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

**Washington,DC  20549**

 

**FORM 10-Q**

 

**ý****             ****Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 for the quarterly period ended September 30, 2004 or**

 

**o****             ****Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 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 of 1934during 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 inRule 12b-2 of the Exchange Act.)

 

Yes  o     No  ý

 

Numberof shares outstanding as of November 10, 2004

 
| **Common  Stock (no par value)** | ** ** | **4,883,038**        |
|----------------------------------|------------|----------------------|
| (Title of Class)                 |       | (Outstanding Shares) |

 

 

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**PSB BANCORP, INC.**

**FORM 10-Q**

**FOR THE QUARTERENDED SEPTEMBER 30, 2004**

 

**TABLE OFCONTENTS**

 
| PART I. | FINANCIAL INFORMATION |                                                                                                                                      |
|--------------|-----------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
|         |                  |                                                                                                                                      |   |
|         | Item 1.          | Financial  Statements                                                                                                                     |   |
|         |                  |                                                                                                                                      |   |
|         |                  | Consolidated Statements of Financial  Condition as of September 30, 2004 (unaudited) and December 31,  2003                     |   |
|         |                  |                                                                                                                                      |   |
|         |                  | Consolidated Statements of Income  (unaudited) for the Three and Nine Month Periods Ended September 30,  2004 and 2003               |   |
|         |                  |                                                                                                                                      |   |
|         |                  | Consolidated  Statements of Cash Flows (unaudited) for the Nine Month Periods Ended September 30,  2004 and 2003                     |   |
|         |                  |                                                                                                                                      |   |
|         |                  | Consolidated Statements of Comprehensive  Income (unaudited) for the Three and Nine Month Periods Ended September 30,  2004 and 2003 |   |
|         |                  |                                                                                                                                      |   |
|         |                  | Notes to  Consolidated Financial Statements                                                                                               |   |
|         |                  |                                                                                                                                      |   |
|         | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                               |   |
|         |                  |                                                                                                                                      |   |
|         | Item 3.               | Quantitative  and Qualitative Disclosures about Market Risk                                                                               |   |
|         |                  |                                                                                                                                      |   |
|         | Item 4.               | Controls  and Procedures                                                                                                                  |   |
|         |                  |                                                                                                                                      |   |
| PART II.     | OTHER INFORMATION     |                                                                                                                                      |
|         |                  |                                                                                                                                      |   |
|         | Item 1.               | Legal Proceedings                                                                                                                         |   |
|         |                  |                                                                                                                                      |   |
|         | Item  2.              | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                              |   |
|         |                  |                                                                                                                                      |   |
|         | Item  3.              | Defaults  Upon Senior Securities                                                                                                          |   |
|         |                  |                                                                                                                                      |   |
|         | Item 4.               | Submission of Matters to a Vote of Security  Holders                                                                                      |   |
|         |                  |                                                                                                                                      |   |
|         | Item 5.               | Other Information                                                                                                                         |   |
|         |                  |                                                                                                                                      |   |
|         | Item 6.               | Exhibits                                                                                                                                  |   |

 

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**PART I****.  FINANCIAL INFORMATION**

 

## **Item 1**.  Financial Statements.

##  

**PSB BANCORP, INC. AND SUBSIDIARY**

**STATEMENTS OF FINANCIAL CONDITION**

**(In thousands except share data)**

 
| ** **                                                                                                                                                                                 | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **(Unaudited)**         | ** ** | **(Audited)**          | ** ** |
| Assets                                                                                                                                                                                     |       |                    |       |                   |       |
| Cash and due  from banks                                                                                                                                                                   |       | $                       | 5,056      |                   | $          | 3,084 |   |
| Interest-earning  deposits with banks                                                                                                                                                      |       | 57,703                  |       | 34,692                 |       |
| Federal  funds sold                                                                                                                                                                        |       | 26,583                  |       | 14,632                 |       |
| Total cash  and cash equivalents                                                                                                                                                           |       | 89,342                  |       | 52,408                 |       |
|                                                                                                                                                                                       |       |                    |       |                   |       |
| Loans  held-for-sale                                                                                                                                                                       |       | 75,936                  |       | 51,859                 |       |
| Investment  securities available-for-sale, at fair value                                                                                                                                   |       | 88,839                  |       | 102,882                |       |
| Investment  securities held to maturity (fair value $1,752 and $790)                                                                                                                       |       | 1,732                   |       | 775                    |       |
| Federal Home  Loan Bank stock – at cost                                                                                                                                               |       | 1,280                   |       | 1,021                  |       |
| Federal  Reserve Bank stock – at cost                                                                                                                                                 |       | 1,139                   |       | 320                    |       |
|                                                                                                                                                                                       |       |                    |       |                   |       |
| Loans                                                                                                                                                                                      |       | 266,195                 |       | 240,452                |       |
| Less  allowance for possible loans losses                                                                                                                                                  |       | (3,031                  | )          | (3,069                 | )          |
| Net loans                                                                                                                                                                                  |       | 263,164                 |       | 237,383                |       |
| Accrued  interest receivable                                                                                                                                                               |       | 2,115                   |       | 2,225                  |       |
| Premises and  equipment, net                                                                                                                                                               |       | 2,597                   |       | 2,855                  |       |
| Bank-owned  life insurance                                                                                                                                                                 |       | 12,579                  |       | 12,224                 |       |
| Other assets                                                                                                                                                                               |       | 5,456                   |       | 6,378                  |       |
|                                                                                                                                                                                       |       | 22,747                  |       | 23,682                 |       |
| Total assets                                                                                                                                                                               |       | $                       | 544,179    |                   | 470,330    |   |
|                                                                                                                                                                                       |       |                    |       |                   |       |
| Liabilities                                                                                                                                                                                |       |                    |       |                   |       |
| Deposits                                                                                                                                                                                   |       |                    |       |                   |       |
| Non-interest  bearing                                                                                                                                                                      |       | 38,871                  |       | 32,806                 |       |
| Interest  bearing                                                                                                                                                                          |       | 448,527                 |       | 383,354                |       |
|                                                                                                                                                                                       |       |                    |       |                   |       |
| Total  deposits                                                                                                                                                                            |       | 487,398                 |       | 416,160                |       |
|                                                                                                                                                                                       |       |                    |       |                   |       |
| Securities  sold under agreements to repurchase                                                                                                                                            |       | 1,109                   |       | 1,099                  |       |
| Advances  from borrowers for taxes and insurance                                                                                                                                           |       | 2,252                   |       | 2,744                  |       |
| Other  liabilities                                                                                                                                                                         |       | 2,108                   |       | 3,204                  |       |
|                                                                                                                                                                                       |       | 5,469                   |       | 7,047                  |       |
| Total  liabilities                                                                                                                                                                         |       | 492,867                 |       | 423,207                |       |
|                                                                                                                                                                                       |       |                    |       |                   |       |
| Shareholders’  equity                                                                                                                                                                 |       |                    |       |                   |       |
| Common stock  authorized, 15,000,000 shares no par value, 4,883,038 and 4,530,940 shares  issued and outstanding on September 30, 2004 and December 31,  2003, respectively |       | 44,817                  |       | 42,179                 |       |
| Retained  earnings                                                                                                                                                                         |       | 8,232                   |       | 6,919                  |       |
| Accumulated  other comprehensive loss                                                                                                                                                      |       | (144                    | )          | (199                   | )          |
| Employee  stock ownership plan                                                                                                                                                             |       | (1,163                  | )          | (1,369                 | )          |
| Treasury  stock, at cost, 78,187 and 75,996 on September 30, 2004 and December 31,  2003, respectively                                                                           |       | (430                    | )          | (407                   | )          |
|                                                                                                                                                                                       |       |                    |       |                   |       |
| Total  shareholders’ equity                                                                                                                                                           |       | 51,312                  |       | 47,123                 |       |
|                                                                                                                                                                                       |       |                    |       |                   |       |
| Total  liabilities and shareholders’ equity                                                                                                                                           |       | $                       | 544,179    |                   | $          | 470,330 |   |
|                                                                                                                                                                                            |            |                         |            |                        |            |  |  |  |  |

 

1

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The accompanying notes are anintegral part of these financial statements

 

2

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**PSB BANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                           | ** ** | **Three months ended  September 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(Unaudited)**                            | ** ** |
| Interest  income                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Loans,  including fees                               |       | $                                          | 5,666      |   | $ | 5,551 |   |
| Investment  securities                               |       | 811                                        |       | 905 |   |
| Deposits  with banks                                 |       | 265                                        |       | 189 |   |
| Total  interest income                               |       | 6,742                                      |       | 6,644 |   |
|                                                 |       |                                       |       |   |   |
| Interest  expense                                    |       |                                       |       |   |   |
| Interest on  deposits                                |       | 2,286                                      |       | 2,123 |   |
| Interest on  borrowings                              |       | 6                                          |       | 6 |   |
| Total  interest expense                              |       | 2,292                                      |       | 2,129 |   |
|                                                 |       |                                       |       |   |   |
| Net interest  income                                 |       | 4,450                                      |       | 4,515 |   |
|                                                 |       |                                       |       |   |   |
| Provision  for loan losses                           |       | 90                                         |       | 0 |   |
|                                                 |       |                                       |       |   |   |
| Net interest  income after provision for loan losses |       | 4,360                                      |       | 4,515 |   |
|                                                 |       |                                       |       |   |   |
| Non-interest  operating income                       |       | 490                                        |       | 483 |   |
|                                                 |       |                                       |       |   |   |
| Other  non-operating income                          |       | 507                                        |       | — |   |
|                                                 |       |                                       |       |   |   |
| Non-interest  expenses                               |       |                                       |       |   |   |
| Salaries and  employee benefits                      |       | 2,564                                      |       | 2,401 |   |
| Occupancy  and equipment                             |       | 608                                        |       | 544 |   |
| Other  operating                                     |       | 1,326                                      |       | 1,385 |   |
| Total  non-interest expenses                         |       | 4,498                                      |       | 4,330 |   |
|                                                 |       |                                       |       |   |   |
| Other  non-operating expenses                        |       | 465                                        |       | — |   |
|                                                 |       |                                       |       |   |   |
| Income  before income taxes                          |       | 394                                        |       | 668 |   |
| Income taxes                                         |       | 134                                        |       | 221 |   |
|                                                 |       |                                       |       |   |   |
| Net income                                           |       | $                                          | 260        |   | $ | 447 |   |
|                                                 |       |                                       |       |   |   |
| Net income  per common share                         |       |                                       |       |   |   |
| Basic:                                               |       | $                                          | 0.06       |   | $ | 0.11 |   |
|                                                 |       |                                       |       |   |   |
| Diluted:                                             |       | $                                          | 0.05       |   | $ | 0.10 |   |

 

The accompanying notes are anintegral part of these financial statements

 

3

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**PSB BANCORP, INC. AND SUBSIDIARY**

**CON**SOLIDATED STATEMENTS OF INCOME

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

 
| ** **                                           | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(Unaudited)**                           | ** ** |
| Interest  income                                     |       |                                      |       |   |   |
| Loans,  including fees                               |       | $                                         | 16,773     |   | $ | 17,706 |   |
| Investment  securities                               |       | 2,617                                     |       | 2,327 |   |
| Deposits  with banks                                 |       | 515                                       |       | 879 |   |
| Total interest  income                               |       | 19,905                                    |       | 20,908 |   |
|                                                 |       |                                      |       |   |   |
| Interest  expense                                    |       |                                      |       |   |   |
| Interest on  deposits                                |       | 6,020                                     |       | 7,612 |   |
| Interest on  borrowings                              |       | 17                                        |       | 22 |   |
| Total  interest expense                              |       | 6,037                                     |       | 7,634 |   |
|                                                 |       |                                      |       |   |   |
| Net interest  income                                 |       | 13,868                                    |       | 13,274 |   |
|                                                 |       |                                      |       |   |   |
| Provision  for loan losses                           |       | 90                                        |       | 45 |   |
|                                                 |       |                                      |       |   |   |
| Net interest  income after provision for loan losses |       | 13,778                                    |       | 13,229 |   |
|                                                 |       |                                      |       |   |   |
| Non-interest  income operating                       |       | 1,503                                     |       | 1,549 |   |
|                                                 |       |                                      |       |   |   |
| Other  non-operating income                          |       | 1,641                                     |       | — |   |
|                                                 |       |                                      |       |   |   |
| Non-interest  expenses                               |       |                                      |       |   |   |
| Salaries and  employee benefits                      |       | 7,193                                     |       | 6,667 |   |
| Occupancy  and equipment                             |       | 1,751                                     |       | 1,543 |   |
| Other  operating                                     |       | 4,367                                     |       | 4,329 |   |
| Total  non-interest expenses                         |       | 13,311                                    |       | 12,539 |   |
|                                                 |       |                                      |       |   |   |
| Other  non-operating expense                         |       | 1,622                                     |       | — |   |
|                                                 |       |                                      |       |   |   |
| Income  before income taxes                          |       | 1,989                                     |       | 2,239 |   |
| Income taxes                                         |       | 676                                       |       | 728 |   |
|                                                 |       |                                      |       |   |   |
| Net income                                           |       | $                                         | 1,313      |   | $ | 1,511 |   |
|                                                 |       |                                      |       |   |   |
| Net income  per common share                         |       |                                      |       |   |   |
|                                                 |       |                                      |       |   |   |
| Basic:                                               |       | $                                         | 0.30       |   | $ | 0.36 |   |
|                                                 |       |                                      |       |   |   |
| Diluted:                                             |       | $                                         | 0.26       |   | $ | 0.35 |   |

 

The accompanying notes are anintegral part of these financial statements

 

4

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**PSB BANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

**(Inthousands)**

 
| ** **                                                                    | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                                                    | ** ** | **(Unaudited)**                           | ** ** |
| CASH FLOW  FROM OPERATING ACTIVITIES                                          |       |                                      |       |   |   |
| Adjustments  to reconcile net income to net cash                              |       |                                      |       |   |   |
| Net income                                                                    |       | $                                         | 1,313      |   | $ | 1,511 |   |
| Adjustments  used in operating activities:                                    |       |                                      |       |   |   |
| Provision  for loan losses                                                    |       | 90                                        |       | 45 |   |
| Depreciation  and amortization                                                |       | 614                                       |       | 658 |   |
| Amortization  of discounts and accretion of premiums on investment securities |       | 104                                       |       | (174 | ) |
| Gain on sale  of real estate                                                  |       | (10                                       | )          | 24 |   |
| Proceeds  from sale and amortization of loans held for sale                   |       | 8,766                                     |       | 28,410 |   |
| Originations  of loans held for sale                                          |       | (32,843                                   | )          | (55,225 | ) |
| ESOP expense                                                                  |       | 460                                       |       | 315 |   |
| Change in  assets and liabilities:                                            |       |                                      |       |   |   |
| Decrease in  accrued interest receivable                                      |       | 110                                       |       | 548 |   |
| Increase in  other assets                                                     |       | (148                                      | )          | (1,275 | ) |
| Decrease in  accrued expenses                                                 |       | (1,096                                    | )          | (2,272 | ) |
|                                                                          |       |                                      |       |   |   |
| Net cash  used in operating activities                                        |       | (22,640                                   | )          | (27,435 | ) |
|                                                                          |       |                                      |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                        |       |                                      |       |   |   |
| Purchase of  investment securities, available-for-sale                        |       | (10,845                                   | )          | (85,304 | ) |
| Proceeds  from sale of investment securities                                  |       | 10,000                                    |       | — |   |
| Proceeds  from maturities and calls of investment securities                  |       | 14,133                                    |       | 41,402 |   |
| Purchase of  Federal Home Loan Bank and Federal Reserve Bank Stock            |       | (1,078                                    | )          | (400 | ) |
| Net  (increase) decrease in loans                                             |       | (25,567                                   | )          | 56,744 |   |
| Proceeds  from sale of real estate owned                                      |       | 170                                       |       | 92 |   |
| Purchase of  premises and equipment                                           |       | (356                                      | )          | (686 | ) |
|                                                                          |       |                                      |       |   |   |
| Net cash  (used in) provided by investing activities                          |       | (13,543                                   | )          | 11,848 |   |
|                                                                          |       |                                      |       |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                                        |       |                                      |       |   |   |
| Net increase  (decrease) in deposits                                          |       | 71,238                                    |       | (16,417 | ) |
| Increase in  securities sold under agreements to repurchase                   |       | 10                                        |       | 21 |   |
| Change in  advances for borrowers’ taxes and insurance                   |       | (492                                      | )          | (1,104 | ) |
| Exercised  stock options                                                      |       | 2,384                                     |       | — |   |
| Change in  treasury stock                                                     |       | (23                                       | )          | (15 | ) |
| Net cash  provided by (used in) financing activities                          |       | 73,117                                    |       | (17,515 | ) |
|                                                                          |       |                                      |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                         |       | 36,934                                    |       | (33,102 | ) |
|                                                                          |       |                                      |       |   |   |
| Cash and  cash equivalents, beginning of period                               |       | 52,408                                    |       | 110,269 |   |
|                                                                          |       |                                      |       |   |   |
| CASH AND  CASH EQUIVALENTS, END OF PERIOD                                     |       | $                                         | 89,342     |   | $ | 77,167 |   |

 

5

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The accompanying notes are anintegral part of these financial statements

 

6

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**PSBBANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENT OF COMPREHENSIVE INCOME**

**(In thousands)**

 
| ** **                                                               | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | **(Unaudited)**                             | ** ** | **(Unaudited)**                            | ** ** |
| Net income                                                               |       | $                                           | 260        |                                       | $          | 447 |   | $ | 1,313 |   | $ | 1,511 |   |
|                                                                     |       |                                        |       |                                       |       |   |   |   |   |
| Other  comprehensive income, net of tax:                                 |       |                                        |       |                                       |       |   |   |   |   |
|                                                                     |       |                                        |       |                                       |       |   |   |   |   |
| Accumulated  comprehensive income (loss), investments available for sale |       | 742                                         |       | (1,014                                     | )          | 55 |   | (1,458 | ) |
|                                                                     |       |                                        |       |                                       |       |   |   |   |   |
| Comprehensive  income (loss)                                             |       | $                                           | 1,002      |                                       | $          | (567 | ) | $ | 1,368 |   | $ | 53 |   |

 

The accompanying notes are anintegral part of these financial statements

 

7

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**PSB BANCORP, INC.**

**NOTES** TO FINANCIAL STATEMENTS

**SEPTEMBER 30, 2004**

**(Unaudited)**

 

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

 

This quarterly reportpresents the consolidated financial statements of PSB Bancorp, Inc.(“PSB”) andits subsidiaries.

 

PSB’s financial statementsreflect all adjustments and disclosures which management believes are necessaryfor a fair presentation of interim results. The results of operation for the quarter presented does not necessarilyindicate the results that PSB will achieve for all of 2004.  You should read these interim financialstatements in conjunction with the consolidated financial statements andaccompanying notes that are presented in the PSB Bancorp, Inc. Annual Report onForm 10-K for the year ended December 31, 2003.

 

The financial information inthis quarterly report has been prepared in accordance with PSB’s customaryaccounting 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 and ExchangeCommission.

 

**2.****             ****Pension Plans**

 

Supplemental ExecutiveRetirement Plan

 

In the third quarter of 2004 First Penn Bankestablished a nonqualified, noncontributory Supplemental Executive RetirementPlan (the “Executive Plan”) for certain executives that provide for paymentsupon retirement, death or disability. The annual benefit is based on annual salary and bonuses (as defined inthe Executive Plan) plus interest. Expense related to the Executive Plan included in the consolidatedstatements of income is approximately $142,500 for the three month period endedSeptember 30, 2004.

 

Net periodic defined benefit pension expense for thethree months ended September 30, 2004 included the following components(in thousands):

 
| ** **                                       | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|
| Service cost                                     |       | $        | 140,000    |   |
| Interest  cost                                   |       | 2,500    |       |
| Expected  return on plan assets                  |       | 0        |       |
| Amortization  of prior service cost              |       | 0        |       |
| Amortization  of unrecognized net actuarial loss |       | 0        |       |
| Net periodic  benefit expense                    |       | $        | 142,500    |   |

 

8

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We currently expect to contribute approximately$142,500 to the Executive Plan with respect to 2004. We made contributions of$0 to the plan in the three month period ended September 30, 2004.

 

Net periodic defined benefit pension expense for thethree months ended September 30, 2004 and 2003 included the followingcomponents (in thousands):

 
| ** **                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Service cost                                     |       | $        | —     |     | $          | — |   |
| Interest  cost                                   |       | 16       |       | 16       |       |
| Expected  return on plan assets                  |       | 14       |       | 13       |       |
| Amortization  of prior service cost              |       | —   |       | —   |       |
| Amortization  of unrecognized net actuarial loss |       | —   |       | —   |       |
| Net periodic  benefit expense                    |       | $        | 3          |     | $          | 4 |   |

 

We currently expect to contribute approximately $20,865to our pension plan with respect to 2004. We are currently evaluating theimpact of the Pension Funding Equity Act enacted in April 2004 on ourprojected funding. We made contributions of $0 to the plan in the three monthperiod ended September 30, 2004.

 

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

 

PSB has appealed the U.S. District Court for theEastern District of Pennsylvania’s ruling in favor of the plaintiffs’ motionfor summary judgment regarding the validity of 895,240 stock optionspreviously declared void by PSB.  Pendingthe outcome of the appeal, PSB and the plaintiffs have entered into anagreement whereby shares of PSB common stock have been issued to the plaintiffsat the strike price of the contested options. However, both the shares of common stock and the proceeds of theexercise of the options have been escrowed pending the outcome of the appeal.

 

The following table illustrates the requireddisclosure of the reconciliation of the numerators and denominators of thebasic and diluted EPS computation.  Thecomputation of dilutive earnings per share now includes 895,240 shares of the1,371,200 options which were issued in connection with the 1999 First Bank ofPhiladelphia acquisition and were originally 

 

9

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deemed invalid by management.  These shares are considered to becontingently issuable shares and are required to be included in the calculationof diluted EPS and excluded from the calculation of basic EPS for the three andnine month period ended September 30, 2004, because they currently areheld in escrow and all or part may be returned pending the outcome of theappeal of the court ruling which rendered the options valid.  

 
| ** **                                                                  | ** ** | **Nine months ended September 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                                    |       | $                                              | 1,313      |   | 4,444 |   | $ | 0.30 |   |
|                                                                        |       |                                           |       |   |   |   |   |
| Effect of  dilutive stock options                                           |       | —                                         |       | 689 |   | (0.04 | ) |
|                                                                        |       |                                           |       |   |   |   |   |
| Diluted  earnings per share                                                 |       |                                           |       |   |   |   |   |
| Income  available to common stockholders plus effect of dilutive securities |       | $                                              | 1,313      |   | 5,133 |   | $ | 0.26 |   |

 

Therewere 2,128 options that were anti-dilutive for the nine months ended September 30,2004.

 
| ** **                                                                  | ** ** | **Three months ended September 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                                    |       | $                                               | 260        |   | 4,437 |   | $ | 0.06 |   |
|                                                                        |       |                                            |       |   |   |   |   |
| Effect of  dilutive stock options                                           |       | —                                          |       | 728 |   | (0.01 | ) |
|                                                                        |       |                                            |       |   |   |   |   |
| Diluted  earnings per share                                                 |       |                                            |       |   |   |   |   |
|                                                                        |       |                                            |       |   |   |   |   |
| Income  available to common stockholders plus effect of dilutive securities |       | $                                               | 260        |   | 5,165 |   | $ | 0.05 |   |

 

Therewere no options that were anti-dilutive for the three months ended September 30,2004.

 
| ** **                                                                  | ** ** | **Nine months ended September 30,  2003** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income (numerator)**                         | ** ** | **Weighted  average shares (denominator)** | ** ** | **Per share  amount** | ** ** |
| ** **                                                                  | ** ** | **(In thousands, except per share  data)**     | ** ** |
| Basic  earnings per share                                                   |       |                                           |       |   |   |   |   |
|                                                                        |       |                                           |       |   |   |   |   |
| Income  available to common stockholders                                    |       | $                                              | 1,511      |   | 4,238 |   | $ | 0.36 |   |
|                                                                        |       |                                           |       |   |   |   |   |
| Effect of  dilutive stock options                                           |       | —                                         |       | 84 |   | (0.01 | ) |
|                                                                        |       |                                           |       |   |   |   |   |
| Diluted  earnings per share                                                 |       |                                           |       |   |   |   |   |
|                                                                        |       |                                           |       |   |   |   |   |
| Income  available to common stockholders plus effect of dilutive securities |       | $                                              | 1,511      |   | 4,322 |   | $ | 0.35 |   |

 

10

----

 

No options were anti-dilutive at September 30,2003.

 
| ** **                                                                  | ** ** | **Three months ended September 30,  2003** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                         | ** ** | **Weighted  average shares (denominator)** | ** ** | **Per share  amount** | ** ** |
| ** **                                                                  | ** ** | **(In thousands, except per share  data)**      | ** ** |
| Basic  earnings per share                                                   |       |                                            |       |   |   |   |   |
|                                                                        |       |                                            |       |   |   |   |   |
| Income  available to common stockholders                                    |       | $                                               | 447        |   | 4,230 |   | $ | 0.11 |   |
|                                                                        |       |                                            |       |   |   |   |   |
| Effect of  dilutive stock options                                           |       | —                                          |       | 92 |   | (0.01 | ) |
|                                                                        |       |                                            |       |   |   |   |   |
| Diluted  earnings per share                                                 |       |                                            |       |   |   |   |   |
|                                                                        |       |                                            |       |   |   |   |   |
| Income  available to common stockholders plus effect of dilutive securities |       | $                                               | 447        |   | 4,322 |   | $ | 0.10 |   |

 

No options were anti-dilutive at September 30,2003.

 

**4.****             ****Stock-Based Compensation**

 

In the second quarter of 2004, PSB awarded a totalof 200,000 restricted shares of common stock to executives of PSB pursuant tothe provisions of PSB’s stock incentive plans.  Shares awarded are earned at a rate of twenty percent (20%) of theaggregate number of shares covered by the share award at the end of each full12 month period following the date of the grant.  However, upon a Change of Control (as definedin the stock incentive plan), all awards vest immediately.  Expense related to the stock awards includedin the consolidated statements of income is $116,000 for the three month periodended September 30, 2004.

 

During the nine months ended September 30,2004, there  were 1,020,000 stock optionsgranted.  The fair value of each optiongranted during this period was $2.27. The fair value was estimated on the date of grant using the BlackScholes pricing model with the following assumptions:  no dividend yield, expected volatility 27.00%,a risk-free interest rate of 3.30% and an expected life of 3.00 years.

 

11

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Had compensation costs for the first nine monthsbeen determined based on the fair value of the options at the grant dates consistentwith the method SFAS No. 123 “Accounting for Stock-Based Compensation,”PSB’s net income and earnings per share, basic and diluted, would have been asreduced to the pro forma amounts indicated below for the three and ninemonth periods ended September 30, 2004:

 
| ** **                               | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(In thousands except per share data)** | ** ** | **2004**                                           | ** ** | **2003**                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                     |       |                                               |       |                                              |       |   |   |   |   |
| Net income  as reported                  |       | $                                                  | 260        |                                              | $          | 447 |   | $ | 1,313 |   | $ | 1,511 |   |
| Less:  stock-based compensation costs    |       | (16                                                | )          | (24                                               | )          | (2,334 | ) | (40 | ) |
| Pro forma net  (loss) income             |       | 244                                                |       | 423                                               |       | (1,021 | ) | 1,471 |   |
| Earnings Per  Share Basic:               |       |                                               |       |                                              |       |   |   |   |   |
| As reported                              |       | $                                                  | 0.06       |                                              | $          | 0.11 |   | $ | 0.29 |   | 0.36 |   |
| Pro forma                           |       | $                                                  | 0.05       |                                              | $          | 0.11 |   | ($0.23 | ) | 0.35 |   |
| Earnings Per  Share Diluted:             |       |                                               |       |                                              |       |   |   |   |   |
| As Reported                              |       | $                                                  | 0.05       |                                              | $          | 0.10 |   | $ | 0.25 |   | 0.35 |   |
| Pro forma                                |       | $                                                  | 0.05       |                                              | $          | 0.10 |   | ($0.20 | ) | 0.34 |   |
|                                          |            |                                                    |            |                                                   |            |  |  |  |  |  |  |  |  |

 

**5.****             ****Regulatory Matters**

 

After several regulatory examinations,effective August 16, 2004, the Memorandum of Understanding entered into on April 14,2003, between PSB and the Federal Reserve Bank of Philadelphia was terminated.

 

**6.****             ****New Accounting Pronouncements**

 

12

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In November 2003, the Emerging Issues TaskForce (EITF) of the FASB issued EITF Abstract 03-1, *The Meaning of Other-Than-Temporary Impairment and its Application toCertain Investments*(EITF 03-1). The quantitative and qualitative disclosure provisions of EITF 03-1 wereeffective for years ending after December 15, 2003 and were included inPSB’s 2003 Form 10-K.  In March 2004,the EITF issued a Consensus on Issue 03-1 requiring that the provisions of EITF03-1 be applied for reporting periods beginning after June 15, 2004 toinvestments accounted for under SFAS No. 115 and 124. EITF 03-1 establishes athree-step approach for determining whether an investment is consideredimpaired, whether that impairment is other-than-temporary, and the measurementof an impairment loss. In September 2004, the FASB issued a proposed StaffPosition, EITF Issue 03-1-a, *ImplementationGuidance for the Application of Paragraph 16 of EITF 03-1* (EITF03-1-a).  EITF 03-1-a would provideimplementation guidance with respect to debt securities that are impairedsolely due to interest rates and/or sector spreads and analyzed for other-

 

13

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than-temporary impairment under paragraph 16 of EITF03-1.  In September 2004, the FASBissued a Staff Position, EITF Issue 03-1-1*,Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1*(EITF03-1-1).  FSP EITF Issue No. 03-1-1, *Effective Date of Paragraphs 10-20 of EITF Issue No.03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments* delays the effective date of certain provisionsof EITF Issue 03-1, including steps two and three of the Issue’s three-stepapproach for determining whether an investment is other-than-temporarilyimpaired.  However, step one of that approach must still be initiallyapplied for impairment evaluations in reporting periods beginning after June 15,2004. The delay of the effective date for paragraphs 10-20 of EITF Issue 03-1will be superseded with the final issuance of proposed FSP EITF Issue 03-1-a*, Implementation Guidance for the Application of Paragraph 16 of EITFIssue No. 03-1, ‘‘The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments.* PSB is currently evaluating thisproposed statement and its effects on its results of operations.

 

**7.****             ****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”) andformed two new subsidiaries, one adopting the MPS name and the other, AvantiCapital, Inc, a registered investment advisory company.  During the year ended December 31, 2001,and 2000, PSB purchased an additional 375,000 shares and 500,000 shares,respectively, of the Preferred Stock for $1.00 per share for a total cost$875,000.  On December 27, 2002, thefounding shareholders of Iron Bridge purchased from PSB 304,350 shares ofpreferred stock for $0.88 per share, which was the average cost per share paidby PSB for these shares.  PSB currentlyowns 87.7% of the Preferred Stock, which represents a 49.9% fully dilutedownership interest in Iron Bridge.  TheIron Bridge subsidiary, MPS, is a nationally recognized firm deliveringcost-effective solutions for high performance total balance sheet management tobanks, thrifts, credit unions and other financial institutions.

 

In the first quarter of 2004 PSB adopted FASB interpretationNo. 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 thefirst quarter of 2004.

 

The consolidation of Iron Bridge resulted in PSBrecording goodwill of $1,424,957 and minority interest of $168,320.  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 valuation methodologies. Ifthe fair value of the 

 

14

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reporting unit exceeds its then book value, nowrite-down of recorded goodwill is necessary. If the fair value of a reporting unit is less, an expense may berequired on PSB’s books to write down the related goodwill to the propercarrying value.  As of September 30,2004, PSB completed its transitional testing, and determined that no impairmentwrite-off was necessary.  No assurancecan be given that future goodwill impairment tests will not result in a chargeto earnings.

 

**8.****             ****Reclassifications**

 

Certain 2003 amounts have been reclassified toconform to the 2004 presentation.

 

15

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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 theBank’s net interest income, which is the difference between interest income oninterest-earning assets, and interest expense on its interest-bearingliabilities.  The Bank’s interest-earningassets consist primarily of loans receivable and investment securities, whileits interest-bearing liabilities consist primarily of deposits and borrowings.  The Bank’s net income is also affected by itsprovision for loan losses and its level of non-interest income as well as byits non-interest expense, such as salary, employee benefits, occupancy costs,and charges relating to non-performing and other classified assets.

 

**Impact of Inflation**

 

The financial statements and related financial datapresented herein have been prepared in accordance with generally acceptedaccounting principles which require the measurement of financial position andoperating results in terms of historical dollars without considering changes inthe relative 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.

 

**Critial Accounting Policies, Judgments and Estimates**

 

**Allowance for Credit 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 

 

16

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additionsto the allowance for loan losses based on their judgments about informationavailable to them at the time of their examination.

 

**Performance Overview**

 

PSB’s net income for the third quarter of 2004 was$260,000 or $0.05 on a diluted per share basis, compared to net income of$477,000 or $0.10 per diluted share for the third quarter of 2003.  The decrease in net income for the thirdquarter of 2004 compared to the third quarter of 2003 is due to increases insalaries and employee benefits, occupancy and equipment expense, and anincrease in PSB’s provision for loan losses.

 

PSB’s net interest margin decreased by 47 basispoints from 3.97% for the three months ended September 30, 2004 to 3.50%for the same period in 2003.

 

**Net Income**

 

PSB’s net income totaled $260,000 and $447,000 forthe three months ended September 30, 2004 and 2003, respectively.  PSB’s basic and diluted earnings per sharefor the three months ended September 30, 2004, were $0.06 and $0.05respectively, compared to $0.11 and $0.10 per share for the three months ended September 30,2003.

 

PSB’s net income for the nine months ended September 30,2004, totaled $1.3 million compared to $1.5 million for the sameperiod in 2003.  PSB’s basic and dilutedearnings per share for the nine months ended September 30, 2004 were $0.30and $0.26 respectively, compared to $0.36 and $0.35 for the basic and dilutedearnings for the nine months ended September 30, 2003.

 

**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 third quarter of 2004 was $4.5 million, unchanged from the thirdquarter of 2003.  Net interest income forthe nine month period ended September 30, 2004, was $13.9 millioncompared to $13.3 million for the same period in 2003, or a 4.51%increase.  This increase is primarilyattributable to an overall lower cost of funds that increased the interest ratespread for the period.

 

Overall, average total interest-earning assetsprovided a yield of 5.30% for the three months ended September 30, 2004,compared to 5.84% for the same period in 2003. Average total loans were $331.9 million for the three months ended September 30,2004, and provided a yield of 6.83% for the period, compared to average totalloans of $276.4 million for the three months ended September 30,2003, which provided a yield of 8.03% for the period.

 

Average total interest-bearing liabilities increasedfrom $401.3 million to $451.1 million or 12.41% for the three monthsended September 30, 2004 compared to the three-month period ended September 30,2003.  The average rate on totalinterest-bearing liabilities decreased 9 basis points from 2.12% for thethree months ended September 30, 2003 to 2.03% for the three months ended September 30,2004.  The increase in interest-bearingliabilities resulted from increases in

 

17

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certificatesof deposit and NOW checking accounts. The decrease in the overall rate paid on interest-bearing liabilitieswas due to PSB’s ability to decrease the rate paid on all of itsinterest-bearing liabilities.

 

Overall, average total interest-earning assetsprovided a yield of 5.59% for the nine months ended September 30, 2004,compared to 6.01% for the same period in 2003. Average total loans of $312.1 million for the nine months ended September 30,2004, provided a yield of 7.17%, compared to average total loans of$291.0 million for the nine months ended September 30, 2003, thatprovided a yield of 8.11%.  The increasein average total loans was primarily due to an increase in multi-familyresidential mortgage loans, nonresidential mortgage loans and commercial loans.

 

Average total interest-bearing liabilities increasedfrom $416.4 million to $419.7 million or 0.79% for the nine monthsended September 30, 2004 compared to the nine months ended September 30,2003.  The primary reason for the changein total interest-bearing liabilities was a increase in certificates of depositand NOW checking accounts.  The averagerate on interest-bearing liabilities for the nine month period ending September 30,2004, decreased 52 basis points from 2.44% for the nine months ended September 30,2003, to 1.92% for the nine months ended September 30, 2004.

 

**Provision for Loan Losses**

 

The provision for loan losses represents the chargeagainst earnings that is required to fund the allowance for loanlosses.   PSB determines the level of the allowance for loan lossesthrough a regular review of the loan portfolio.   Management’sevaluation of the adequacy of the allowance for loan losses is based upon anexamination of the portfolio as well as such factors as declining trends, thevolume of loan concentrations, adverse situations that may affect the borrower’sability to pay, prior loss experience within the portfolio, current economicconditions and the results of the most recent regulatory examinations.  PSB made a provision of $90,000 for loanlosses during the nine months ended September 30, 2004 and made aprovision of $45,000 for the nine months ended September 30, 2003.Additionally,  PSB had charge-offsagainst the allowance for loan losses of $304,000 and $574,000 and recoveriesof $176,000 and $130,000 during the nine month periods ended September 30,2004 and 2003, respectively.

 

18

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**Average Balance Sheets and Rate/Yield Analysis**

 

Net interestincome is affected by changes in both average interest rates and averagevolumes of interest-earning assets and interest-bearing liabilities.  The following tables present the averagedaily balances of assets, liabilities, and shareholders’ equity and therespective interest earned or paid on interest-earning assets andinterest-bearing liabilities, as well as average rates for the periodindicated:

 
| ** **                                                               | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | **Average  Balance**                       | ** ** | **Interest** | ** ** | **Yield/****Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)**                 | ** ** |
| **ASSETS**                                                               |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                 |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits                                                |       | $                                          | 82,933     |   | $ | 265 |   | 1.28 | % | $ | 87,342 |   | $ | 189 |   | 0.87 | % |
| Investment securities                                                    |       | 50,826                                     |       | 400 |   | 3.15 |   | 61,339 |   | 460 |   | 3.00 |   |
| Mortgage-backed securities                                               |       | 43,089                                     |       | 411 |   | 3.82 |   | 29,957 |   | 445 |   | 5.94 |   |
| Loans                                                                    |       | 331,904                                    |       | 5,666 |   | 6.83 |   | 276,379 |   | 5,550 |   | 8.03 |   |
| Total interest-earning assets                                            |       | 508,752                                    |       | $ | 6,742 |   | 5.30 | % | 455,017 |   | $ | 6,644 |   | 5.84 | % |
| Noninterest-earning assets                                               |       | 27,877                                     |       |   |   |   |   | 28,160 |   |   |   |   |   |
| Total assets                                                             |       | $                                          | 536,629    |   |   |   |   |   | $ | 483,177 |   |   |   |   |   |
|                                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Now checking accounts                                                    |       | $                                          | 27,293     |   | $ | 32 |   | 0.47 | % | $ | 22,737 |   | $ | 34 |   | 0.60 | % |
| Money market accounts                                                    |       | 67,823                                     |       | 195 |   | 1.15 |   | 73,099 |   | 169 |   | 0.92 |   |
| Savings deposits                                                         |       | 90,014                                     |       | 242 |   | 1.08 |   | 93,803 |   | 328 |   | 1.40 |   |
| Certificates                                                             |       | 264,855                                    |       | 1,817 |   | 2.74 |   | 210,584 |   | 1,592 |   | 3.02 |   |
| Total deposits                                                           |       | 449,985                                    |       | 2,286 |   | 1.02 | % | 400,223 |   | 2,123 |   | 2.12 |   |
| Borrowed money                                                           |       | 1,108                                      |       | 6 |   | 2.17 |   | 1,095 |   | 6 |   | 2.19 |   |
| Total interest-bearing  liabilities                                      |       | 451,093                                    |       | $ | 2,292 |   | 2.03 | % | 401,318 |   | $ | 2,129 |   | 2.12 | % |
| Non-interest-bearing  liabilities                                        |       | 35,972                                     |       |   |   |   |   | 34,947 |   |   |   |   |   |
| Total liabilities                                                        |       | 487,065                                    |       |   |   |   |   | 436,265 |   |   |   |   |   |
| Shareholders’ equity                                                |       | 49,564                                     |       |   |   |   |   | 46,912 |   |   |   |   |   |
|                                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and  shareholders’ equity                         |       | $                                          | 536,629    |   |   |   |   |   | $ | 483,177 |   |   |   |   |   |
| Net interest income                                                      |       |                                       |       | $ | 4,450 |   |   |   |   |   | $ | 4,515 |   |   |   |
| Interest rate spread                                                     |       |                                       |       |   |   | 3.27 | % |   |   |   |   | 3.72 | % |
| Net yield on interest-earning  assets                                    |       |                                       |       |   |   | 3.50 | % |   |   |   |   | 3.97 | % |
|                                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Ratio of interest-earning  assets to  interest-bearing  liabilities |       |                                       |       |   |   | 1.15 | x |   |   |   |   | 1.15 | x |

 

19

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| ** **                                                               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | **Average  Balance**                      | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)**                | ** ** |
| **ASSETS**                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits                                                |       | $                                         | 64,527     |   | $ | 515 |   | 1.06 | % | $ | 108,455 |   | $ | 879 |   | 1.08 | % |
| Investment securities                                                    |       | 51,311                                    |       | 1,106 |   | 2.87 |   | 30,725 |   | 781 |   | 3.39 |   |
| Mortgage-backed securities                                               |       | 47,144                                    |       | 1,511 |   | 4.27 |   | 33,683 |   | 1,542 |   | 6.10 |   |
| Loans                                                                    |       | 312,056                                   |       | 16,773 |   | 7.17 |   | 291,027 |   | 17,706 |   | 8.11 |   |
| Total interest-earning assets                                            |       | 475,038                                   |       | $ | 19,905 |   | 5.59 | % | 463,890 |   | $ | 20,908 |   | 6.01 | % |
| Noninterest-earning assets                                               |       | 25,095                                    |       |   |   |   |   | 25,778 |   |   |   |   |   |
| Total assets                                                             |       | $                                         | 500,133    |   |   |   |   |   | $ | 489,668 |   |   |   |   |   |
|                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Now checking accounts                                                    |       | $                                         | 26,7636    |   | $ | 99 |   | 0.49 | % | $ | 22,043 |   | $ | 161 |   | 0.97 | % |
| Money market accounts                                                    |       | 69,103                                    |       | 611 |   | 1.18 |   | 71,367 |   | 783 |   | 1.46 |   |
| Savings deposits                                                         |       | 91,291                                    |       | 758 |   | 1.11 |   | 93,749 |   | 1,155 |   | 1.64 |   |
| Certificates                                                             |       | 231,502                                   |       | 4,552 |   | 2.62 |   | 228,121 |   | 5,513 |   | 3.22 |   |
| Total deposits                                                           |       | 418,632                                   |       | 6,020 |   | 1.92 |   | 415,280 |   | 7,612 |   | 2.44 |   |
| Borrowed money                                                           |       | 1,105                                     |       | 17 |   | 2.05 |   | 1,090 |   | 22 |   | 2.69 |   |
| Total interest-bearing  liabilities                                      |       | 419,737                                   |       | $ | 6,037 |   | 1.92 | % | 416,370 |   | $ | 7,634 |   | 2.44 | % |
| Non-interest-bearing  liabilities                                        |       | 31,845                                    |       |   |   |   |   | 26,575 |   |   |   |   |   |
| Total liabilities                                                        |       | 451,582                                   |       |   |   |   |   | 442,945 |   |   |   |   |   |
| Shareholders’ equity                                                |       | 48,551                                    |       |   |   |   |   | 46,723 |   |   |   |   |   |
|                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and  shareholders’ equity                         |       | $                                         | 500,133    |   |   |   |   |   | $ | 489,668 |   |   |   |   |   |
| Net interest income                                                      |       |                                      |       | $ | 13,868 |   |   |   |   |   | $ | 13,274 |   |   |   |
| Interest rate spread                                                     |       |                                      |       |   |   | 3.67 | % |   |   |   |   | 3.56 | % |
| Net yield on interest-earning  assets                                    |       |                                      |       |   |   | 3.89 | % |   |   |   |   | 3.82 | % |
| Ratio of interest-earning  assets to  interest-bearing  liabilities |       |                                      |       |   |   | 1.13 | x |   |   |   |   | 1.11 | x |

 

**Allowance for Loan Losses**

 

The allowance forloan losses is established through a provision for loan losses charged toexpense.  Loans are charged against theallowance for possible loan losses when management believes that thecollectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate toabsorb loan losses on existing loans that may become uncollectible based onevaluations of the collectibility of loans and prior loan loss experience.  The evaluations take into consideration suchfactors as changes in the nature and volume of the loan portfolio, overall portfolioquality, review of specific problem loans and current economic conditions thatmay affect the borrower’s ability to pay. These estimates are particularly susceptible to changes that may resultin a material adjustment to the allowance for loan losses.

 

20

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Asadjustments become identified, they are reported in earnings for the period inwhich they become known.  Managementbelieves that it makes an informed judgment based upon available information.

 

It is theobjective of PSB’s evaluation process to establish the following components ofthe allowance for loan losses:  aspecific allocation for certain identified loans, a general allocation forpools of loans based on risk rating, and a general allocation for inherent loanportfolio losses.  Management performscurrent evaluations of its criticized and classified loan portfolios andassigns specific reserves that reflect the current risk to PSB.  A general reserve allocation is applied forpools of loans based on risk rating for all loans not specifically reserved foras described previously.  The methodologyused to calculate the provision is consistent with the guidance provided in SABNo. 102.  Management reviews the adequacyof its allowance on an ongoing basis and will provide, as management may deemnecessary, for additional provisions in future periods.

 

PSB accounts forits impaired loans in accordance with SFAS No. 114, “Accounting by Creditorsfor Impairment of a Loan,” as amended by SFAS No. 118, “Accounting by Creditorsfor Impairment of a Loan - Income Recognition and Disclosures.”  This standard requires that a creditormeasure impairment based on the present value of expected future cash flowdiscounted at the loan’s effective interest rate, except that, as a practicalexpedient, a creditor may measure impairment based on a loan’s observablemarket price, or the fair value of the collateral if the loan is collateraldependent.  Regardless of the measurementmethod, a creditor must measure impairment based on the fair value of the collateralwhen the creditor determines that foreclosure is probable.

 

**Non-interest Income**

 

Non-interestincome consists of service charges, rental income, other income and gain on thesale of loans.  Non-interest income forthe Bank increased $7,000 or 1.45% to $490,000 for the three months endedSeptember 30, 2004, from $483,000 for the same period in the prior year.  It decreased by $46,000, or 6.25%, to $1.5million for the nine month ending September 30, 2004 from $1.6 million in theprior comparative period.  The amount ofother non-operating income listed separately on the Consolidated Statements ofIncome for the three and nine months periods ended September 30, 2004 was$507,000 and $1.6 million resulting from an accounting change that requiredthat PSB consolidate the financial results of Iron Bridge as part of theadoption of FIN 46(R).  The investment inIron Bridge is more fully described in Note 7 to the Consolidated FinancialStatements.

 

**Non-interest Expense**

 

Non-interestexpense for the Bank increased $168,000 or 4.65%, to $4.5 million for thethree months ended September 30, 2004, from $4.3 million for the sameperiod in the prior year.  Non-interestexpense increased by $772,000, or 6.40%, to $13.3 million for the ninemonths ending September 30, 2004 from $12.5 million in the priorcomparative period.  The primary reasonsfor the increase in non-interest expense in both the three and nine monthcomparative periods were increases in salaries and employee benefits andoccupancy and equipment expense.

 

21

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Theamount of other non-operating expense listed separately on the ConsolidatedStatements of Income for the three and nine month periods endedSeptember 30, 2004 was $465,000 and $1.6 million resulting from anaccounting change that required that PSB consolidate the financial results ofIron Bridge as part of the adoption of FIN 46(R).  The investment in Iron Bridge is more fullydescribed in Note 7 to the Consolidated Financial Statements.

 

The followingtable provides a summary of non-interest expense, by category of expense, forthe nine months ended September 30, 2004, and 2003:

 
| ** **                       | ** ** | **Nine months ended September  30,** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                       | ** ** | **(In thousands)**                        | ** ** |
|                             |       |                                      |       |   |   |
| Salaries and employment benefits |       | $                                         | 7,193      |   | $ | 6,667 |   |
| Rent and occupancy expense       |       | 1,751                                     |       | 1,543 |   |
| Professional fees                |       | 635                                       |       | 779 |   |
| FDIC insurance expense           |       | 149                                       |       | 125 |   |
| General insurance                |       | 220                                       |       | 178 |   |
| Advertising                      |       | 218                                       |       | 126 |   |
| Data processing fees             |       | 134                                       |       | 240 |   |
| Director fees                    |       | 184                                       |       | 205 |   |
| Other operating expense          |       | 2,827                                     |       | 2,676 |   |
| Other non-operating expense      |       | 1,622                                     |       | — |   |
| Total                            |       | $                                         | 14,933     |   | $ | 12,539 |   |

 

**Provisionfor Income Taxes**

 

Income taxprovisions for the three and nine month periods ended September 30, 2004were $134,000 and $676,000, respectively, compared to $221,000 and $728,000,respectively, for the same periods in 2003.

 

**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 $186 million credit facility with theFederal Home Loan Bank (“FHLB”). Advances are secured by FHLB stock and qualifying mortgage loans. PSBhad no outstanding borrowings from the FHLB as of September 30, 2004.

 

22

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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 nine months endedSeptember 30, 2004, net cash used in operating activities was $22.6 million,compared to net cash used in operating activities of $27.3 million for thesame period of 2003.  During the ninemonths ended September 30, 2004, net cash used in investing activities was$13.5 million, compared to net cash provided by investing activities of$11.7 million for the same period of 2003. Financing activities provided net cash of $73.1 million during thenine months ended September 30, 2004, compared to $17.5 million innet cash used in financing activities for the same period of 2003.  The net result of these items was a$36.9 million increase in cash and cash equivalents for the nine monthsended September 30, 2004, compared to a $33.1 million decrease incash and cash equivalents for the same period of 2003.

 

**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 interest incomeunder 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.  AtSeptember 30, 2004, PSB was required to have a minimum Tier I andtotal capital ratios of 6.0% and 10.0%, respectively, and a minimum Tier Ileverage ratio of 5.0%.  PSB’s actualTier I and total capital ratios at September 30, 2004, were 14.86%and 15.75%, respectively, and PSB’s Tier I leverage ratio was 9.37%.  These ratios exceed the requirements forclassification as a “well capitalized” institution, the industry’s highestcapital category.

 

OnSeptember 30, 2004, PSB was in compliance with regulatory capitalrequirements as shown in the following table:

 

23

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| ** **                           | ** ** | **Well Capitalized**       | ** ** | **At September 30, 2004** | ** ** | **At December 31, 2003** | ** ** |
|--------------------------------------|------------|----------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | **Ratios**                 | ** ** | **PSB**                   | ** ** | **Bank**                 | ** ** | **PSB** | ** ** | **Bank** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)** | ** ** |
| Tier I Capital                       |       |                       |       | $                         | 50,149     |                     | $          | 39,173 |   | $ | 45,918 |   | $ | 37,394 |   |
| Tier II Capital                      |       |                       |       | 3,031                     |       | 3,031                    |       | 3,069 |   | `3,069 |   |
| Total Qualifying Capital             |       |                       |       | $                         | 53,180     |                     | $          | 42,204 |   | $ | 48,987 |   | $ | 40,463 |   |
|                                 |       |                       |       |                      |       |                     |       |   |   |   |   |
| Risk Adjusted Total Assets           |       |                       |       | $                         | 337,590    |                     | $          | 334,597 |   | $ | 302,032 |   | $ | 300,301 |   |
|                                 |       |                       |       |                      |       |                     |       |   |   |   |   |
| Tier I Risk Based Capital Ratio |       | 6.00                       | %          | 14.86                     | %          | 11.71                    | %          | 15.20 | % | 12.45 | % |
| Total Risk Based Capital Ratio       |       | 10.00                      | %          | 15.75                     | %          | 12.61                    | %          | 16.22 | % | 13.47 | % |
| Leverage Ratio                       |       | 5.00                       | %          | 9.37                      | %          | 7.53                     | %          | 9.72 | % | 7.94 | % |
|                                 |       |                       |       |                      |       |                     |       |   |   |   |   |
| Average Assets                       |       |                       |       | $                         | 535,203    |                     | $          | 520,139 |   | $ | 472,474 |   | $ | 470,766 |   |

 

**FINANCIALCONDITION**

 

**General**

 

PSB’s total assetsincreased $73.8 million from $470.3 at December 31, 2003, to$544.2 million, as of September 30, 2004 an increase of 15.7%.  Net loans outstanding grew by$25.8 million or 10.86%, and cash and cash equivalents grew by 70.47% to$89.3 million during the nine months of 2004. The increase in loans was funded by an increase in deposits.  Total deposits equaled $487.4 million,an increase of $71.2 million or 17.11% during 2004.

 

At September 30,2004, PSB’s net loan portfolio totaled $263.2 million compared to$237.4 million at December 31, 2003. The increased business development efforts as part of the banks overallstrategic plan, coupled with quality, consistent underwriting, competitive pricingand fees led to an increase in the volume of five or more family residentialmortgage loans, non-residential mortgage loans and commercial loans asindicated in the tables below.

 

The followingtables summarize the loan portfolio of PSB by loan category and amount atSeptember 30, 2004, compared to December 31, 2003, respectively.  From time to time, TransNational MortgageCorp., a subsidiary of PSB, has originated and sold mortgage loans to thirdparty 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 to PSB’s general classifications (Dollarsin thousands):

 

24

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| ** **                      | ** ** | **At September 30,  2004** | ** ** | **At December 31,  2003** | ** ** | ** ** | ** ** | ** **  | ** ** |
|---------------------------------|------------|----------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **                      | ** ** | **Amount**                 | ** ** | **Percent**                    | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Variance** | ** ** | **% Change** | ** ** |
| Real Estate Loans(1):           |       |                       |       |                           |       |       |       |        |       |   |   |   |   |
| One-to-four family(2)           |       | $                          | 64,630     |                           | 24.27      | %          | $          | 65,385      |       | 27.15 | % | $ | (755 | ) | -1.15 | % |
| Construction loans              |       | 10,387                     |       | 3.90                           | %          | 18,444     |       | 7.66        | %          | (8,057 | ) | -43.68 | % |
| Five or more family residential |       | 18,424                     |       | 6.92                           | %          | 14,055     |       | 5.84        | %          | 4,369 |   | 31.09 | % |
| Nonresidential                  |       | 118,638                    |       | 44.55                          | %          | 97,011     |       | 40.29       | %          | 21,627 |   | 22.29 | % |
|                            |       |                       |       |                           |       |       |       |        |       |   |   |   |   |
| Commercial loans                |       | 29,336                     |       | 11.02                          | %          | 21,854     |       | 9.08        | %          | 7,482 |   | 34.24 | % |
| Consumer loans                  |       | 24,866                     |       | 9.34                           | %          | 24,062     |       | 9.99        | %          | 804 |   | 3.34 | % |
| Total loans                     |       | $                          | 266,281    |                           | 100.00     | %          | $          | 240,811     |       | 100.00 | % | $ | 25,470 |   | 10.58 | % |
|                            |       |                       |       |                           |       |       |       |        |       |   |   |   |   |
| Less:                           |       |                       |       |                           |       |       |       |        |       |   |   |   |   |
| Unearned fees and discounts     |       | $                          | 86         |                           | $          | 359        |       |        |       |   |   |   |   |   |   |
| Allowance for loan losses       |       | 3,037                      |       | 3,069                          |       |       |       |        |       |   |   |   |   |
| Net Loans                       |       | $                          | 263.164    |                           | $          | 237,383    |       |        |       |   |   |   |   |   |   |

 

----

(1)               Real Estate Loans represent loanssecured by real estate

 

(2)               Does not include loans held for sale

 
| Total loans with: |   |   |    |   |   |   |   |    |   |
|-------------------|--------|--------|---------|--------|--------|--------|--------|---------|--------|
| Fixed rates       |   | $      | 166,487 |   | 62.52  | %      | $      | 157,235 |   | 65.29 | % |
| Adjustable rate   |   | 99,794 |    | 37.48  | %      | 83,576 |   | 34.71   | %      |
| Total loans       |   | $      | 266,281 |   | 100.00 | %      | $      | 240,811 |   | 100.00 | % |

 

Total investmentsecurities decreased $13.1 million, or 12.62%, to $90.6 million atSeptember 30, 2004, from $103.7 million at December 31, 2003.

 

The Bankimplemented a disciplined asset and liability management process to manage ourdeposit and loan pricing.  Through thisprocess we have significantly lowered our cost of deposits and reduced interestrate risk.  Our strategies have beendirected to increasing the attractiveness of our core deposit products.  As we continue to execute this strategy itwill provide the Bank with greater flexibility to react to changes in theinterest rate environment

 

**Asset Quality**

 

**Non-Performing Assets**

 

PSB’s level ofnon-performing assets increased $1.2 million or 21.42% to $6.8 million atSeptember 30, 2004, from $5.6 million at December 31, 2003.  As a matter of policy, the accrual of loaninterest is discontinued if management believes that, after consideringeconomic and business conditions and collection efforts, the borrower’sfinancial condition is such that collection of interest becomes doubtful.  This is normally done when a loan reaches90 days 

 

25

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delinquent.  At this time, all accrued but unpaid interestis reversed.  There are occasionalexceptions if the loans are in the process of collection and the loan is fullysecured.

 

Thefollowing table sets forth non-performing assets as of September 30, 2004and December 31, 2003:

 
| ** **                                                                              | ** ** | **At September 30,  2004** | ** ** | **At December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------|------------|
| ** **                                                                              | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                    |       |                       |       |                      |       |
| Loans past due 90 days or more  as to interest or principal and accruing  interest |       | $                          | —     |                      | $          | — |   |
| Nonaccrual loans                                                                        |       | 6,566                      |       | 5,203                     |       |
|                                                                                    |       |                       |       |                      |       |
| Total nonperforming loans                                                               |       | 6,566                      |       | 5,203                     |       |
| Real estate owned (REO)                                                                 |       | 214                        |       | 374                       |       |
| Total nonperforming assets                                                              |       | $                          | 6,780      |                      | $          | 5,577 |   |
|                                                                                    |       |                       |       |                      |       |
| Nonperforming loans to total  loans                                                     |       | 2.47                       | %          | 2.16                      | %          |
|                                                                                    |       |                       |       |                      |       |
| Nonperforming assets to total  assets                                                   |       | 1.25                       | %          | 1.19                      | %          |
|                                                                                    |       |                       |       |                      |       |
| Allowance for loan losses to  total loans                                               |       | 1.14                       | %          | 1.28                      | %          |
|                                                                                    |       |                       |       |                      |       |
| Allowance for loan losses to  nonperforming loans                                       |       | 46.16                      | %          | 58.99                     | %          |
|                                                                                    |       |                       |       |                      |       |
| Allowance for loan losses to  nonperforming assets                                      |       | 44.71                      | %          | 55.03                     | %          |
|                                                                                    |       |                       |       |                      |       |
| Net charge-offs as a percentage  of total loans                                         |       | 0.05                       | %          | 0.32                      | %          |

 

Note:  Totalloans includes loans held for sale

 

## **Item 3**. Quantitative and Qualitative Disclosures About Market Risk

##  

There has been nomaterial change in PSB’s assessment of its sensitivity to market risk since itspresentation in the 2003 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 ofSeptember30, 2004. Based on this evaluation, the Chief Executive Officer andChief Financial Officer concluded that PSB’s disclosure controls and proceduresare effective in alerting them in a timely manner to material informationrequired to be included in PSB’s SEC reports. In addition, PSB’s management, including the Chief Executive Officer andChief Financial Officer, reviewed PSB’s internal controls, and there have beenno significant changes in PSB’s internal controls or in 

 

26

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other factors that couldsignificantly affect those controls subsequent to the date of their lastevaluation.

 

# **PART II**.  OTHER INFORMATION

#  

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

##  

PSB hasappealed the U.S. District Court for the Eastern District of Pennsylvania’sruling in favor of the plaintiffs’ motion for summary judgment regarding thevalidity of 895,240 stock options previously declared void by PSB.  Pending the outcome of the appeal, PSB andthe plaintiffs have entered into an agreement whereby shares of PSB commonstock have been issued to the plaintiffs at the strike price of the contestedoptions.  However, both the shares of commonstock and the proceeds of the exercise of the options have been escrowedpending the outcome of the appeal.

 

## **Item 2.**           Unregistered Sales ofEquity Securities and Use of Proceeds.

##  

None

 

## **Item 3.**           Defaultsupon 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.

 
| 10.1*  |   | Supplemental  Executive Retirement Plan Agreement between PSB Bancorp, Inc. and Vincent J.  Fumo  |
|--------|--------|---------------------------------------------------------------------------------------------------|
|   |   |                                                                                              |
| 10.2*  |   | Supplemental  Executive Retirement Plan Agreement between PSB Bancorp, Inc. and Anthony  DiSandro |
|   |   |                                                                                              |
| 31.1   |   | Certification  of Anthony DiSandro pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.    |
|   |   |                                                                                              |
| 31.2   |   | Certification  of John Carrozza pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        |

 

27

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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. |
|----|--------|---------------------------------------------------------------------------------------------------------------------------|

 

----

*  Denotes Management Compensation Plan

 

**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, |
|               |               | Acting Chief  Financial Officer |
|               |               | (Principal  Financial Officer and |
|               |               | Chief Accounting Officer) |
|               |               |   |
| November 15,  2004 |               |   |

 

28

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Document**                                                                                                              |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------|
| 10.1*           |       | Supplemental  Executive Retirement Plan Agreement between PSB Bancorp, Inc. and Vincent J.  Fumo                          |
|            |       |                                                                                                                      |
| 10.2*           |       | Supplemental  Executive Retirement Plan Agreement between PSB Bancorp, Inc. and Anthony  DiSandro                         |
|            |       |                                                                                                                      |
| 31.1            |       | Certification  of Anthony DiSandro pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                            |
|            |       |                                                                                                                      |
| 31.2            |       | Certification  of John Carrozza pursuant to Section 302 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. |

 

----

* Denotes ManagementCompensation Plan

 

29

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