**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **for the quarterly period ended June 30,  2005**                                                  |
| ** ** | ** ** | **Or**                                                                                                  |
| **o**      | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
| ** ** | ** ** | **for the transition period from.**                                                                     |

 

**No. 000-24601**

**(Commission FileNumber)**

 

**PSB BANCORP, INC.**

(Exact Name of Registrant as Specified in itsCharter)

 
| **Pennsylvania**         | ** ** | **23-2930740**           |
|--------------------------|------------|--------------------------|
| (State of Incorporation) |       | (IRS Employer ID Number) |

 

**1835 MarketStreet, Philadelphia, PA 19103**

(Address of Principal Executive Offices)

 

**(215) 979-7900**

(Registrant’s TelephoneNumber)

 

Indicateby checkmark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes  ý     No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act.)

 

Yes  o     No  ý

 

Numberof shares outstanding as of June 30, 2005

 
| **Common Stock (no par value)** | ** ** | **5,097,828**        |
|---------------------------------|------------|----------------------|
| (Title of Class)                |       | (Outstanding Shares) |

 

 

----

 

**PSB BANCORP, INC.**

**FORM 10-Q**

**FOR THE QUARTERENDED JUNE 30, 2005**

 

**TABLE OFCONTENTS**

 
| PART I.  | FINANCIAL  INFORMATION | 2                                                                                                                          |
|---------------|------------------------|----------------------------------------------------------------------------------------------------------------------------|
|          |                   |                                                                                                                       |   |
|          | Item 1.           | Financial Statements                                                                                                       | 2 |
|          |                   |                                                                                                                       |   |
|          |                   | Consolidated Statements of Financial Condition  as of June 30, 2005, (unaudited) and December 31, 2004           | 2 |
|          |                   |                                                                                                                       |   |
|          |                   | Consolidated Statements of Income  (unaudited) for the Three and Six Month Periods Ended June 30, 2005, and  2004     | 3 |
|          |                   |                                                                                                                       |   |
|          |                   | Consolidated Statements of Cash Flows  (unaudited) for the Six Month Periods Ended June 30, 2005, and 2004            | 5 |
|          |                   |                                                                                                                       |   |
|          |                   | Consolidated Statements of Comprehensive  Income (unaudited) for the Six Month Periods Ended June 30, 2005, and  2004 | 6 |
|          |                   |                                                                                                                       |   |
|          |                   | Notes to Consolidated Financial Statements                                                                                 | 7 |
|          |                   |                                                                                                                       |   |
|          | Item 2.                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                | 10 |
|          |                   |                                                                                                                       |   |
|          | Item 3.                | Quantitative and Qualitative Disclosures  about Market Risk                                                                | 19 |
|          |                   |                                                                                                                       |   |
|          | Item 4.                | Controls and Procedures                                                                                                    | 19 |
|          |                   |                                                                                                                       |   |
| PART II. | OTHER  INFORMATION     | 19                                                                                                                         |
|          |                   |                                                                                                                       |   |
|          | Item  1.               | Legal  Proceedings                                                                                                         | 19 |
|          |                   |                                                                                                                       |   |
|          | Item 2.                | Unregistered Sales of Equity Securities and Use of Proceeds                                                                | 21 |
|          |                   |                                                                                                                       |   |
|          | Item 3.                | Defaults Upon Senior Securities                                                                                            | 21 |
|          |                   |                                                                                                                       |   |
|          | Item 4.                | Submission of Matters to a Vote of Security Holders                                                                        | 21 |
|          |                   |                                                                                                                       |   |
|          | Item  5.               | Other  Information                                                                                                         | 21 |
|          |                   |                                                                                                                       |   |
|          | Item 6.                | Exhibits                                                                                                                   | 21 |

 

1

----

 

**PART I. FINANCIAL INFORMATION**

 

## **Item1.  Financial Statements.**

##  

**PSB BANCORP, INC. AND SUBSIDIARIES**

**STATEMENTS OF FINANCIAL CONDITION**

**(In thousands except per share data)**

 
| ** **                                                                                                                                                                            | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **(Unaudited)**         | ** ** | **(Audited)**               | ** ** |
| Assets                                                                                                                                                                                |       |                    |       |                        |       |
| Cash and due  from banks                                                                                                                                                              |       | $                       | 6,243      |                        | $          | 4,355 |   |
| Interest-earning  deposits with banks                                                                                                                                                 |       | 55,628                  |       | 49,964                      |       |
| Federal  funds sold                                                                                                                                                                   |       | 2,572                   |       | 331                         |       |
| Total cash  and cash equivalents                                                                                                                                                      |       | 64,443                  |       | 54,650                      |       |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Loans  held-for-sale                                                                                                                                                                  |       | 4,329                   |       | 3,792                       |       |
| Investment  securities available-for-sale, at fair value                                                                                                                              |       | 95,609                  |       | 94,112                      |       |
| Investment  securities held to maturity (fair value $1,506 and $1,544)                                                                                                                |       | 1,436                   |       | 1,533                       |       |
| Federal Home  Loan Bank stock – at cost                                                                                                                                          |       | 1,009                   |       | 1,308                       |       |
| Federal  Reserve Bank stock – at cost                                                                                                                                            |       | 1,187                   |       | 1,139                       |       |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Loans                                                                                                                                                                                 |       | 353,174                 |       | 356,142                     |       |
| Less  allowance for possible loans losses                                                                                                                                             |       | (3,193                  | )          | (3,157                      | )          |
| Net loans                                                                                                                                                                             |       | 349,981                 |       | 352,985                     |       |
| Accrued  interest receivable                                                                                                                                                          |       | 2,173                   |       | 2,071                       |       |
| Premises and  equipment, net                                                                                                                                                          |       | 2,812                   |       | 2,470                       |       |
| Bank-owned  life insurance                                                                                                                                                            |       | 12,928                  |       | 12,696                      |       |
| Other assets                                                                                                                                                                          |       | 6,679                   |       | 6,321                       |       |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Total assets                                                                                                                                                                          |       | $                       | 542,586    |                        | $          | 533,077 |   |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Liabilities                                                                                                                                                                           |       |                    |       |                        |       |
| Deposits                                                                                                                                                                              |       |                    |       |                        |       |
| Non-interest  bearing                                                                                                                                                                 |       | 41,074                  |       | 30,786                      |       |
| Interest  bearing                                                                                                                                                                     |       | 442,385                 |       | 444,494                     |       |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Total  deposits                                                                                                                                                                       |       | 483,459                 |       | 475,280                     |       |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Securities  sold under agreements to repurchase                                                                                                                                       |       | 1,119                   |       | 1,105                       |       |
| Advances from  borrowers for taxes and insurance                                                                                                                                      |       | 2,774                   |       | 3,114                       |       |
| Other  liabilities                                                                                                                                                                    |       | 2,375                   |       | 1,421                       |       |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Total  liabilities                                                                                                                                                                    |       | 489,727                 |       | 480,920                     |       |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Shareholders’  equity                                                                                                                                                            |       |                    |       |                        |       |
| Common stock  authorized, 15,000,000 shares no par value, 5,097,828 and 4,893,609 shares  issued and outstanding on June 30, 2005 and December 31, 2004,  respectively |       | 45,598                  |       | 45,270                      |       |
| Retained  earnings                                                                                                                                                                    |       | 9,766                   |       | 8,989                       |       |
| Accumulated  other comprehensive loss                                                                                                                                                 |       | (911                    | )          | (440                        | )          |
| Employee  stock ownership plan                                                                                                                                                        |       | (1,164                  | )          | (1,232                      | )          |
| Treasury  stock, at cost, 78,252 and 78,187 on June 30, 2005, and  December 31, 2004, respectively                                                                          |       | (430                    | )          | (430                        | )          |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Total  shareholders’ equity                                                                                                                                                      |       | 52,859                  |       | 52,157                      |       |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| Total  liabilities and shareholders’ equity                                                                                                                                      |       | $                       | 542,586    |                        | $          | 533,077 |   |

 

The accompanying notes are anintegral part of these financial statements

 

2

----

 

**PSB BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(In thousands, except per share data)**

 
| ** **                                                                                  | ** ** | **Three months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)**                       | ** ** |
| Interest  income                                                                            | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Loans,  including fees                                                                      |       | $                                     | 6,226      |   | $ | 5,118 |   |
| Investment  securities                                                                      |       | 846                                   |       | 818 |   |
| Deposits  with banks                                                                        |       | 347                                   |       | 160 |   |
| Total  interest income                                                                      |       | 7,419                                 |       | 6,929 |   |
|                                                                                        |       |                                  |       |   |   |
| Interest  expense                                                                           |       |                                  |       |   |   |
| Interest on  deposits                                                                       |       | 2,700                                 |       | 1,937 |   |
| Interest on  borrowings                                                                     |       | 6                                     |       | 5 |   |
| Total  interest expense                                                                     |       | 2,706                                 |       | 1,942 |   |
|                                                                                        |       |                                  |       |   |   |
| Net interest  income                                                                        |       | 4,713                                 |       | 4,987 |   |
|                                                                                        |       |                                  |       |   |   |
| Provision  for loan losses                                                                  |       | 90                                    |       | 0 |   |
|                                                                                        |       |                                  |       |   |   |
| Net interest  income after provision for loan losses                                        |       | 4,623                                 |       | 4,987 |   |
|                                                                                        |       |                                  |       |   |   |
| Non-interest  operating income                                                              |       |                                  |       |   |   |
| Service fees  on deposit accounts                                                           |       | 289                                   |       | 276 |   |
| Loss on sale  of real estate owned                                                          |       | (5                                    | )          | 11 |   |
| Bank owned  life insurance                                                                  |       | 118                                   |       | 76 |   |
| Gain on sale  of investment securities                                                      |       | 3                                     |       | — |   |
| Other                                                                                       |       | 180                                   |       | 110 |   |
| Total  non-interest operating income                                                        |       | 585                                   |       | 473 |   |
|                                                                                        |       |                                  |       |   |   |
| Non-interest  expenses                                                                      |       |                                  |       |   |   |
| Salaries and  employee benefits                                                             |       | 2,536                                 |       | 2,463 |   |
| Occupancy  and equipment                                                                    |       | 627                                   |       | 578 |   |
| Other  operating                                                                            |       | 1,729                                 |       | 1,735 |   |
| Total  non-interest expenses                                                                |       | 4,892                                 |       | 4,776 |   |
|                                                                                        |       |                                  |       |   |   |
| Income  before net effect of income taxes and Ironbridge Holdings, Inc.  consolidation |       | 316                                   |       | 684 |   |
|                                                                                        |       |                                  |       |   |   |
| Net effect  of Ironbridge Holdings, Inc. consolidation                                 |       | (2                                    | )          | 65 |   |
|                                                                                        |       |                                  |       |   |   |
| Income  before net effect of income taxes                                                   |       | 314                                   |       | 749 |   |
| Income taxes                                                                                |       | (111                                  | )          | (225 | ) |
|                                                                                        |       |                                  |       |   |   |
| Net income                                                                                  |       | $                                     | 203        |   | $ | 524 |   |
|                                                                                        |       |                                  |       |   |   |
| Net income  per common share                                                                |       |                                  |       |   |   |
| Basic:                                                                                      |       | $                                     | 0.04       |   | $ | 0.12 |   |
|                                                                                        |       |                                  |       |   |   |
| Diluted:                                                                                    |       | $                                     | 0.04       |   | $ | 0.10 |   |

 

The accompanying notes are anintegral part of these financial statements

 

3

----

 
| ** **                                                                                  | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)**                     | ** ** |
| Interest  income                                                                            | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Loans,  including fees                                                                      |       | $                                   | 12,271     |   | $ | 11,107 |   |
| Investment  securities                                                                      |       | 1,680                               |       | 1,806 |   |
| Deposits  with banks                                                                        |       | 656                                 |       | 250 |   |
| Total  interest income                                                                      |       | 14,607                              |       | 13,163 |   |
|                                                                                        |       |                                |       |   |   |
| Interest  expense                                                                           |       |                                |       |   |   |
| Interest on  deposits                                                                       |       | 5,189                               |       | 3,734 |   |
| Interest on  borrowings                                                                     |       | 12                                  |       | 11 |   |
| Total  interest expense                                                                     |       | 5,201                               |       | 3,745 |   |
|                                                                                        |       |                                |       |   |   |
| Net interest  income                                                                        |       | 9,406                               |       | 9,418 |   |
|                                                                                        |       |                                |       |   |   |
| Provision  for loan losses                                                                  |       | 225                                 |       | 0 |   |
|                                                                                        |       |                                |       |   |   |
| Net interest  income after provision for loan losses                                        |       | 9,181                               |       | 9,418 |   |
|                                                                                        |       |                                |       |   |   |
| Non-interest  operating income                                                              |       |                                |       |   |   |
| Service fees  on deposit accounts                                                           |       | 611                                 |       | 545 |   |
| Loss on sale  of real estate owned                                                          |       | (43                                 | )          | 27 |   |
| Bank owned  life insurance                                                                  |       | 233                                 |       | 196 |   |
| Gain on sale  of investment securities                                                      |       | 423                                 |       | — |   |
| Other                                                                                       |       | 293                                 |       | 245 |   |
| Total non-interest  operating income                                                        |       | 1,517                               |       | 1,013 |   |
|                                                                                        |       |                                |       |   |   |
| Non-interest  expenses                                                                      |       |                                |       |   |   |
| Salaries and  employee benefits                                                             |       | 5,024                               |       | 4,629 |   |
| Occupancy  and equipment                                                                    |       | 1,275                               |       | 1,143 |   |
| Other  operating                                                                            |       | 3,301                               |       | 3,041 |   |
| Total  non-interest expenses                                                                |       | 9,600                               |       | 8,813 |   |
|                                                                                        |       |                                |       |   |   |
| Income  before net effect of income taxes and Ironbridge Holdings, Inc.  consolidation |       | 1,098                               |       | 814 |   |
|                                                                                        |       |                                |       |   |   |
| Net effect  of Ironbridge Holdings, Inc. consolidation                                 |       | 33                                  |       | (23 | ) |
|                                                                                        |       |                                |       |   |   |
| Income  before net effect of income taxes                                                   |       | 1,131                               |       | 1,595 |   |
| Income taxes                                                                                |       | (357                                | )          | (463 | ) |
|                                                                                        |       |                                |       |   |   |
| Net income                                                                                  |       | $                                   | 774        |   | $ | 1,132 |   |
|                                                                                        |       |                                |       |   |   |
| Net income  per common share                                                                |       |                                |       |   |   |
| Basic:                                                                                      |       | $                                   | 0.17       |   | $ | 0.26 |   |
|                                                                                        |       |                                |       |   |   |
| Diluted:                                                                                    |       | $                                   | 0.14       |   | $ | 0.22 |   |

 

Theaccompanying notes are an integral part of these financial statements

 

4

----

 

**PSB BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands, except per share data)**

 
| ** **                                                                    | ** ** | **Six months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                                                    | ** ** | **(Unaudited)**                     | ** ** |
| CASH FLOW  FROM OPERATING ACTIVITIES                                          |       |                                |       |   |   |
| Adjustments  to reconcile net income to net cash                              |       |                                |       |   |   |
| Net income                                                                    |       | $                                   | 774        |   | $ | 1,132 |   |
| Adjustments  used in operating activities:                                    |       |                                |       |   |   |
| Provision  for possible loan losses                                           |       | 225                                 |       | — |   |
| Depreciation  and amortization                                                |       | 499                                 |       | 384 |   |
| Amortization  of discounts and accretion of premiums on investment securities |       | 140                                 |       | 72 |   |
| Restricted  stock.                                                            |       | 200                                 |       | — |   |
| Loss (gain)  on sale of real estate                                           |       | 43                                  |       | (27 | ) |
| Proceeds  from sale and amortization of loans held-for-sale                   |       | 18,674                              |       | 7,719 |   |
| Originations  of loans held-for-sale                                          |       | (19,201                             | )          | (18,493 | ) |
| ESOP expense                                                                  |       | 196                                 |       | 301 |   |
| Change in  assets and liabilities:                                            |       |                                |       |   |   |
| (Increase)  decrease in accrued interest receivable                           |       | (102                                | )          | 220 |   |
| (Increase)  in other assets                                                   |       | 305                                 |       | (137 | ) |
| (Increase)  decrease change in accrued expenses                               |       | 954                                 |       | (1,027 | ) |
| Total  Adjustments                                                            |       | 1,933                               |       | (10,988 | ) |
|                                                                          |       |                                |       |   |   |
| Net cash  provided by (used in) operating activities                          |       | 2,707                               |       | (9,856 | ) |
|                                                                          |       |                                |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                        |       |                                |       |   |   |
| Purchase of  investment securities, available-for-sale                        |       | (10,092                             | )          | (9,765 | ) |
| Proceeds  from sales of investment securities                                 |       | 2,135                               |       | 10,000 |   |
| Proceeds  from maturities and calls of investment securities                  |       | 5,378                               |       | 10,614 |   |
| Redemption  of Federal Home Loan Bank and Federal Reserve Bank stock          |       | 252                                 |       | (1,042 | ) |
| Net decrease  (increase) in loans                                             |       | 2,212                               |       | (14,224 | ) |
| Proceeds  from sale of real estate owned                                      |       | 165                                 |       | 170 |   |
| Purchase of  premises and equipment                                           |       | (835                                | )          | (221 | ) |
|                                                                          |       |                                |       |   |   |
| Net cash  used in investing activities                                        |       | (767                                | )          | (4,468 | ) |
|                                                                          |       |                                |       |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                                        |       |                                |       |   |   |
| Net increase  in deposits                                                     |       | 8,179                               |       | 32,405 |   |
| Increase in  securities sold under agreements to repurchase                   |       | 14                                  |       | 7 |   |
| (Decrease)  increase in advances for borrowers’ taxes and insurance      |       | (340                                | )          | 322 |   |
| Exercised  stock options                                                      |       |                                |       | 27 |   |
| Change in  treasury stock                                                     |       |                                |       | (23 | ) |
| Net cash  provided by financing activities                                    |       | 7,853                               |       | 32,738 |   |
|                                                                          |       |                                |       |   |   |
| NET INCREASE  IN CASH AND CASH EQUIVALENTS                                    |       | 9,793                               |       | 18,414 |   |
|                                                                          |       |                                |       |   |   |
| Cash and  cash equivalents, beginning of period                               |       | 54,650                              |       | 52,408 |   |
|                                                                          |       |                                |       |   |   |
| CASH AND  CASH EQUIVALENTS, END OF PERIOD                                     |       | $                                   | 64,443     |   | $ | 70,822 |   |

 

The accompanying notes are anintegral part of these financial statements

 

5

----

 

**PSB BANCORP,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF COMPREHENSIVEINCOME**

**(In thousands)**

 
| ** **                                                             | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(Unaudited)**                        | ** ** |
| Net income                                                             |       | $                                      | 203        |                                 | $          | 524 |   | $ | 774 |   | $ | 1,132 |   |
|                                                                   |       |                                   |       |                                 |       |   |   |   |   |
| Other  comprehensive income, net of tax:                               |       |                                   |       |                                 |       |   |   |   |   |
|                                                                   |       |                                   |       |                                 |       |   |   |   |   |
| Accumulated  comprehensive gain (loss), investments available for sale |       | 543                                    |       | (1,400                               | )          | (471 | ) | (687 | ) |
|                                                                   |       |                                   |       |                                 |       |   |   |   |   |
| Comprehensive  income                                                  |       | $                                      | 746        |                                 | $          | (876 | ) | $ | 303 |   | $ | 445 |   |

 

The accompanying notes are anintegral part of these financial statements

 

6

----

 

**PSB BANCORP, INC.**

**NOTES TO FINANCIAL STATEMENTS**

**JUNE 30, 2005**

**(Unaudited)**

 

**1.****             ****Basis of Presentation**

 

This quarterly report presents the consolidatedfinancial statements of PSB Bancorp, Inc. (“PSB”) and its subsidiaries.

 

PSB’s financial statements reflect all adjustmentsand disclosures that management believes are necessary for a fair presentationof interim results.  The results ofoperations for the quarter presented does not necessarily indicate the resultsthat PSB will achieve for all of 2005. You should read these interim financial statements in conjunction withthe consolidated financial statements and accompanying notes that are presentedin the PSB Bancorp, Inc. Annual Report on Form 10-K for the yearended December 31, 2004.

 

The financial information in this quarterly reporthas been prepared in accordance with PSB’s customary accounting practices;these financial statements have not been audited.  Certain information and footnote disclosuresrequired under generally accepted accounting principles have been condensed oromitted, as permitted by rules and regulations of the Securities andExchange Commission.

 

**2.****             ****Earnings Per Share (EPS)**

 

The following table illustrates the required disclosure of thenumerators and denominators of the basic and diluted EPS computation.  PSB was a defendant in a lawsuit resultingfrom the cancellation of a number of options issued in conjunction with theacquisition of First Bank of Philadelphia (see Part II, Item 1 – LegalProceedings, herein)  The computation ofdilutive earnings per share for all periods presented in the below tablesincludes 895,240 shares of the 1,371,200 options which were issued in connectionwith the 1999 First Bank of Philadelphia acquisition and were originally deemedinvalid by management.  These shares continueto be considered contingently issuable shares and are required to be includedin the calculation of diluted EPS and excluded from the calculation of basicEPS.

 
| ** **                                                                  | ** ** | **Six months ended June 30,  2005**   | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                    | ** ** | **Weighted  average shares  (denominator)** | ** ** | **Per share  amount** | ** ** |
| ** **                                                                  | ** ** | **(In thousands, except per share  data)** | ** ** |
| Basic  earnings per share                                                   |       |                                       |       |   |   |   |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Income  available to common stockholders                                    |       | $                                          | 774        |   | 4,659 |   | $ | 0.17 |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Effect of  dilutive stock options                                           |       | —                                     |       | 985 |   | (0.03 | ) |
|                                                                        |       |                                       |       |   |   |   |   |
| Diluted  earnings per share                                                 |       |                                       |       |   |   |   |   |
| Income  available to common stockholders plus effect of dilutive securities |       | $                                          | 774        |   | 5,644 |   | $ | 0.14 |   |

 

All options were dilutive at June 30, 2005.

 
| ** **                                                                  | ** ** | **Three months ended June 30,  2005**      | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                    | ** ** | **Weighted  average shares  (denominator)** | ** ** | **Per share  amount** | ** ** |
| ** **                                                                  | ** ** | **(In thousands, except per share  data)** | ** ** |
| Basic  earnings per share                                                   |       |                                       |       |   |   |   |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Income  available to common stockholders                                    |       | $                                          | 203        |   | 4,655 |   | $ | 0.04 |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Effect of  dilutive stock options                                           |       | —                                     |       | 967 |   | — |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Diluted  earnings per share                                                 |       |                                       |       |   |   |   |   |
| Income  available to common stockholders plus effect of dilutive securities |       | $                                          | 203        |   | 5,622 |   | $ | 0.04 |   |

 

7

----

 

All options were dilutive at June 30, 2005.

 
| ** **                                                                  | ** ** | **Six months ended June 30, 2004**         | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                    | ** ** | **Weighted  average shares  (denominator)** | ** ** | **Per share  amount** | ** ** |
| ** **                                                                  | ** ** | **(In thousands, except per share  data)** | ** ** |
| Basic  earnings per share                                                   |       |                                       |       |   |   |   |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Income  available to common stockholders                                    |       | $                                          | 1,132      |   | 4,284 |   | $ | 0.26 |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Effect of  dilutive stock options                                           |       | —                                     |       | 796 |   | (0.04 | ) |
|                                                                        |       |                                       |       |   |   |   |   |
| Diluted  earnings per share                                                 |       |                                       |       |   |   |   |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Income  available to common stockholders plus effect of dilutive securities |       | $                                          | 1,132      |   | 5,080 |   | $ | 0.22 |   |

 

There were 2,128 options that were not dilutive forthe six months ended June 30, 2004.

 
| ** **                                                                  | ** ** | **Three months ended June 30,  2004**      | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                    | ** ** | **Weighted  average shares  (denominator)** | ** ** | **Per share  amount** | ** ** |
| ** **                                                                  | ** ** | **(In thousands, except per share  data)** | ** ** |
| Basic  earnings per share                                                   |       |                                       |       |   |   |   |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Income  available to common stockholders                                    |       | $                                          | 524        |   | 4,277 |   | $ | 0.12 |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Effect of  dilutive stock options                                           |       | —                                     |       | 772 |   | (0.02 | ) |
|                                                                        |       |                                       |       |   |   |   |   |
| Diluted  earnings per share                                                 |       |                                       |       |   |   |   |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Income  available to common stockholders plus effect of dilutive securities |       | $                                          | 524        |   | 5,049 |   | $ | 0.10 |   |

 

All options were dilutive at June 30, 2004.

 

**3.****             ****New Accounting Pronouncements**

 

In December 2004, the FASB issued SFAS No. 123R, “Share-BasedPayment” (SFAS 123R).  Thisstatement is a revision of SFAS No. 123, “Accounting for Stock-BasedCompensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issuedto Employees.”  SFAS 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their fairvalues.  The provisions of this statementare effective for interim or annual periods beginning after June 15,2005.  PSB is currently evaluating theprovisions of this revision to determine the impact on its consolidatedfinancial statements.  It is, however,expected to have a negative effect on consolidated net income.

 

In March 2005 the FASB issued Interpretation No. 47,“Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47requires an entity to recognize a liability for the fair value of a legalobligation to perform asset-retirement activities that are conditional on afuture event if the amount can be reasonably estimated. The Interpretationprovides guidance to evaluate whether fair value is reasonably estimable.  FIN 47 is effective no later than the end offiscal years ending after December 15, 2005.

 

8

----

 

**4.****             ****Variable Interest Entities**

 

In January 29, 1999, PSB purchased 1,600,000shares of Series A Convertible Preferred Stock, $.01 par value per share,(the “Preferred Stock”) of McGuire Performance Solutions, Inc. (“MPS”).  PSB purchased the shares for $.78125 pershare for a total cost of $1,250,000.  In2000, MPS changed its name to Iron Bridge Holdings, Inc. (“Iron Bridge”)and formed two new subsidiaries, one adopting the MPS name and the other,Avanti Capital, Inc, a registered investment advisory company.  During the year ended December 31, 2001,PSB purchased an additional 375,000 shares and 500,000 shares, respectively, ofthe Preferred Stock for $1.00 per share for a total cost $875,000.  On December 27, 2002, the foundingshareholders of Iron Bridge purchased from PSB 314,350 shares of preferredstock for $0.88 per share, which was the average cost per share paid by PSB forthese shares.  PSB currently owns 87.7%of the Preferred Stock, which represents a 49.9% fully diluted ownershipinterest in Iron Bridge.  The Iron Bridgesubsidiary, MPS, is a nationally recognized firm delivering cost-effectivesolutions for high performance total balance sheet management to banks,thrifts, credit unions and other financial institutions.

 

In the second quarter of 2004, PSB adopted FASBinterpretation No. 46(R) Consolidation of Variable Interest Entities (“FIN 46(R)”).  In applying FIN 46(R), it was determined thatPSB, as the largest shareholder and virtually Iron Bridge’s only financialresource, would absorb a majority of Iron Bridge’s expected losses.  Therefore, it was PSB’s conclusion that inaccordance with FIN 46(R), Iron Bridge is a variable interest entity and thusPSB was required to consolidate the financial results of Iron Bridge during thesecond quarter of 2004.

 

The consolidation of Iron Bridge resulted in PSBrecording goodwill of $1.4 million and minority interest of $246,000.  PSB accounts for goodwill in accordance withSFAS 142, “Goodwill and Other Intangible Assets”.  Goodwill is now subject to impairment testingat least annually to determine whether write-downs of the recorded balances arenecessary.  PSB tests for impairmentbased on the goodwill maintained at each defined reporting unit.  A fair value is determined for each reportingunit based on at least one of three various market valuationmethodologies.  If the fair value of thereporting unit exceeds its then book value, no write-down of recorded goodwillis necessary.  If the fair value of areporting unit is less, an expense may be required on PSB’s books to write downthe related goodwill to the proper carrying value.  As of March 31, 2005, PSB updated itsimpairment testing from December 31, 2004, and determined that no impairmentwrite-off was necessary.  No assurancecan be given that future goodwill impairment tests will not result in a chargeto earnings.

 

**5.****             ****Reclassifications**

 

Certain 2004 amounts have been reclassified toconform to the 2005 presentation.

 

9

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**Item 2.****           Management’s Discussionand Analysis of the Financial Condition and Results of Operations.**

 

**RESULTS OF OPERATIONS**

 

**General**

 

PSB’s results of operations depend primarily on theFirst Penn Bank’s (the “Bank”) net interest income, which is the differencebetween interest income on its interest-earning assets, and interest expense onits interest-bearing liabilities.  TheBank’s interest-earning assets consist primarily of loans receivable andinvestment securities, while its interest-bearing liabilities consist primarilyof deposits and borrowings.  The Bank’snet income is also affected by its provision for loan losses and its level ofnon-interest income as well as by its non-interest expense, such as salary,employee benefits, occupancy costs, and charges relating to non-performing andother classified assets.

 

**Impact of Inflation**

 

The financial statements and related financial datapresented herein have been prepared in accordance with generally acceptedaccounting principles that require the measurement of financial position andoperating results in historical dollars without considering changes in therelative purchasing power of money over time due to inflation.  The primary impact of inflation on theoperation of the Bank is reflected in increased operating costs.  Unlike most industrial companies, virtuallyall of the assets and liabilities of a financial institution are monetary innature.  As a result, interest rates havea more significant impact on a financial institution’s performance than theeffects of inflation.  Interest rates donot necessarily move in the same direction or in the same magnitude as theprice of goods and services.

 

**Critical Accounting Policies, Judgments, and Estimates**

 

The accounting and reporting policies of PSB and itssubsidiaries conform with accounting principles generally accepted in theUnited States of America (US GAAP) applicable to the financial servicesindustry.  All significant inter-companytransactions are eliminated in consolidation and certain reclassifications aremade when necessary to conform the previous year’s financial statements to thecurrent year’s presentation.  Inpreparing the consolidated financial statements, management is required to makeestimates and assumptions that affect the reported amount of assets andliabilities as of the dates of the balance sheets and revenues and expendituresfor the periods presented.  Therefore,actual results could differ significantly from those estimates.

 

***Allowance for Loan Losses***

 

PSB uses the reserve method of accounting for loanlosses.  The balance in the allowance forloan losses is determined based on management’s review and evaluation of theloan portfolio in relation to past loss experience, the size and composition ofthe portfolio, current economic events and conditions, and other pertinentfactors, including management’s assumptions as to future delinquencies,recoveries, and losses.  Increases to theallowance for loan losses are made by charges to the provision for loanlosses.  Recoveries of previouslycharged-off amounts are credited to the allowance for loan losses.

 

While management considers the allowance for loanlosses to be adequate based on information currently available, futureadditions to the allowance may be necessary due to changes in economicconditions or management’s assumptions as to future delinquencies, recoveriesand losses and management’s intent with regard to the disposition ofloans.  In addition, the regulators, asan integral part of their examination process, periodically review the Bank’sallowance for loan losses.  The bankingregulators may require the Bank to recognize additions to the allowance forloan losses based on their judgments about information available to them at thetime of their examination.

 

**Performance Overview**

 

PSB’s net income for the second quarter of 2005 was $203,000 or $0.04and $0.04 on a basic and diluted per share basis, respectively, comparedto net income of $524,000 or $0.12 and $0.10 on a basic and diluted per sharebasis for 2004.  The results for the second quarter of 2005 were affectedprimarily by rising interest rates that increased the cost of funds.  Additionally, increases in non-interestexpense in the areas of salaries and employee benefits, professional fees andother operating expenses related to the opening of a new branch in theChinatown section of Philadelphia and the on-going litigation (See PartII-Item 1. “Legal Proceedings”) had a dampening effect on net income.

 

10

----

 

For the three months ended June 30, 2005, the Bank’s net interestmargin decreased 47 basis points to 3.72% from 4.19% for the same period in2004.

 

The Bank’s net interest margin decreased by 40 basis points from 4.11%for the six months ended June 30, 2004 to 3.71% for the same period in2005.

 

**Net Income**

 

PSB’s net income totaled $203,000 and $524,000 for thethree months ended June 30, 2005 and 2004, respectively.  PSB’s basic and diluted earnings per sharefor the three months ended June 30, 2005 were $0.04 and $0.04respectively, compared to $0.12 and $0.10 per share for the three months ended June 30,2004.

 

PSB’s net income totaled $774,000 and $1.1 million for the six monthsended June 30, 2005 and June 30, 2004, respectively.  PSB’sbasic and diluted earnings per share for the six months ended June 30,2005 were $0.17 and $0.14 respectively compared to $0.26 and $0.22 for the sixmonths ended June 30, 2004.  Risinginterest contributed to the increase in the cost of funds resulting in adecrease in net interest income. Additionally, increases in non-interest expense in the areas of salariesand employee benefits, professional fees and other operating expenses relatedto the opening of a new branch in the Chinatown section of Philadelphiaalso negatively effected net income during the first six months of 2005.

 

Management continues to pursue lending strategies to increase consumerhome equity, and home equity lines of credit balances.  The commercial real estate and constructionloan departments are seeking to currently become more competitive in the risinginterest rate market while trying to minimize additional credit risk.

 

**Net Interest Income and Average Balances**

 

Net interest income is a key component of PSB’sprofitability and is managed in coordination with PSB’s interest ratesensitivity position.  Net interestincome for the second quarter of 2005 decreased 6.0% from $5.0 million in thesecond quarter of 2004 compared to $4.7 million for the second quarter of 2005.Net interest income for the six month period ended June 30, 2005, was$9.4 million the same as the six month period in 2004.

 

Overall, average total interest-earningassets provided a yield of 5.86% for the three months ended June 30, 2005,compared to 5.82% for the same period in 2004. Average total loans were $356.5 million for the three months ended June 30,2005, and provided a yield of 6.99% for the period, compared to average totalloans of $308.3 million for the three months ended June 30, 2004,which provided a yield of 7.63% for the period.

 

Overall, average total interest-earning assetsprovided a yield of 5.76% for the six months ended June 30, 2005, comparedto 5.75% for the same period in 2004. Average total loans were $356.2 million for the six months ended June 30,2005, and provided a yield of 6.89% for the period, compared to average totalloans of $302.1 million for the six months ended June 30, 2004, whichprovided a yield of 7.35%.

 

Average total interest-bearing liabilities increasedfrom $415.0 million to $445.0 million or 7.23% for the three monthsended June 30, 2005 compared to the three-month period ended June 30,2004.  The average rate on totalinterest-bearing liabilities increased 56 basis points from 1.87% for thethree months ended June 30, 2004 to 2.43% for the three months ended June 30,2005.  The increase in interest-bearingliabilities resulted from increases in certificates of deposit.  The increase in the overall rate paid oninterest-bearing liabilities was due to PSB’s decision to increase deposits byoffering more competitive interest rates on its certificates of deposit.

 

Average total interest-bearing liabilities increasedfrom $400.3 million to $445.1 million or 11.19% for the six monthsended June 30, 2005, compared to the six month period ended June 30,2004.  The average rate on totalinterest-bearing liabilities increased 47 basis points from 1.87% for thesix months ended June 30, 2004 to 2.34% for the six months ended June 30,2005.  The increase in interest-bearingliabilities resulted from a significant increase in certificates ofdeposit.  The increase in the overallrate paid on interest-bearing liabilities was due to PSB’s decision to increasedeposits by offering more competitive interest rates on its certificates ofdeposit.

 

The combination of our increased funding costs resultingfrom higher rates and reduced loan yield resulted in a 40 basis pointcompression of our net interest margin for the period ended June 30, 2005,compared to the six month period ended June 30, 2004 and a 47 basis pointcompression for the three month period ended June 30, 2005 compared to thethree month period ended June 30, 2004.

 

11

----

 

**Provision for Loan Losses**

 

The provision for loan losses represents the chargeagainst earnings that is required to fund the allowance for loan losses.  PSB determines the level of the allowance forloan losses through a regular review of the loan portfolio.  Management’s evaluation of the adequacy of theallowance for loan losses is based upon an examination of the portfolio as wellas such factors as declining trends, the volume of loan concentrations, adversesituations that may affect the borrower’s ability to pay, prior loss experiencewithin the portfolio, current economic conditions and the results of the mostrecent regulatory examinations.  PSB madea provision of $225,000 for loan losses during the six months ended June 30,2005 and made no provision for the six months ended June 30, 2004.  Additionally, PSB had charge-offs against the allowance for loan losses of $268,000and $192,000 and recoveries of $80,000 and $98,000 during the six month periodsended June 30, 2005 and 2004, respectively.

 

12

----

 

**Average Balance Sheets and Rate/YieldAnalysis**

 

Net interest income is affected by changes in bothaverage interest rates and average volumes of interest-earning assets andinterest-bearing liabilities.  Thefollowing tables present the average daily balances of assets, liabilities, andshareholders’ equity and the respective interest earned or paid oninterest-earning assets and interest-bearing liabilities, as well as averagerates for the period indicated:

 
| ** **                                                             | ** ** | **Three  months Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **Average  Balance**                  | ** ** | **Interest** | ** ** | **Yield/****Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                                             | ** ** | **(Dollars  in thousands)**           | ** ** |
| **ASSETS**                                                             |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits                                              |       | $                                     | 54,554     |   | $ | 347 |   | 2.54 | % | $ | 67,608 |   | $ | 160 |   | 0.95 | % |
| Investment securities                                                  |       | 61,702                                |       | 505 |   | 3.27 |   | 49,003 |   | 416 |   | 3.40 |   |
| Mortgage-backed securities                                             |       | 34,064                                |       | 341 |   | 4.00 |   | 51,447 |   | 472 |   | 3.67 |   |
| Loans                                                                  |       | 356,461                               |       | 6,226 |   | 6.99 |   | 308,271 |   | 5,881 |   | 7.63 |   |
| Total interest-earning assets                                          |       | 506,781                               |       | $ | 7,419 |   | 5.86 | % | 476,329 |   | $ | 6,929 |   | 5.82 | % |
| Noninterest-earning assets                                             |       | 33,318                                |       |   |   |   |   | 20,240 |   |   |   |   |   |
| Total assets                                                           |       | $                                     | 540,099    |   |   |   |   |   | $ | 496,569 |   |   |   |   |   |
|                                                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                                        |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Now checking accounts                                                  |       | $                                     | 25,297     |   | $ | 32 |   | 0.51 | % | $ | 26,313 |   | $ | 34 |   | 0.52 | % |
| Money market accounts                                                  |       | 50,720                                |       | 193 |   | 1.52 |   | 71,114 |   | 201 |   | 1.13 |   |
| Savings deposits                                                       |       | 83,963                                |       | 251 |   | 1.20 |   | 92,840 |   | 247 |   | 1.06 |   |
| Certificates                                                           |       | 283,866                               |       | 2,224 |   | 3.13 |   | 223,649 |   | 1,455 |   | 2.60 |   |
| Total deposits                                                         |       | 443,846                               |       | 2,700 |   | 1.22 | % | 413,916 |   | 1,937 |   | 1.87 |   |
| Borrowed money                                                         |       | 1,118                                 |       | 6 |   | 2.15 |   | 1,105 |   | 5 |   | 1.81 |   |
| Total interest-bearing liabilities                                     |       | 444,964                               |       | $ | 2,706 |   | 2.43 | % | 415,021 |   | $ | 1,942 |   | 1.87 | % |
| Non-interest-bearing liabilities                                       |       | 42,745                                |       |   |   |   |   | 33,316 |   |   |   |   |   |
| Total liabilities                                                      |       | 487,709                               |       |   |   |   |   | 448,337 |   |   |   |   |   |
| Shareholders’ equity                                              |       | 52,390                                |       |   |   |   |   | 48,232 |   |   |   |   |   |
|                                                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity                        |       | $                                     | 540,099    |   |   |   |   |   | $ | 496,569 |   |   |   |   |   |
| Net interest income                                                    |       |                                  |       | $ | 4,713 |   |   |   |   |   | $ | 4,987 |   |   |   |
| Interest rate spread                                                   |       |                                  |       |   |   | 3.42 | % |   |   |   |   | 3.95 | % |
| Net yield on interest-earning assets                                   |       |                                  |       |   |   | 3.72 | % |   |   |   |   | 4.19 | % |
|                                                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Ratio of interest-earning assets to  interest-bearing liabilities |       |                                  |       |   |   | 1.14 | x |   |   |   |   | 1.15 | x |

 

13

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| ** **                                                             | ** ** | **Six  months Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                             | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **Average  Balance**           | ** ** | **Interest** | ** ** | **Yield/****Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                                             | ** ** | **(Dollars  in thousands)**    | ** ** |
| **ASSETS**                                                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                               |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits                                              |       | $                              | 56,514     |   | $ | 656 |   | 2.32 | % | $ | 55,324 |   | $ | 250 |   | 0.90 | % |
| Investment securities                                                  |       | 59,981                         |       | 971 |   | 3.24 |   | 51,553 |   | 752 |   | 2.92 |   |
| Mortgage-backed securities                                             |       | 34,478                         |       | 709 |   | 4.11 |   | 49,172 |   | 1,054 |   | 4.29 |   |
| Loans                                                                  |       | 356,242                        |       | 12,271 |   | 6.89 |   | 302,133 |   | 11,107 |   | 7.35 |   |
| Total interest-earning assets                                          |       | 507,215                        |       | $ | 14,607 |   | 5.76 | % | 458,182 |   | $ | 13,163 |   | 5.75 | % |
| Noninterest-earning assets                                             |       | 30,543                         |       |   |   |   |   | 29,663 |   |   |   |   |   |
| Total assets                                                           |       | $                              | 537,758    |   |   |   |   |   | $ | 487,845 |   |   |   |   |   |
|                                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                                        |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Now checking accounts                                                  |       | $                              | 25,599     |   | $ | 66 |   | 0.52 | % | $ | 26,458 |   | $ | 67 |   | 0.51 | % |
| Money market accounts                                                  |       | 50,219                         |       | 355 |   | 1.41 |   | 69,743 |   | 416 |   | 1.19 |   |
| Savings deposits                                                       |       | 85,218                         |       | 490 |   | 1.15 |   | 91,930 |   | 516 |   | 1.12 |   |
| Certificates                                                           |       | 282,918                        |       | 4,278 |   | 3.02 |   | 211,045 |   | 2,735 |   | 2.59 |   |
| Total deposits                                                         |       | 443,954                        |       | 5,189 |   | 2.34 | % | 399,176 |   | 3,734 |   | 1.87 |   |
| Borrowed money                                                         |       | 1,117                          |       | 12 |   | 2.15 |   | 1,103 |   | 11 |   | 1.99 |   |
| Total interest-bearing liabilities                                     |       | 445,071                        |       | $ | 5,201 |   | 2.34 | % | 400,279 |   | $ | 3,745 |   | 1.87 | % |
| Non-interest-bearing liabilities                                       |       | 40,375                         |       |   |   |   |   | 39,704 |   |   |   |   |   |
| Total liabilities                                                      |       | 485,446                        |       |   |   |   |   | 439,983 |   |   |   |   |   |
| Shareholders’ equity                                              |       | 52,312                         |       |   |   |   |   | 47,862 |   |   |   |   |   |
|                                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and  shareholders’ equity                  |       | $                              | 537,758    |   |   |   |   |   | $ | 487,845 |   |   |   |   |   |
| Net interest income                                                    |       |                           |       | $ | 9,406 |   |   |   |   |   | $ | 9,418 |   |   |   |
| Interest rate spread                                                   |       |                           |       |   |   | 3.42 | % |   |   |   |   | 3.87 | % |
| Net yield on interest-earning assets                                   |       |                           |       |   |   | 3.71 | % |   |   |   |   | 4.11 | % |
|                                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Ratio of interest-earning assets to  interest-bearing liabilities |       |                           |       |   |   | 1.13 | x |   |   |   |   | 1.14 | x |

 

14

----

 

**Non-interest Income**

 

Non-interestincome consists of service charges, rental income, other income, and gain onthe sale of loans and securities. Non-interest income for the three month period ended June 30, 2005,increased $112,000 or 23.68% compared to the same period of 2004.  Non-interest income increased $504,000 or49.75% to $1.5 million for the six months ended June 30, 2005, from $1.0million for the same period in the prior year. The significant increase in non-interest income in the six months ended June 30,2005, was almost exclusively attributable to the gain on the sale of investmentsecurities held by PSA Service Corp.

 

The following table providesa summary of non-interest income, by category of income, for the six monthsended June 30, 2005, and 2004 (in thousands):

 
| ** **                                   | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **(In thousands)**                 | ** ** |
|                                         |       |                               |       |   |   |
| Service fees  on deposit accounts            |       | $                                  | 611        |   | $ | 545 |   |
| Loss on sale  of loans and real estate owned |       | (43                                | )          | 27 |   |
| Banked owned  life insurance                 |       | 233                                |       | 196 |   |
| Gain on sale  of stock and investments       |       | 423                                |       | — |   |
| Other                                        |       | 293                                |       | 245 |   |
| Total                                        |       | $                                  | 1,517      |   | $ | 1,013 |   |

 

15

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**Non-interest Expense**

 

Non-interestexpense for the Bank increased $787,000 or 9.09%, to $9.6 million for thesix months ended June 30, 2005, from $8.8 million for the same periodin the prior year.  The primary reasonsfor the increase in non-interest expense were increases in salaries andemployee benefits and occupancy and equipment expense and other operatingexpenses related to expenditures for the Bank’s new branch in the Chinatownsection of Philadelphia and professional fees related to the on-goingoption litigation.

 

The following table provides asummary of non-interest expense, by category of expense, for the six monthsended June 30, 2005, and 2004:

 
| ** **                       | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------|------------|------------------------------------|------------|
| ** **                       | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                       | ** ** | **(In thousands)**                 | ** ** |
|                             |       |                               |       |   |   |
| Salaries and employment benefits |       | $                                  | 5,024      |   | $ | 4,629 |   |
| Rent and occupancy expense       |       | 1,275                              |       | 1,143 |   |
| Professional fees                |       | 753                                |       | 422 |   |
| FDIC insurance expense           |       | 61                                 |       | 120 |   |
| General insurance                |       | 159                                |       | 153 |   |
| Advertising                      |       | 135                                |       | 153 |   |
| Data processing fees             |       | 181                                |       | 106 |   |
| Director fees                    |       | 136                                |       | 137 |   |
| Other operating expense          |       | 1,876                              |       | 1,950 |   |
| Total                            |       | $                                  | 9,600      |   | $ | 8,813 |   |

 

**Provisionfor Income Taxes**

 

Income taxprovisions for the six month periods ended June 30, 2005 and 2004 were$357,000 and $463,000, respectively.

 

**Liquidity**

 

The maintenance ofadequate liquidity and the mitigation of interest rate risk are integral to themanagement of PSB’s balance sheet. Liquidity represents the ability to meet potential cash outflowsresulting from deposit customers who need to withdraw funds or borrowers whoneed available credit.  PSB’s liquidityis quantified through the use of a standard liquidity ratio of liquid assets(cash and cash equivalents, investment securities available-for-sale,mortgage-backed securities available-for-sale and Federal Home Loan Bank stock)to short-term borrowings plus deposits.

 

PSB’sasset/liability management committee monitors the level of short-term assetsand liabilities to maintain an appropriate balance between liquidity, risk, andreturn.  Liquidity is derived fromvarious sources which include increases in core deposits, sales of certificatesof deposits, the amortization, and prepayment of loans and mortgage-backedsecurities, and maturities of investment securities and other short-terminvestments.  The liquidity position ofPSB is also strengthened by a $201.7 million credit facility with theFederal Home Loan Bank (“FHLB”). Advances are secured by FHLB stock and qualifying mortgage loans.  PSB had no outstanding borrowings from theFHLB as of June 30, 2005.

 

Maximizing cashflow over time is crucial to the maintenance of adequate liquidity.  PSB’s total cash flow is a product of itsoperating activities, investing activities and financing activities.  During the six months ended June 30,2005, net cash provided by operating activities was $2.7 million, comparedto net cash used in operating activities of $9.9 million for the same period of2004.  During the six months endedJune 30, 2005, net cash used in investing activities was $767,000,compared to net cash used in investing activities of $4.5 million for thesame period of 2004.  Financingactivities provided net cash of $7.9 million during the six months endedJune 30, 2005, compared to $32.7 million in net cash provided byfinancing activities for the same period of 2004.  The net result of these items was a$9.8 million increase in cash and cash equivalents for the six monthsended June 30, 2005, compared to an $18.4 million increase in cashand cash equivalents for the same period of 2004.

 

16

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**Interest Rate Sensitivity**

 

Interest ratesensitivity focuses on the impact of fluctuating interest rates and there-pricing characteristics of rate sensitive assets and liabilities on netinterest income.  Interest ratesensitivity is closely related to liquidity since each is directly affected bythe maturity of assets and liabilities. Rate sensitivity also deals with exposure to fluctuations in interestrates and its effect on net interest income. The primary function of PSB’s interest rate sensitivity management is toreduce exposure to interest rate risk through an appropriate balance betweeninterest-earning assets and interest-bearing liabilities.  The goal is to minimize fluctuations in thenet interest margin of PSB due to general changes in interest rates.

 

The blending offixed and floating-rate loans and investments to match the re-pricing andmaturity characteristics of the various funding sources is a continuous processin an attempt to minimize any significant fluctuations in net interestincome.  The composition of the balancesheet is designed to minimize any significant fluctuation in net interestincome and to maximize liquidity. Management believes that the accessibility to FHLB borrowings willprovide the flexibility to assist in keeping fluctuations in net interestincome under control and to maintain an adequate liquidity position.

 

**Capital Adequacy**

 

PSB is required tomaintain minimum ratios of Tier I and total capital to total “riskweighted” assets and a minimum Tier I leverage ratio, as defined by thebanking regulators.  At June 30,2005, PSB was required to have a minimum Tier I and total capital ratiosof 6.0% and 10.0%, respectively, and a minimum Tier I leverage ratio of5.0%.  PSB’s actual Tier I and totalcapital ratios at June 30, 2005, were 14.58% and 15.47%, respectively, andPSB’s Tier I leverage ratio was 9.72%. These ratios exceed the requirements for classification as a “wellcapitalized” institution, the industry’s highest capital category.

 

On June 30,2005, PSB was in compliance with regulatory capital requirements as shown inthe following table:

 

 
| ** **                           | ** ** | **Well   Capitalized**     | ** ** | **At June 30, 2005** | ** ** | **At December 31, 2004** | ** ** |
|--------------------------------------|------------|----------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **Ratios**                 | ** ** | **PSB**                   | ** ** | **Bank**                      | ** ** | **PSB** | ** ** | **Bank** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)** | ** ** |
| Tier I Capital                       |       |                       |       | $                         | 52,335     |                          | $          | 41,190 |   | $ | 51,207 |   | $ | 39,938 |   |
| Tier II Capital                      |       |                       |       | 3,193                     |       | 3,193                         |       | 3,157 |   | 3,157 |   |
| Total Qualifying Capital             |       |                       |       | $                         | 55,528     |                          | $          | 44,383 |   | $ | 54,364 |   | $ | 43,095 |   |
|                                 |       |                       |       |                      |       |                          |       |   |   |   |   |
| Risk Adjusted Total Assets           |       |                       |       | $                         | 358,868    |                          | $          | 355,404 |   | $ | 351,023 |   | $ | 349,124 |   |
|                                 |       |                       |       |                      |       |                          |       |   |   |   |   |
| Tier I Risk Based Capital Ratio |       | 6.00                       | %          | 14.58                     | %          | 11.59                         | %          | 14.59 | % | 11.44 | % |
| Total Risk Based Capital Ratio       |       | 10.00                      | %          | 15.47                     | %          | 12.49                         | %          | 15.49 | % | 12.34 | % |
| Leverage Ratio                       |       | 5.00                       | %          | 9.72                      | %          | 7.68                          | %          | 9.53 | % | 7.48 | % |
|                                 |       |                       |       |                      |       |                          |       |   |   |   |   |
| Average Assets                       |       |                       |       | $                         | 538,693    |                          | $          | 536,195 |   | $ | 537,232 |   | $ | 534,026 |   |

 

**FINANCIAL CONDITION**

 

**General**

 

PSB’s total assetsincreased $9.5 million from $533.1 at December 31, 2004, to$542.6 million, as of June 30, 2005, an increase of 1.78%.  Net loans outstanding decreased by $3.0million, or 0.85%, and cash and cash equivalents grew by 17.95% to $64.5million during the first six months of 2005. Total deposits equaled $483.5 million, an increase of$8.2 million or 1.72%, during the first six months of 2005.  The increase in deposits was primarily as aresult of increases in certificates of deposit. At June 30, 2005, PSB’s net loan portfolio totaled$350.0 million compared to $353.0 million at December 31, 2004.

 

17

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The followingtables summarize the loan portfolio of PSB by loan category and amount atJune 30, 2005, compared to December 31, 2004, respectively.  From time to time, TransNational MortgageCorp., a subsidiary of PSB, has originated and sold mortgage loans to firstparty investors within PSB’s financial reporting periods.  Similarly, student loans are frequentlyoriginated and sold within PSB’s financial reporting periods.  Such mortgage and student loans are notreflected in the financial tables and financial statements pertaining to aparticular period to the extent that such loans were sold prior to any periodend.  The loan categories correspond toPSB’s general classifications (Dollars in thousands):

 
| ** **                      | ** ** | **At June 30,  2005** | ** ** | **At December 31,  2004** | ** ** | ** ** | ** ** | ** **  | ** ** |
|---------------------------------|------------|----------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **                      | ** ** | **Amount**                 | ** ** | **Percent**                    | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Variance** | ** ** | **% Change** | ** ** |
| Real Estate Loans(1):           |       |                       |       |                           |       |       |       |        |       |   |   |   |   |
| One-to-four family(2)           |       | $                          | 132,709    |                           | 37.57      | %          | $          | 140,459     |       | 39.43 | % | $ | (3,689 | ) | (2.63 | )% |
| Construction loans              |       | 32,867                     |       | 9.30                           | %          | 21,854     |       | 6.13        | %          | 9,369 |   | 42.87 | % |
| Five or more family residential |       | 19,815                     |       | 5.61                           | %          | 18,888     |       | 5.30        | %          | (1,302 | ) | (6.89 | )% |
| Nonresidential                  |       | 124,582                    |       | 35.27                          | %          | 132,066    |       | 37.07       | %          | (4,780 | ) | (3.62 | )% |
|                            |       |                       |       |                           |       |       |       |        |       |   |   |   |   |
| Commercial loans                |       | 19,705                     |       | 5.58                           | %          | 21,439     |       | 6.02        | %          | (620 | ) | (2.89 | )% |
| Consumer loans                  |       | 23,562                     |       | 6.67                           | %          | 21,516     |       | 6.04        | %          | 285 |   | 1.32 | % |
| Total loans                     |       | $                          | 353,240    |                           | 100.00     | %          | $          | 356,222     |       | 100.00 | % | $ | (737 | ) | (0.21 | )% |
|                            |       |                       |       |                           |       |       |       |        |       |   |   |   |   |
| Less:                           |       |                       |       |                           |       |       |       |        |       |   |   |   |   |
| Unearned fees and discounts     |       | $                          | 66         |                           |       |       | $          | 80          |       |   |   |   |   |   |   |
| Allowance for loan losses       |       | 3,193                      |       |                           |       | 3,157      |       |        |       |   |   |   |   |
| Net Loans                       |       | $                          | 349,981    |                           |       |       | $          | 352,985     |       |   |   |   |   |   |   |

 

----

(1)               Real Estate Loans represent loanssecured by real estate

 

(2)               Does not include loans held for sale

 

The following table summarizesthe loan portfolio of PSB by loan type and amount at June 30, 2005, andDecember 31, 2005.

 
| ** **      | ** ** | **At June 30   2005** | ** ** | **At December 31,   2004** | ** ** |
|-----------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | **Amount**                 | ** ** | **Percent**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Fixed rates     |       | $                          | 249,149    |                            | 70.53      | % | $ | 252,659 |   | 70.93 | % |
| Adjustable rate |       | 104,091                    |       | 29.47                           | %          | 103,563 |   | 29.07 | % |
| Total loans     |       | $                          | 353,240    |                            | 100.00     | % | $ | 356,222 |   | 100.00 | % |

 

Total investmentsecurities decreased $4.5 million, or 4.71%, to $91.1 million atJune 30, 2005, from $95.6 million at December 31, 2004.

 

**Asset Quality**

 

**Non-Performing Assets**

 

PSB’snon-performing assets increased $273,000, or 4.88%, to $4.3 million atJune 30, 2005, from $4.1 million at December 31, 2004.  As a matter of policy, the accrual of loaninterest is discontinued if management believes that, after considering economicand business conditions and collection efforts, the borrower’s financialcondition is such that collection of interest becomes doubtful.  This is normally done when a loan reaches90 days delinquent.  At this time,all accrued but unpaid interest is reversed. There are occasional exceptions if the loans are in the process ofcollection and the loan is fully secured.

 

18

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The followingtable sets forth non-performing assets as of June 30, 2005 and December 31,2004:

 
| ** **                                                                              | ** ** | **At June 30,   2005** | ** ** | **At December 31,   2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                              | ** ** | **(Dollars in thousands)**  | ** ** |
|                                                                                    |       |                        |       |                            |       |
| Loans past due 90 days or more  as to interest or principal and accruing  interest |       | $                           | —     |                            | $          | — |   |
| Nonaccrual loans                                                                        |       | 3,279                       |       | 3,633                           |       |
|                                                                                    |       |                        |       |                            |       |
| Total nonperforming loans                                                               |       | 3,279                       |       | 3,633                           |       |
| Real estate owned (REO)                                                                 |       | 1,049                       |       | 422                             |       |
| Total nonperforming assets                                                              |       | $                           | 4,328      |                            | $          | 4,055 |   |
|                                                                                    |       |                        |       |                            |       |
| Nonperforming loans to total  loans                                                     |       | 0.93                        | %          | 1.02                            | %          |
|                                                                                    |       |                        |       |                            |       |
| Nonperforming assets to total  assets                                                   |       | 0.80                        | %          | 0.76                            | %          |
|                                                                                    |       |                        |       |                            |       |
| Allowance for loan losses to  total loans                                               |       | 0.90                        | %          | 0.90                            | %          |
|                                                                                    |       |                        |       |                            |       |
| Allowance for loan losses to  nonperforming loans                                       |       | 97.38                       | %          | 86.90                           | %          |
|                                                                                    |       |                        |       |                            |       |
| Allowance for loan losses to  nonperforming assets                                      |       | 73.78                       | %          | 77.85                           | %          |
|                                                                                    |       |                        |       |                            |       |
| Net charge-offs as a percentage  of total loans                                         |       | 0.08                        | %          | 0.04                            | %          |

 

Note:  Totalloans includes loans held for sale

 

**Allowance for Loan Losses**

 

The allowance for loan losses is established through aprovision for loan losses charged to expense. Loans are charged against the allowance for possible loan losses whenmanagement believes that the collectibility of the principal is unlikely.  The allowance is an amount that managementbelieves will be adequate to absorb loan losses on existing loans that maybecome uncollectible based on evaluations of the collectibility of loans andprior loan loss experience.  Theevaluations take into consideration such factors as changes in the nature andvolume of the loan portfolio, overall portfolio quality, review of specificproblem loans and current economic conditions that may affect the borrower’sability to pay.  These estimates areparticularly susceptible to changes that may result in a material adjustment tothe allowance for loan losses. As adjustments become identified, they arereported in earnings for the period in which they become known.  Management believes that it makes an informedjudgment based upon available information.

 

It is the objective of PSB’s evaluation process toestablish the following components of the allowance for loan losses:  a specific allocation for certain identifiedloans, a general allocation for pools of loans based on risk rating, and ageneral allocation for inherent loan portfolio losses.  Management performs current evaluations ofits criticized and classified loan portfolios and assigns specific reservesthat reflect the current risk to PSB.  Ageneral reserve allocation is applied for pools of loans based on risk ratingfor all loans not specifically reserved for as described previously.  The methodology used to calculate the provisionis consistent with the guidance provided in SEC Staff Accounting BulletinNo. 102.  Management reviews theadequacy of its allowance on an ongoing basis and will provide, as managementmay deem necessary, for additional provisions in future periods.

 

PSB accountsfor its impaired loans in accordance with SFAS No. 114, “Accounting byCreditors for Impairment of a Loan”, as amended by SFAS No. 118,“Accounting by Creditors for Impairment of a Loan - Income Recognition andDisclosures”.  This standard requiresthat a creditor measure impairment based on the present value of expectedfuture cash flow discounted at the loan’s effective interest rate, except that,as a practical expedient, a creditor may measure impairment based on a loan’sobservable market price, or the fair value of the collateral if the loan iscollateral dependent.  Regardless of themeasurement method, a creditor must measure impairment based on the fair valueof the collateral when the creditor determines that foreclosure is probable.

 

## **Item 3.  Quantitative andQualitative Disclosures About Market Risk**

##  

There has been nomaterial change in PSB’s assessment of its sensitivity to market risk since itspresentation in the 2004 Annual Report on Form 10-K filed with theSecurities and Exchange Commission.

 

## **Item 4.  Controls And Procedures**

##  

PSB’s managementconducted an evaluation, under the supervision and with the participation ofPSB’s Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of PSB’s disclosure controls and procedures as ofJune 30, 2005.  Based on thisevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat PSB’s disclosure controls and procedures are effective in alerting them ina timely manner to material information required to be included in PSB’s SECreports.  In addition, PSB’s management,including the Chief Executive Officer and Chief Financial Officer, reviewedPSB’s internal controls, and there have been no significant changes in PSB’sinternal controls or in other factors that could significantly affect thosecontrols subsequent to the date of their last evaluation.

 

# **PART II.  OTHER INFORMATION**

 

## **Item 1.**           Legal Proceedings.

 

Following is asummary of the various claims and lawsuits involving PSB Bancorp, Inc.(“PSB”) other than the usual ordinary course of business claims to enforceliens, foreclosure proceedings on properties in which PSB holds securityinterests, claims involving the making and servicing of real property loans,and other issues incident to PSB’s business.

 

InOctober 1999, in connection with the acquisition of First Bank ofPhiladelphia (“FBP”), each outstanding share of FBP was exchanged for .857shares of PSB common stock.  In addition,under the terms of the merger agreement, options to acquire 1,612,500 shares ofFBP were to be converted into options to acquire 1,381,912 shares of PSB commonstock.  In the fourth quarter of 2001,PSB declared 1,371,200 options previously issued by FBP and converted to PSBoptions in the merger to be void because PSB believed, among other reasons,that these options were unlawfully and improperly granted.  The following actions are either related tothe voiding of such options or were initiated by plaintiffs involved directlyor indirectly in the option litigation or counsel for such plaintiffs.

 

19

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A.  On March 6, 2002, Carl Lingle, RaymondSilverstein as Trustee under an Irrevocable Trust, Conwell Ltd. Partnership,Gerald Lehrfeld, Joan Lehrfeld, Jay Roseman, and Lynn Roseman, purported optionholders, brought an action in the United States District Court for the EasternDistrict of Pennsylvania (the “Court”) to have 895,240 of the optionspreviously voided by PSB declared valid and enforceable.

 

On June 30,2004, the Court granted the plaintiffs’ motion for summary judgment.  PSB appealed the Court’s decision to theUnited States Court of Appeals for the Third Circuit (the “Appeals Court”).  Subsequently, on February 15, 2005, theAppeals Court upheld the grant of summary judgment for the plaintiffs.  On February 28, 2005, PSB filed apetition for rehearing with the Appeals Court in which PSB averred that, basedon recently discovered information, the court lacked jurisdiction because atleast one of the plaintiffs was a Pennsylvania resident and therefore diversityof citizenship was absent.

 

On April 1,2005, the Appeals Court granted PSB’s petition for rehearing, vacated its priorruling, dismissed the case for lack of subject matter jurisdiction and remandedthe case to the Court with instructions to dismiss the underlying case for lackof subject matter.  On April 26,2005, the Court dismissed the original case for lack of subject matterjurisdiction (the “Dismissal”).

 

B.   On June 17, 2004, Hal Shaffer, apurported option holder filed an action in the United States District Court forthe Eastern District of Pennsylvania seeking among other actions a declaratoryjudgment that 342,800 of the options previously declared invalid by PSB werevalid and enforceable.  OnFebruary 28, 2005, PSB filed a motion to dismiss which was subsequentlydenied by the Court.  On April 25,2005, PSB filed a motion for reconsideration. PSB intends to defend vigorously the action.  However, there can be no assurance regardingthe eventual outcome of this litigation.

 

C.  On September 7, 2004, Conwell Ltd.Partnership, a purported option holder filed an action in the United StatesDistrict Court for the Eastern District of Pennsylvania seeking among otheractions a declaratory judgment that 133,160 of the options previously declaredinvalid by PSB are valid and enforceable. The plaintiff filed a motion for summary judgment that was denied.  On February 28, 2005, PSB filed a motionto dismiss for lack of subject matter jurisdiction.  In response, the plaintiff filed a motion tobe allowed to transfer the purported options to Lynn Roseman.  Oral argument was held on March 30,2005.  PSB intends to defend vigorouslythe action.  However, there can be noassurance regarding the eventual outcome of this litigation.

 

D.  On December 29, 2004, PSB received ashareholder demand letter (the “Demand Letter”) on behalf of several purportedshareholders alleging that certain of PSB’s officers, directors and employeesengaged in a pattern and practice of acts of waste of corporate assets andfailed to make certain required public disclosures.  The purported acts related to failure todisclose certain information in PSB’s Securities Act of 1934 reports filed withthe SEC, incomplete or inaccurate financial reporting, certain actions taken bydirectors related to the merger of PSB and Jade Financial Corp., and issuesrelated to PSB’s decision to void the FBP options.  On January 20, 2005, the board ofdirectors of PSB appointed a special committee composed of three independentdirectors.  The independent directorsappointed to the special committee are Dennis Wesley, James W. Eastwood, andJames Kenney.  The special committee wascharged with (i) investigating the allegations in the Demand Letter,(ii) preparing and presenting a report to the full board of directors ofthe results of their investigation, and (iii) making a recommendation tothe full board of directors as to whether or not to proceed with a shareholderderivative action.  The special committeehas engaged separate legal counsel to assist it in the preparation of itsreport.

 

E.  On March 17, 2005, Raymond Silverstein,as Trustee under an Irrevocable Trust dated April 1, 1993, and CarlLingle, as shareholders suing derivatively in the name and right of PSB, filedan action in the United States District Court for the Eastern District ofPennsylvania against PSB and each individual member of the board of directorsseeking among other things a judgment declaring the 2001 PSB Stock IncentivePlan (the “Plan”) and certain options granted pursuant to the Plan to be nulland void.  The plaintiffs contend thatPSB’s board of directors breached their fiduciary duty and engaged inself-dealing by knowingly disavowing 1,317,200 options granted in theacquisition of First Bank of Philadelphia which they knew were valid andsubsequently soliciting and obtaining the approval of PSB’s shareholders forthe Plan to allow for the granting of new options to PSB’s board of directorsand executive management.  OnApril 29, 2005, PSB filed a motion to dismiss the cases.  PSB unequivocally denies the allegationscontained in the action and intends to defend vigorously the action.  However, there can be no assurance regardingthe eventual outcome of this litigation.

 

F.  On April 8, 2005, PSB filed adeclaratory judgment action in the Court of Common Pleas of Philadelphia Countyagainst the various purported option holders seeking an order declaring thedisputed options void and invalid.

 

G.  On April 15, 2005, in response to theDismissal, Carl Lingle, Raymond Silverstein, as Trustee under an IrrevocableTrust, Gerald Lehrfeld, Joan Lehrfeld, Jay Roseman and Lynn Roseman, purportedoption holders, filed an action 

 

20

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in the United States DistrictCourt for the Eastern District of Pennsylvania seeking among other actions adeclaratory judgment that 854,858 options previously declared invalid by PSBare valid and enforceable or in the alternative an award of money damagesestimated to be not less than $11 million. PSB intends to defend vigorously the action.  However, there can be no assurance regardingthe eventual outcome of this litigation.

 

There are noadditional material developments to report regarding the above actions at thetime of the filing of this quarterly report on Form 10-Q.

 

Additionalinformation related to these actions is contained in PSB’s previously filedreports on Forms 10-K, 10-Q and 8-K.

 

## **Item 2.**           Unregistered Sales of Equity Securities andUse of Proceeds.

##  

None

 

## **Item 3.**           Defaults upon Senior Securities.

##  

Not Applicable

 

## **Item 4.**           Submission of Matters to a Vote ofSecurity Holders.

##  

None

 

## **Item 5.**           Other Information.

##  

None

 

## **Item 6.**           Exhibits.

 

(a) Exhibits.

 
| 31.1   |   | Certification  of Anthony DiSandro pursuant to Section 312 of the Sarbanes-Oxley Act of  2002. |
|--------|--------|-----------------------------------------------------------------------------------------------------|
|   |   |                                                                                                |
| 31.2   |   | Certification  of John Carrozza pursuant to Section 312 of the Sarbanes-Oxley Act of  2002.    |

 

21

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| 32 |   | Certification  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|----|--------|-------------------------------------------------------------------------------------------------------------------------------------|

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereuntodully authorized.

 
|                  | PSB BANCORP,  INC. |
|-----------------------|--------------------|
|                  |               |   |
|                  | By:                |   /s/Anthony  DiSandro |
|                  |               | Anthony  DiSandro, |
|                  |               | President,  Chief Executive Officer, and Director |
|                  |               |   |
|                  |               |   |
|                  | By:                |   /s/John  Carrozza |
|                  |               | John  Carrozza, |
|                  |               |  Chief Financial Officer |
|                  |               | (Principal  Financial Officer and |
|                  |               | Chief Accounting Officer) |
|                  |               |   |
| August 15,  2005 |               |   |

 

22

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Document**                                                                                                                        |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                          |
| 31.1                 |       | Certification  of Anthony DiSandro pursuant to Section 312 of the Sarbanes-Oxley Act of  2002.                                 |
|                 |       |                                                                                                                                |
| 31.2                 |       | Certification  of John Carrozza pursuant to Section 312 of the Sarbanes-Oxley Act of  2002.                                    |
|                 |       |                                                                                                                                |
| 32                   |       | Certification  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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