|       
|        | 3  | .1       |  | Articles of Incorporation of PSB Bancorp, Inc. (incorporated
    herein by reference to Exhibit 3.1 of the SB-2 Registration
    Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                                  
|       
|        | 3  | .2       |  | Bylaws of PSB Bancorp, Inc. (incorporated herein by reference to
    Exhibit 3.2 of the SB-2 Registration Statement of PSB
    Bancorp, Inc. filed October 9, 1997)                                                                                                     
|       
|        | 10 | .1*      |  | First Penn Banks Retirement Plan (incorporated herein by
    reference to Exhibit 10.1 of the SB-2 Registration
    Statement of PSB Bancorp, Inc. filed October 9, 1997)                                                                                              
|       
|        | 10 | .2*      |  | First Penn Banks Cash or Deferred Profit Sharing Plan
    (incorporated herein by reference to Exhibit 10.2 of the
    SB-2 Registration Statement of PSB Bancorp, Inc. filed
    October 9, 1997)                                                                     
|       
|        | 10 | .3*      |  | First Penn Banks Profit Sharing Plan (incorporated herein
    by reference to Exhibit 10.3 of the SB-2 Registration
    Statement of PSB Bancorp, Inc filed October 9, 1997)                                                                                           
|       
|        | 10 | .4*      |  | Employment Agreement with Vincent J. Fumo (incorporated herein
    by reference to Exhibit 7.1 of the SB-2 Registration
    Statement of PSB Bancorp, Inc. filed October 9, 1997.)                                                                                      
|       
|        | 10 | .5*      |  | Employment Agreement with Anthony DiSandro (incorporated herein
    by reference to Exhibit 7.1 of the SB-2 Registration
    Statement of PSB Bancorp, Inc. filed October 9, 1997.)                                                                                     
|       
|        | 10 | .6*      |  | First Penn Banks Employee Stock Ownership Plan
    (incorporated herein by reference to Exhibit 10.4 of the
    SB-2 Registration Statement of PSB Bancorp, Inc. filed on
    October 9, 1997)                                                                         
|       
|        | 10 | .7       |  | Lease Agreement between Eleven Colonial Penn Plaza Associates
    and First Penn Bank, dated as of October 10, 1995
    (incorporated herein by reference to Exhibit 10.7 of
    Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed
    May 5, 1998)                  
|       
|        | 10 | .8       |  | Lease Agreement between Eleven Colonial Penn Plaza Associates
    and First Penn Bank, dated as of October 12, 1995
    (incorporated herein by reference to Exhibit 10.8 of
    Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed
    on May 5, 1998)               
|       
|        | 10 | .9*      |  | First Penn Banks Stock Option Plan (incorporated herein by
    reference to Exhibit 10.9 of the S-4 Registration Statement
    of PSB Bancorp, Inc. filed June 25, 1999)                                                                                               
|       
|        | 10 | .10*     |  | First Penn Banks Management Recognition Plan (incorporated
    herein by reference to Exhibit 10.10 of the S-4
    Registration Statement of PSB Bancorp, Inc. filed June 25,
    1999)                                                                                
|       
|        | 10 | .11*     |  | PSB Bancorp, Inc. 2001 Stock Incentive Plan (incorporated herein
    by reference to Exhibit 10.13 of PSBs Annual Report
    on Form 10-K filed on April 1, 2002)                                                                                                      
|       
|        | 10 | .12*     |  | Employment Agreement for Frank Borrelli (incorporated by
    reference to Exhibit 10.12 of PSBs Annual Report on
    Form 10-K filed on March 31, 2005)                                                                                                                
|       
|        | 10 | .13      |  | Supplemental Employee Retirement Plan  Mr. Fumo
    (incorporated by reference to Exhibit 10.1 of PSBs
    Quarterly Report on Form 10-Q filed on November 15,
    2004                                                                                               
|       
|        | 10 | .14      |  | Supplemental Employee Retirement Plan 
    Mr. DiSandro (incorporated by reference to
    Exhibit 10.1 of PSBs Quarterly Report on
    Form 10-Q filed on November 15, 2004                                                                                           
|       
|        | 14 |          |  | Code of Ethics (incorporated by reference to Exhibit 14 of
    PSBs Annual Report on Form 10-K filed on
    April 5, 2004)                                                                                                                                             
|        | 21 |          |  | Schedule of Subsidiaries. (filed herewith)                                                                                                                                                                                                                              
|       
|        | 31 | .1       |  | Certification of Report by Chief Executive Officer. (filed
    herewith)                                                                                                                                                                                                
|       
|        | 31 | .2       |  | Certification of Report by Chief Financial Officer. (filed
    herewith)                                                                                                                                                                                                
|       
|        | 32 |          |  | Certification of Report by Chief Executive Officer and Chief
    Financial Officer. (filed herewith)                                                                                                                                                                    
|       
|        | 99 | .1       |  | 2005 Financial Statements (filed herewith)                                                                                                                                                                                                                              






|  |                                                                       
|- | ----------------------------------------------------------------------
|* | Denotes a management contract or compensatory plan or
    arrangement.

45