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

**Washington,DC  20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                             |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       | ** **                                                                                                                                                         |
|       |       | **for the quarterly period ended March 31,  2005 or**                                                                                                         |
|       |       | ** **                                                                                                                                                         |
| **o**      | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                            |
|       |       | ** **                                                                                                                                                         |
|       |       | **for the transition period  from                     .** |

 

**No. 000-24601**

**(Commission FileNumber)**

 

**PSB BANCORP, INC.**

(Exact Name of Registrant as Specified in itsCharter)

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

 

**1835 MarketStreet, Philadelphia, PA 19103**

(Address of Principal Executive Offices)

 

**(215) 979-7900**

(Registrant’s TelephoneNumber)

 

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

 

Yes  ý     No  o

 

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

 

Yes  o     No  ý

 

Numberof shares outstanding as of March 31, 2005

 
| **Common  Stock (no par value)** | ** ** | **4,893,609**        |
|----------------------------------|------------|----------------------|
| (Title of Class)                 |       | (Outstanding Shares) |

 

 

----

 

**PSB BANCORP, INC.**

**FORM 10-Q**

**FOR THE QUARTERENDED MARCH 31, 2005**

 

**TABLE OFCONTENTS**

 
| PART I.  | FINANCIAL INFORMATION |                                                                                                                        |
|---------------|-----------------------|-----------------------------------------------------------------------------------------------------------------------------|
|          |                  |                                                                                                                        |   |
|          | Item 1.          | Financial  Statements                                                                                                       |   |
|          |                  |                                                                                                                        |   |
|          |                  | Consolidated Statements of Financial Condition as of March 31,  2005 (unaudited) and December 31, 2004            |   |
|          |                  |                                                                                                                        |   |
|          |                  | Consolidated Statements of Income (unaudited) for the Three Month  Periods Ended March 31, 2005 and 2004               |   |
|          |                  |                                                                                                                        |   |
|          |                  | Consolidated  Statements of Cash Flows (unaudited) for the Three Month Periods Ended March 31,  2005 and 2004          |   |
|          |                  |                                                                                                                        |   |
|          |                  | Consolidated Statements of Comprehensive Income (unaudited) for the  Three Month Periods Ended March 31, 2005 and 2004 |   |
|          |                  |                                                                                                                        |   |
|          |                  | 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                                                                                                                    |   |

 

1

----

 

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

 

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

##  

**PSB BANCORP, INC. AND SUBSIDIARY**

**STATEMENTS OF FINANCIAL CONDITION**

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

 
| ** **                                                                                                                                                                            | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **(Unaudited)**          | ** ** | **(Audited)**               | ** ** |
| Assets                                                                                                                                                                                |       |                     |       |                        |       |
| Cash and due from banks                                                                                                                                                               |       | $                        | 7,554      |                        | $          | 4,355 |   |
| Interest-earning deposits with banks                                                                                                                                                  |       | 55,715                   |       | 49,964                      |       |
| Federal funds sold                                                                                                                                                                    |       | 2,654                    |       | 331                         |       |
| Total cash and cash equivalents                                                                                                                                                       |       | 65,923                   |       | 54,650                      |       |
|                                                                                                                                                                                  |       |                     |       |                        |       |
| Loans held-for-sale                                                                                                                                                                   |       | 1,018                    |       | 3,792                       |       |
| Investment securities available-for-sale,  at fair value                                                                                                                              |       | 89,619                   |       | 94,112                      |       |
| Investment securities held to maturity  (fair value $1,506 and $1,544)                                                                                                                |       | 1,510                    |       | 1,533                       |       |
| Federal Home Loan Bank stock – at cost                                                                                                                                           |       | 1,009                    |       | 1,308                       |       |
| Federal Reserve Bank stock – at cost                                                                                                                                             |       | 1,187                    |       | 1,139                       |       |
|                                                                                                                                                                                  |       |                     |       |                        |       |
| Loans                                                                                                                                                                                 |       | 355,411                  |       | 356,142                     |       |
| Less allowance for possible loans losses                                                                                                                                              |       | (3,201                   | )          | (3,157                      | )          |
| Net loans                                                                                                                                                                             |       | 352,210                  |       | 352,985                     |       |
| Accrued interest receivable                                                                                                                                                           |       | 2,269                    |       | 2,071                       |       |
| Premises and equipment, net                                                                                                                                                           |       | 2,655                    |       | 2,470                       |       |
| Bank-owned life insurance                                                                                                                                                             |       | 12,810                   |       | 12,696                      |       |
| Other assets                                                                                                                                                                          |       | 7,338                    |       | 6,321                       |       |
|                                                                                                                                                                                  |       | 25,072                   |       | 23,558                      |       |
| Total assets                                                                                                                                                                          |       | $                        | 537,548    |                        | $          | 533,077 |   |
|                                                                                                                                                                                  |       |                     |       |                        |       |
| Liabilities                                                                                                                                                                           |       |                     |       |                        |       |
| Deposits                                                                                                                                                                              |       |                     |       |                        |       |
| Non-interest bearing                                                                                                                                                                  |       | 37,497                   |       | 30,786                      |       |
| Interest bearing                                                                                                                                                                      |       | 441,835                  |       | 444,494                     |       |
|                                                                                                                                                                                  |       |                     |       |                        |       |
| Total deposits                                                                                                                                                                        |       | 479,332                  |       | 475,280                     |       |
|                                                                                                                                                                                  |       |                     |       |                        |       |
| Securities sold under agreements to  repurchase                                                                                                                                       |       | 1,116                    |       | 1,105                       |       |
| Advances from borrowers for taxes and  insurance                                                                                                                                      |       | 2,540                    |       | 3,114                       |       |
| Other liabilities                                                                                                                                                                     |       | 2,642                    |       | 1,421                       |       |
|                                                                                                                                                                                  |       | 6,298                    |       | 5,640                       |       |
| Total liabilities                                                                                                                                                                     |       | 485,630                  |       | 480,920                     |       |
|                                                                                                                                                                                  |       |                     |       |                        |       |
| Shareholders’ equity                                                                                                                                                             |       |                     |       |                        |       |
| Common stock authorized, 15,000,000 shares  no par value, 4,893,609 and 4,890,543 shares issued and outstanding on  March 31, 2005 and December 31, 2004, respectively |       | 45,437                   |       | 45,270                      |       |
| Retained earnings                                                                                                                                                                     |       | 9,563                    |       | 8,989                       |       |
| Accumulated other comprehensive loss                                                                                                                                                  |       | (1,454                   | )          | (440                        | )          |
| Employee stock ownership plan                                                                                                                                                         |       | (1,198                   | )          | (1,232                      | )          |
| Treasury stock, at cost, 78,187 and 78,187  on March 31, 2005 and December 31, 2004, respectively                                                                           |       | (430                     | )          | (430                        | )          |
|                                                                                                                                                                                  |       |                     |       |                        |       |
| Total shareholders’ equity                                                                                                                                                       |       | 51,918                   |       | 52,157                      |       |
|                                                                                                                                                                                  |       |                     |       |                        |       |
| Total liabilities and shareholders’ equity                                                                                                                                       |       | $                        | 537,548    |                        | $          | 533,077 |   |

 

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  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(Unaudited)**                        | ** ** |
| Interest income                                                        | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Loans, including fees                                                  |       | $                                      | 6,045      |   | $ | 5,226 |   |
| Investment securities                                                  |       | 834                                    |       | 918 |   |
| Deposits with banks                                                    |       | 309                                    |       | 90 |   |
| Total interest income                                                  |       | 7,188                                  |       | 6,234 |   |
|                                                                   |       |                                   |       |   |   |
| Interest expense                                                       |       |                                   |       |   |   |
| Interest on deposits                                                   |       | 2,489                                  |       | 1,797 |   |
| Interest on borrowings                                                 |       | 6                                      |       | 6 |   |
| Total interest expense                                                 |       | 2,495                                  |       | 1,803 |   |
|                                                                   |       |                                   |       |   |   |
| Net interest income                                                    |       | 4,693                                  |       | 4,431 |   |
|                                                                   |       |                                   |       |   |   |
| Provision for loan losses                                              |       | 135                                    |       | 0 |   |
|                                                                   |       |                                   |       |   |   |
| Net interest income after provision for  loan losses                   |       | 4,558                                  |       | 4,431 |   |
|                                                                   |       |                                   |       |   |   |
| Non-interest operating income                                          |       |                                   |       |   |   |
| Service fees on deposit accounts                                       |       | 322                                    |       | 276 |   |
| Loss on sale of real estate owned                                      |       | (38                                    | )          | (2 | ) |
| Banked owned life insurance                                            |       | 115                                    |       | 76 |   |
| Gain on sale of Investments Securities                                 |       | 420                                    |       | — |   |
| Other                                                                  |       | 113                                    |       | 123 |   |
|                                                                   |       | 932                                    |       | 473 |   |
|                                                                   |       |                                   |       |   |   |
| Non-interest expenses                                                  |       |                                   |       |   |   |
| Salaries and employee benefits                                         |       | 2,488                                  |       | 2,221 |   |
| Occupancy and equipment                                                |       | 648                                    |       | 564 |   |
| Other operating                                                        |       | 1,572                                  |       | 1,305 |   |
| Total non-interest expenses                                            |       | 4,708                                  |       | 4,090 |   |
|                                                                   |       |                                   |       |   |   |
| Income before net effect of income taxes  and Ironbridge consolidation |       | 782                                    |       | 814 |   |
|                                                                   |       |                                   |       |   |   |
| Net Effect of Ironbridge consolidation                                 |       | 35                                     |       | 32 |   |
|                                                                   |       |                                   |       |   |   |
| Income before net effect of income taxes                               |       | 817                                    |       | 846 |   |
| Income taxes                                                           |       | (246                                   | )          | (238 | ) |
|                                                                   |       |                                   |       |   |   |
| Net income                                                             |       | $                                      | 571        |   | $ | 608 |   |
|                                                                   |       |                                   |       |   |   |
| Net income per common share                                            |       |                                   |       |   |   |
| Basic:                                                                 |       | $                                      | 0.12       |   | $ | 0.14 |   |
|                                                                   |       |                                   |       |   |   |
| Diluted:                                                               |       | $                                      | 0.10       |   | $ | 0.14 |   |

 

The accompanying notes are anintegral part of these financial statements

 

3

----

 

**PSB BANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

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

 
| ** **                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                                    | ** ** | **(Unaudited)**                        | ** ** |
| CASH FLOW FROM OPERATING ACTIVITIES                                           |       |                                   |       |   |   |
| Adjustments to reconcile net income to net  cash                              |       |                                   |       |   |   |
| Net income                                                                    |       | $                                      | 571        |   | $ | 608 |   |
| Adjustments used in operating activities:                                     |       |                                   |       |   |   |
| Provision for possible loan losses                                            |       | 135                                    |       | — |   |
| Depreciation and amortization                                                 |       | 246                                    |       | 165 |   |
| Amortization of discounts and accretion of  premiums on investment securities |       | 56                                     |       | (49 | ) |
| Restricted Stock                                                              |       | 100                                    |       | — |   |
| Loss on sale of real estate owned                                             |       | 38                                     |       | 2 |   |
| Gain on sale of investment securities                                         |       | (420                                   | )          | — |   |
| Proceeds from sale and amortization of  loans held-for-sale                   |       | 9,679                                  |       | 6,369 |   |
| Originations of loans held-for-sale                                           |       | (6,905                                 | )          | (5,276 | ) |
| ESOP expense                                                                  |       | 100                                    |       | 152 |   |
| Change in assets and liabilities:                                             |       |                                   |       |   |   |
| (Increase) decrease in accrued interest  receivable                           |       | (198                                   | )          | 189 |   |
| (Increase) in other assets                                                    |       | (32                                    | )          | (1,217 | ) |
| (Increase) decrease change in accrued  expenses                               |       | 944                                    |       | (1275 | ) |
| Total Adjustments                                                             |       | 3,743                                  |       | (940 | ) |
|                                                                          |       |                                   |       |   |   |
| Net cash provided by (used in) operating  activities                          |       | 4,314                                  |       | (332 | ) |
|                                                                          |       |                                   |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                         |       |                                   |       |   |   |
| Purchase of investment securities,  available-for-sale                        |       | (2,198                                 | )          | (5,000 | ) |
| Proceeds from maturities and calls of  investment securities                  |       | 5,578                                  |       | 13,612 |   |
| Purchase of Federal Home Loan Bank and  Federal Reserve Bank Stock            |       | 251                                    |       | (906 | ) |
| Net decrease (increase) in loans                                              |       | 104                                    |       | (2,581 | ) |
| Proceeds from sale of real estate owned                                       |       | 165                                    |       | 36 |   |
| Purchase of premises and equipment                                            |       | (430                                   | )          | (26 | ) |
|                                                                          |       |                                   |       |   |   |
| Net cash provided by investing activities                                     |       | 3,470                                  |       | 5,135 |   |
|                                                                          |       |                                   |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                         |       |                                   |       |   |   |
| Net increase in deposits                                                      |       | 4,052                                  |       | 19,784 |   |
| Increase in securities sold under  agreements to repurchase                   |       | 11                                     |       | 3 |   |
| (Decrease) increase in advances for  borrowers’ taxes and insurance      |       | (574                                   | )          | 137 |   |
| Exercised stock options                                                       |       | —                                 |       | 27 |   |
| Net cash provided by financing activities                                     |       | 3,489                                  |       | 19,951 |   |
|                                                                          |       |                                   |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                     |       | 11,273                                 |       | 24,754 |   |
|                                                                          |       |                                   |       |   |   |
| Cash and cash equivalents, beginning of  period                               |       | 54,650                                 |       | 52,408 |   |
|                                                                          |       |                                   |       |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                      |       | $                                      | 65,923     |   | $ | 77,162 |   |

 

The accompanying notes are anintegral part of these financial statements

 

4

----

 

**PSBBANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENT OF COMPREHENSIVE INCOME**

**(In thousands)**

 
| ** **                                                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                               | ** ** | **(Unaudited)**                        | ** ** |
| Net income                                                               |       | $                                      | 571        |   | $ | 608 |   |
|                                                                     |       |                                   |       |   |   |
| Other comprehensive income, net of tax:                                  |       |                                   |       |   |   |
|                                                                     |       |                                   |       |   |   |
| Accumulated comprehensive income (loss),  investments available for sale |       | (1,014                                 | )          | (713 | ) |
|                                                                     |       |                                   |       |   |   |
| Comprehensive (loss)                                                     |       | $                                      | (443       | ) | $ | (105 | ) |

 

The accompanying notes are anintegral part of these financial statements

 

5

----

 

**PSB BANCORP, INC.**

**NOTES** TO FINANCIAL STATEMENTS

**MARCH 31, 2005**

**(Unaudited)**

 

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

 

Thisquarterly report presents the consolidated financial statements of PSB Bancorp, Inc.(“PSB”) and its subsidiaries.

 

PSB’sfinancial statements reflect all adjustments and disclosures that managementbelieves are necessary for a fair presentation of interim results.  The result of operation for the quarterpresented does not necessarily indicate the results that PSB will achieve forall of 2005.  You should read theseinterim financial statements in conjunction with the consolidated financialstatements and accompanying notes that are presented in the PSB Bancorp, Inc.Annual Report on Form 10-K for the year ended December 31, 2004.

 

Thefinancial information in this quarterly report has been prepared in accordancewith PSB’s customary accounting practices; these financial statements have notbeen audited.  Certain information andfootnote disclosures required under generally accepted accounting principleshave been condensed or omitted, as permitted by rules and regulations ofthe Securities and Exchange Commission.

 

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

 

PSB appealedthe U.S. District Court for the Eastern District of Pennsylvania’s ruling infavor of the plaintiffs’ motion for summary judgment regarding the validity of895,240 stock options previously declared void by PSB.  Pending the outcome of the appeal, PSB andthe plaintiffs entered into an agreement whereby shares of PSB common stockwere issued to the plaintiffs at the strike price of the contestedoptions.  However, both the shares ofcommon stock and the proceeds of the exercise of the options have been escrowedpending the outcome of the appeal.  OnFebruary 15, 2005, The United States Court of Appeals for the ThirdCircuit (the “Appeals Court”) upheld the grant of summary judgment for theplaintiffs.  On February 28, 2005,PSB filed a motion for rehearing with the Appeals Court in which PSB averredthat, based on recently discovered information, the court lacked jurisdictionbecause at least one of the plaintiffs was a Pennsylvania resident andtherefore diversity of citizenship, thus jurisdiction, was absent.

 

**Subsequent Events**

 

On April 1,2005, the Appeals Court reversed its prior decision for lack of subject matterjurisdiction and remanded the case to the U.S. District Court for the EasternDistrict of Pennsylvania (the “Court”) with instructions to dismiss theunderlying case for lack of subject matter. On April 26, 2005, the Court dismissed the original case withprejudice for lack of subject matter jurisdiction.

 

The followingtable illustrates the required disclosure of the numerators and denominators ofthe basic and diluted EPS computation. Because the dismissal of plaintiffs’ case did not occur until after thequarter end, the computation of dilutive earnings per share now includes895,240 shares of the 1,371,200 options which were issued in connection withthe 1999 First Bank of Philadelphia acquisition and were originally deemedinvalid by management.  These shares areconsidered to be contingently issuable shares and are required to be includedin the calculation of diluted EPS and excluded from the calculation of basicEPS for the three periods ended March 31, 2005 and 2004, because theycurrently are held in escrow and all or part may be returned pending theoutcome of the appeal of the court ruling which rendered the options valid.

 
| ** **                                                                  | ** ** | **Three months ended March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                    | ** ** | **Weighted  average shares  (denominator)** | ** ** | **Per share  amount** | ** ** |
| ** **                                                                  | ** ** | **(In thousands, except per share data)**  | ** ** |
| Basic earnings per share                                                    |       |                                       |       |   |   |   |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                          | 571        |   | 4,668 |   | $ | 0.12 |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Effect of dilutive stock options                                            |       | —                                     |       | 1,004 |   | — |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                       |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                          | 571        |   | 5,672 |   | $ | 0.10 |   |

 

6

----

 

Nooptions were anti-dilutive at March 31, 2005.

 
| ** **                                                                  | ** ** | **Three months ended March 31, 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                                     |       | $                                          | 608        |   | 4,269 |   | $ | 0.14 |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Effect of dilutive stock options                                            |       | —                                     |       | 145 |   | — |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                       |       |   |   |   |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                          | 1,511      |   | 4,414 |   | $ | 0.14 |   |

 

Nooptions were anti-dilutive at March 31, 2004.

 

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

 

In December 2004,the FASB issued SFAS No. 123R, “Share-Based Payment”(SFAS 123R).  This statement is arevision of SFAS No. 123, “Accounting for Stock-Based Compensation”, andsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123R requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values.  The provisions of this statement areeffective for interim or annual periods beginning after June 15,2005.  The Company is currentlyevaluating the provisions of this revision to determine the impact on itsconsolidated financial statements.  Itis, however, expected to have a negative effect on consolidated net income.

 

In March 2005 the FASB issued Interpretation No. 47,“Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47requires an entity to recognize a liability for the fair value of a legalobligation to perform asset-retirement activities that are conditional on afuture event if the amount can be reasonably estimated. The Interpretationprovides guidance to evaluate whether fair value is reasonably estimable.  FIN 47 is effective no later than the end offiscal years ending after December 15, 2005. FIN 47 is not expected tohave a material impact on the Company’s financial position or results ofoperations.

 

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

 

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

 

7

----

 

In the first quarter of 2004 PSB adopted FASBinterpretation No. 46(R) Consolidation of Variable Interest Entities (“FIN46(R)”).  In applying FIN 46(R), it wasdetermined that PSB, as the largest shareholder and virtually Iron Bridge’sonly financial resource, would absorb a majority of Iron Bridge’s expectedlosses.  Therefore, it was PSB’s conclusionthat in accordance with FIN 46(R), Iron Bridge is a variable interest entityand thus PSB was required to consolidate the financial results of Iron Bridgeduring the first quarter of 2004.

 

The consolidation of Iron Bridge resulted in PSBrecording goodwill of $1.4 million and minority interest of $277,000.  PSB accounts for goodwill in accordance withSFAS 142, “Goodwill and Other Intangible Assets”.  Goodwill is now subject to impairment testingat least annually to determine whether write-downs of the recorded balances arenecessary.  PSB tests for impairmentbased on the goodwill maintained at each defined reporting unit.  A fair value is determined for each reportingunit based on at least one of three various market valuationmethodologies.  If the fair value of thereporting unit exceeds its then book value, no write-down of recorded goodwillis necessary.  If the fair value of areporting unit is less, an expense may be required on PSB’s books to write downthe related goodwill to the proper carrying value.  As of March 31, 2005, PSB completed itsimpairment testing, and determined that no impairment write-off wasnecessary.  No assurance can be giventhat future goodwill impairment tests will not result in a charge to earnings.

 

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

 

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

 

8

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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 andborrowings.  The Bank’s net income isalso affected by its provision for loan losses and its level of non-interestincome as well as by its non-interest expense, such as salary, employeebenefits, occupancy costs, and charges relating to non-performing and otherclassified assets.

 

**Impact of Inflation**

 

The financial statements and related financial datapresented herein have been prepared in accordance with generally acceptedaccounting principles that require the measurement of financial position andoperating results in 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.

 

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

 

The accounting and reporting policies of the Companyand its subsidiaries conform with accounting principles generally accepted inthe United States of America (US GAAP) applicable to the financial servicesindustry.  All significant inter-companytransactions are eliminated in consolidation and certain reclassifications aremade when necessary to conform the previous year’s financial statements to thecurrent year’s presentation.  In preparingthe consolidated financial statements, management is required to make estimatesand assumptions that affect the reported amount of assets and liabilities as ofthe dates of the balance sheets and revenues and expenditures for the periodspresented.  Therefore, actual resultscould differ significantly from those estimates.

 

Allowancefor Loan Losses**-**PSB uses the reserve method of accounting forloan losses.  The balance in theallowance for loan losses is determined based on management’s review and evaluationof the loan portfolio in relation to past loss experience, the size andcomposition of the portfolio, current economic events and conditions, and otherpertinent factors, including management’s assumptions as to futuredelinquencies, recoveries, and losses. Increases to the allowance for loan losses are made by charges to theprovision for loan losses.  Recoveries ofpreviously charged-off amounts are credited to the allowance for loan losses.

 

While management considers the allowance for loan lossesto be adequate based on information currently available, future additions tothe allowance may be necessary due to changes in economic conditions ormanagement’s assumptions as to future delinquencies, recoveries and losses andmanagement’s intent with regard to the disposition of loans.  In addition, the regulators, as an integralpart of their examination process, periodically review the Bank’s allowance forloan losses.  The banking regulators mayrequire the Bank to recognize additions to the allowance for loan losses basedon their judgments about information available to them at the time of theirexamination.

 

IncomeTaxes—Under the liability method, deferred tax assets and liabilities aredetermined based on the difference between the financial statement and taxbases of assets and liabilities.  Basedupon the review of all components of the deferred tax assets and liabilities,future taxable income of PSB and regulatory guidelines, management hasdetermined that no allowance is deemed necessary at December 31, 2004.  However, circumstances could arise that wouldrequire management to revisit the need for such an allowance.

 

PSB accounts for goodwill in accordance withSFAS 142, “Goodwill and Other Intangible Assets”.  Goodwill is now subject to impairment testingat least annually to determine whether write-downs of the recorded balances arenecessary.  PSB tests for impairmentbased on the goodwill maintained at each defined reporting unit.  A fair value is determined for each reportingunit based on at least one of three various market valuationmethodologies.  If the fair value of thereporting unit exceeds its then book value, no write-down of recorded goodwillis necessary.  If the fair value of areporting unit is less, an expense may be required on PSB’s books to write downthe related goodwill to the proper carrying value.  As of December 31, 2004, PSB completed itstransitional testing, and determined that no impairment write-off wasnecessary.  No assurance can be giventhat future goodwill impairment tests will not result in a charge of earnings.

 

**Performance Overview**

 

PSB’s netincome for the first quarter of 2005 was $571,000 or $0.12 and $0.10 on a basicand diluted per share basis, respectively, compared to net income of$608,000 or $0.14 per basic and diluted share for 2004.  The results forthe first quarter of 2005 were affected primarily by rising interest rates thatdecreased the yield on loans and mortgage-backed securities and increased thecost of funds.  Additionally, increasesin non-interest expense in the areas of salaries and employee benefits,professional fees and other operating expenses related to the opening of a newbranch in the Chinatown section of Philadelphia had a dampening effect onnet income.

 

9

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The Bank’s netinterest margin decreased by 33 basis points from 4.03% for the three monthsended March 31, 2004 to 3.70% for the same period in 2005.

 

**Net Income**

 

PSB’s netincome totaled $571,000 and $608,000 for the three months ended March 31,2005 and March 31, 2004, respectively.  PSB’s basic and dilutedearnings per share for the three months ended March 31, 2005 were $0.12and $.0.10 respectively compared to $0.14 and $0.14 for the three months ended March 31,2004.  The results for the first quarterof 2005 were effected primarily by rising interest rates overall that decreasedthe yield on loans and mortgage-backed securities and increased the cost offunds particularly on the Bank’s certificates of deposit resulting in a lowerinterest rate spread.  Increases innon-interest expense in the areas of salaries and employee benefits,professional fess and other operating expenses related to the opening of a newbranch in the Chinatown section of Philadelphia also negatively effectednet income.

 

Managementcontinues to pursue lending strategies to enhance the growth of consumer homeequity, and home equity lines of credit. The commercial real estate and construction loan departments are seekingto currently become more competitive in the uncertain interest rate marketwhile trying to minimize additional credit risk.

 

**Net Interest Income and Average Balances**

 

Net interest income is a key component of PSB’sprofitability and is managed in coordination with PSB’s interest ratesensitivity position.  Net interestincome for the first quarter of 2005 increased 6.82% from $4.4 million in thefirst quarter of 2004 compared to $4.7 million for the first quarter of 2005.  The increase in net interest income isrelated to a significant increase in loan volume and interest-earning depositswith banks.

 

Overall, average total interest-earning assetsprovided a yield of 5.66% for the three months ended March 31, 2005,compared to 5.67% for the same period in 2004. Average total loans were $356.0 million for the three months ended March 31,2005, and provided a yield of 6.79% for the period, compared to average totalloans of $296.0 million for the three months ended March 31, 2004,which provided a yield of 7.06%.

 

Average total interest-bearing liabilities increasedfrom $385.5 million to $450.6 million or 16.89% for the three monthsended March 31, 2005 compared to the three-month period ended March 31,2004.  The average rate on totalinterest-bearing liabilities increased 34 basis points from 1.87% for thethree months ended March 31, 2004 to 2.21% for the three months ended March 31,2005.  The increase in interest-bearingliabilities resulted entirely from an increase in certificates of deposit.  The increase in the overall rate paid oninterest-bearing liabilities was due to PSB’s decision to increase deposits byoffering more competitive interest rates on its certificates of deposit.

 

Although a majority of these new funds were deployedinto lending opportunities, because of competitive conditions, the yield on ourloan portfolio fell by 27 basis point. The combination of our increased funding costs and reduced loan yieldresulted in the 33 basis point compression of our net interest margin.

 

**Provision for Loan Losses**

 

The provision for loan losses represents the chargeagainst earnings that is required to fund the allowance for loan losses.  PSB determines the level of the allowance forloan losses through a regular review of the loan portfolio.  Management’s evaluation of the adequacy ofthe allowance for loan losses is based upon an examination of the portfolio aswell as such factors as declining trends, the volume of loan concentrations,adverse situations that may affect the borrower’s ability to pay, prior lossexperience within the portfolio, current economic conditions and the results ofthe most recent regulatory examinations. PSB made a provision of $135,000 for loan losses during the three monthsended March 31, 2005 and made no provision for the three months ended March 31,2004.  Additionally, PSB had charge-offsagainst the allowance for loan losses of $132,000 and $64,000 and recoveries of$41,000 and $54,000 during the three month periods ended March 31, 2005and 2004, respectively.

 

10

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

 

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

 
| ** **                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                               | ** ** | **Average  Balance**                  | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)**            | ** ** |
| **ASSETS**                                                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits                                                |       | $                                     | 58,473     |   | $ | 309 |   | 2.11 | % | $ | 43,039 |   | $ | 90 |   | 0.84 | % |
| Investment securities                                                    |       | 58,260                                |       | 468 |   | 3.21 |   | 54,103 |   | 336 |   | 2.48 |   |
| Mortgage-backed securities                                               |       | 34,891                                |       | 366 |   | 4.20 |   | 46,896 |   | 582 |   | 4.96 |   |
| Loans                                                                    |       | 356,022                               |       | 6,045 |   | 6.79 |   | 295,995 |   | 5,226 |   | 7.06 |   |
| Total interest-earning assets                                            |       | 507,646                               |       | $ | 7,188 |   | 5.66 | % | 440,033 |   | $ | 6,234 |   | 5.67 | % |
| Noninterest-earning assets                                               |       | 27,667                                |       |   |   |   |   | 40,341 |   |   |   |   |   |
| Total assets                                                             |       | $                                     | 535,313    |   |   |   |   |   | $ | 480,374 |   |   |   |   |   |
|                                                                     |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Now checking accounts                                                    |       | $                                     | 25,900     |   | $ | 34 |   | 0.53 | % | $ | 26,602 |   | $ | 33 |   | 0.50 | % |
| Money market accounts                                                    |       | 54,258                                |       | 162 |   | 1.19 |   | 68,371 |   | 215 |   | 1.26 |   |
| Savings deposits                                                         |       | 87,390                                |       | 239 |   | 1.09 |   | 91,019 |   | 269 |   | 1.18 |   |
| Certificates                                                             |       | 281,970                               |       | 2,054 |   | 2.91 |   | 198,442 |   | 1,280 |   | 2.58 |   |
| Total deposits                                                           |       | 449,518                               |       | 2,489 |   | 1.11 | % | 384,434 |   | 1,797 |   | 0.93 |   |
| Borrowed money                                                           |       | 1,115                                 |       | 6 |   | 2.15 |   | 1,101 |   | 6 |   | 2.18 |   |
| Total interest-bearing  liabilities                                      |       | 450,633                               |       | $ | 2,495 |   | 2.21 | % | 385,535 |   | $ | 1,803 |   | 1.87 | % |
| Non-interest-bearing  liabilities                                        |       | 32,642                                |       |   |   |   |   | 46,983 |   |   |   |   |   |
| Total liabilities                                                        |       | 483,275                               |       |   |   |   |   | 432,518 |   |   |   |   |   |
| Shareholders’ equity                                                |       | 52,038                                |       |   |   |   |   | 47,856 |   |   |   |   |   |
|                                                                     |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and  shareholders’ equity                         |       | $                                     | 535,313    |   |   |   |   |   | $ | 480,374 |   |   |   |   |   |
| Net interest income                                                      |       |                                  |       | $ | 4,693 |   |   |   |   |   | $ | 4,431 |   |   |   |
| Interest rate spread                                                     |       |                                  |       |   |   | 3.45 | % |   |   |   |   | 3.80 | % |
| Net yield on interest-earning  assets                                    |       |                                  |       |   |   | 3.70 | % |   |   |   |   | 4.03 | % |
|                                                                     |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Ratio of interest-earning  assets to  interest-bearing  liabilities |       |                                  |       |   |   | 1.13 | x |   |   |   |   | 1.14 | x |

 

11

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**Allowance for Loan Losses**

 

The allowance for loan losses is established through aprovision for loan losses charged to expense. Loans are charged against the allowance for possible loan losses whenmanagement believes that the collectibility of the principal is unlikely.  The allowance is an amount that managementbelieves will be adequate to absorb loan losses on existing loans that maybecome uncollectible based on evaluations of the collectibility of loans andprior loan loss experience.  Theevaluations take into consideration such factors as changes in the nature andvolume of the loan portfolio, overall portfolio quality, review of specificproblem loans and current economic conditions that may affect the borrower’sability to pay.  These estimates areparticularly susceptible to changes that may result in a material adjustment tothe allowance for loan losses.  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 the objective of PSB’s evaluation process toestablish the following components of the allowance for loan losses: a specificallocation for certain identified loans, a general allocation for pools ofloans 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 SECStaff Accounting Bulletin No. 102. Management reviews the adequacy of its allowance on an ongoing basis andwill provide, as management may deem necessary, for additional provisions infuture periods.

 

PSB accounts for its impaired loans in accordance withSFAS No. 114, “Accounting by Creditors for Impairment of a Loan”, asamended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan- Income Recognition and Disclosures”. This standard requires that a creditor measure impairment based on thepresent value of expected future cash flow discounted at the loan’s effectiveinterest rate, except that, as a practical expedient, a creditor may measureimpairment based on a loan’s observable market price, or the fair value of thecollateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairmentbased on the fair value of the collateral when the creditor determines thatforeclosure is probable.

 

**Non-interest Income**

 

Non-interest income consists of servicecharges, rental income, other income, and gain on the sale of loans andsecurities.  Non-interest income for theBank increased $459,000 or 97.00% to $932,000 for the three months ended March 31,2005, from $473,000 for the same period in the prior year.  The significant increase in non-interestincome in the first quarter of 2005 was almost exclusively attributable to thegain on the sale of investment securities held by PSA Service Corp.

 

The following table provides a summary ofnon-interest income, by category of income, for the three months ended March 31,2005, and 2004 (in thousands):

 
| ** **                        | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(In thousands)**                    | ** ** |
|                              |       |                                  |       |   |   |
| Service fees on deposit accounts  |       | $                                     | 322        |   | $ | 276 |   |
| Loss on sale of real estate owned |       | (38                                   | )          | (2 | ) |
| Banked owned life insurance       |       | 115                                   |       | 76 |   |
| Gain on sale of investments       |       | 420                                   |       | — |   |
| Other                             |       | 113                                   |       | 123 |   |
| Total                             |       | $                                     | 932        |   | $ | 473 |   |

 

12

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**Non-interest Expense**

 

Non-interest expense for the Bank increased $618,000or 14.63%, to $4.7 million for the three months ended March 31, 2005,from $4.1 million for the same period in the prior year.  The primary reasons for the increase innon-interest expense were increases in salaries and employee benefits andoccupancy and equipment expense and other operating expenses related toexpenditures for the Bank’s new branch in the Chinatown section ofPhiladelphia.

 

13

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The following table provides a summary of non-interestexpense, by category of expense, for the three months ended March 31,2005, and 2004:

 
| ** **                       | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                       | ** ** | **(In thousands)**                    | ** ** |
|                             |       |                                  |       |   |   |
| Salaries and employment benefits |       | $                                     | 2,448      |   | $ | 2,221 |   |
| Rent and occupancy expense       |       | 648                                   |       | 564 |   |
| Professional fees                |       | 300                                   |       | 160 |   |
| FDIC insurance expense           |       | 30                                    |       | 48 |   |
| General insurance                |       | 81                                    |       | 82 |   |
| Advertising                      |       | 47                                    |       | 34 |   |
| Data processing fees             |       | 100                                   |       | 107 |   |
| Director fees                    |       | 68                                    |       | 69 |   |
| Other operating expense          |       | 986                                   |       | 805 |   |
| Total                            |       | $                                     | 4,708      |   | $ | 4,090 |   |

 

**Provision for Income Taxes**

 

Income tax provisions for the three month periodsended March 31, 2005 and 2004 were $246,000 and $238,000, respectively.

 

**Liquidity**

 

The maintenance of adequate liquidity and themitigation of interest rate risk are integral to the management of PSB’sbalance sheet.  Liquidity represents theability to meet potential cash outflows resulting from deposit customers whoneed to withdraw funds or borrowers who need available credit.  PSB’s liquidity is quantified through the useof a standard liquidity ratio of liquid assets (cash and cash equivalents,investment securities available-for-sale, mortgage-backed securitiesavailable-for-sale and Federal Home Loan Bank stock) to short-term borrowingsplus deposits.

 

PSB’s asset/liability management committee monitorsthe level of short-term assets and liabilities to maintain an appropriatebalance between liquidity, risk, and return. Liquidity is derived from various sources which include increases incore deposits, sales of certificates of deposits, the amortization, andprepayment of loans and mortgage-backed securities, and maturities ofinvestment securities and other short-term investments.  The liquidity position of PSB is alsostrengthened by a $201.7 million credit facility with the Federal HomeLoan Bank (“FHLB”).  Advances are securedby FHLB stock and qualifying mortgage loans. PSB had no outstanding borrowings from the FHLB as of March 31,2005.

 

Maximizing cash flow over time is crucial to themaintenance of adequate liquidity.  PSB’stotal cash flow is a product of its operating activities, investing activitiesand financing activities.  During thethree months ended March 31, 2005, net cash provided by operating activitieswas $4.3 million, compared to net cash used in operating activities of$332,000 for the same period of 2004. During the three months ended March 31, 2005, net cash provided byinvesting activities was $3.5 million, compared to net cash provided byinvesting activities of $5.1 million for the same period of 2004.  Financing activities provided net cash of$11.3 million during the three months ended March 31, 2005, comparedto $20.0 million in net cash provided by financing activities for the sameperiod of 2004.  The net result of theseitems was an $11.3 million increase in cash and cash equivalents for thethree months ended March 31, 2005, compared to a $24.8 millionincrease in cash and cash equivalents for the same period of 2004.

 

**Interest Rate Sensitivity**

 

Interest rate sensitivity focuses on the impact offluctuating interest rates and the re-pricing characteristics of rate sensitiveassets and liabilities on net interest income. Interest rate sensitivity is closely related to liquidity since each isdirectly affected by the maturity of assets and liabilities.  Rate sensitivity also deals with exposure tofluctuations in interest rates and its effect on net interest income.  The primary function of PSB’s interest ratesensitivity management is to reduce exposure to interest rate risk through anappropriate balance between interest-earning assets and interest-bearingliabilities.  The goal is to minimizefluctuations in the net interest margin of PSB due to general changes ininterest rates.

 

14

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The blending of fixed and floating-rate loans andinvestments to match the re-pricing and maturity characteristics of the variousfunding sources is a continuous process in an attempt to minimize any significantfluctuations in net interest income.  Thecomposition of the balance sheet is designed to minimize any significantfluctuation in net interest income and to maximize liquidity.  Management believes that the accessibility toFHLB borrowings will provide the flexibility to assist in keeping fluctuationsin net interest income under control and to maintain an adequate liquidityposition.

 

**Capital Adequacy**

 

PSB is required to maintain minimum ratios ofTier I and total capital to total “risk weighted” assets and a minimumTier I leverage ratio, as defined by the banking regulators.  At March 31, 2005, PSB was required tohave a minimum Tier I and total capital ratios of 6.0% and 10.0%,respectively, and a minimum Tier I leverage ratio of 5.0%.  PSB’s actual Tier I and total capitalratios at March 31, 2005, were 14.59% and 15.49%, respectively, and PSB’sTier I leverage ratio was 9.73%. These ratios exceed the requirements for classification as a “wellcapitalized” institution, the industry’s highest capital category.

 

On March 31, 2005, PSB was in compliance withregulatory capital requirements as shown in the following table:

 
| ** **                           | ** ** | **Well  Capitalized**      | ** ** | **At March 31, 2005** | ** ** | **At December 31, 2004** | ** ** |
|--------------------------------------|------------|----------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **Ratios**                 | ** ** | **PSB**                    | ** ** | **Bank**                      | ** ** | **PSB** | ** ** | **Bank** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)** | ** ** |
| Tier I Capital                       |       |                       |       | $                          | 51,940     |                          | $          | 40,768 |   | $ | 51,207 |   | $ | 39,938 |   |
| Tier II Capital                      |       |                       |       | 3,201                      |       | 3,201                         |       | 3,157 |   | 3,157 |   |
| Total Qualifying Capital             |       |                       |       | $                          | 55,141     |                          | $          | 43,969 |   | $ | 54,364 |   | $ | 43,095 |   |
|                                 |       |                       |       |                       |       |                          |       |   |   |   |   |
| Risk Adjusted Total Assets           |       |                       |       | $                          | 355,990    |                          | $          | 352,487 |   | $ | 351,023 |   | $ | 349,124 |   |
|                                 |       |                       |       |                       |       |                          |       |   |   |   |   |
| Tier I Risk Based Capital Ratio |       | 6.00                       | %          | 14.59                      | %          | 11.57                         | %          | 14.59 | % | 11.44 | % |
| Total Risk Based Capital Ratio       |       | 10.00                      | %          | 15.49                      | %          | 12.47                         | %          | 15.49 | % | 12.34 | % |
| Leverage Ratio                       |       | 5.00                       | %          | 9.73                       | %          | 7.67                          | %          | 9.53 | % | 7.48 | % |
|                                 |       |                       |       |                       |       |                          |       |   |   |   |   |
| Average  Assets                      |       |                       |       | $                          | 533,907    |                          | $          | 531,509 |   | $ | 537,232 |   | $ | 534,026 |   |

 

**FINANCIAL CONDITION**

 

**General**

 

PSB’s total assets increased $4.4 million from$533.1 at December 31, 2004, to $537.5 million, as of March 31,2005 an increase of 0.82%.  Net loansoutstanding decreased by $775,000 or 0.22%, and cash and cash equivalents grewby 20.48% to $65.9 million during the three months of 2005.  The increase in loans was funded by anincrease in deposits primarily through increases in certificates ofdeposit.  Total deposits equaled$479.3 million, an increase of $4.0 million or 0.84% during2005.  At March 31, 2005, PSB’s netloan portfolio totaled $352.2 million compared to $353.0 million at December 31,2004.

 

15

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The following tables summarize the loan portfolio ofPSB by loan category and amount at March 31, 2005, compared to December 31,2004, respectively.  From time to time,TransNational Mortgage Corp., a subsidiary of PSB, has originated and soldmortgage loans to first party investors within PSB’s financial reportingperiods.  Similarly, student loans arefrequently originated and sold within PSB’s financial reporting periods.  Such mortgage and student loans are notreflected in the financial tables and financial statements pertaining to aparticular period to the extent that such loans were sold prior to any periodend.  The loan categories correspond toPSB’s general classifications (Dollars in thousands):

 
| ** **                      | ** ** | **At March 31,  2005** | ** ** | **At December 31,  2004** | ** ** | ** ** | ** ** | ** **  | ** ** |
|---------------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **                      | ** ** | **Amount**                  | ** ** | **Percent**                    | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Variance** | ** ** | **% Change** | ** ** |
| Real Estate Loans(1):           |       |                        |       |                           |       |       |       |        |       |   |   |   |   |
| One-to-four family(2)           |       | $                           | 136,770    |                           | 38.47      | %          | $          | 140,459     |       | 39.43 | % | $ | (3,689 | ) | (2.63 | )% |
| Construction loans              |       | 31,223                      |       | 8.78                           | %          | 21,854     |       | 6.13        | %          | 9,369 |   | 42.87 | % |
| Five or more family residential |       | 17,586                      |       | 4.95                           | %          | 18,888     |       | 5.30        | %          | (1,302 | ) | (6.89 | )% |
| Nonresidential                  |       | 127,286                     |       | 35.81                          | %          | 132,066    |       | 37.07       | %          | (4,780 | ) | (3.62 | )% |
|                            |       |                        |       |                           |       |       |       |        |       |   |   |   |   |
| Commercial loans                |       | 20,819                      |       | 5.86                           | %          | 21,439     |       | 6.02        | %          | (620 | ) | (2.89 | )% |
| Consumer loans                  |       | 21,801                      |       | 6.13                           | %          | 21,516     |       | 6.04        | %          | 285 |   | 1.32 | % |
| Total loans                     |       | $                           | 355,485    |                           | 100.00     | %          | $          | 356,222     |       | 100.00 | % | $ | (737 | ) | (0.21 | )% |
|                            |       |                        |       |                           |       |       |       |        |       |   |   |   |   |
| Less:                           |       |                        |       |                           |       |       |       |        |       |   |   |   |   |
| Unearned fees and discounts     |       | $                           | 74         |                           |       |       | $          | 80          |       |   |   |   |   |   |   |
| Allowance for loan losses       |       | 3,201                       |       |                           |       | 3,157      |       |        |       |   |   |   |   |
| Net Loans                       |       | $                           | 352,210    |                           |       |       | 352,985    |        |       |   |   |   |   |   |

 

----

(1)               RealEstate Loans represent loans secured by real estate

 

(2)               Doesnot include loans held for sale

 

The followingtable summarizes loan portfolio of PSB by loan type and amount at March 31,2005, and December 31, 2005.

 
| ** **      | ** ** | **At March 31  2005** | ** ** | **At December 31,  2004** | ** ** |
|-----------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **      | ** ** | **Amount**                 | ** ** | **Percent**                    | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Fixed rates     |       | $                          | 248,417    |                           | 69.88      | % | $ | 252,659 |   | 70.93 | % |
| Adjustable rate |       | 107,068                    |       | 30.12                          | %          | 103,563 |   | 29.07 | % |
| Total loans     |       | $                          | 355,485    |                           | 100.00     | % | $ | 356,222 |   | 100.00 | % |

 

Total investment securities decreased$4.5 million, or 4.94%, to $91.1 million at March 31, 2005, from$95.6 million at December 31, 2004.

 

The Bank’s business strategies have been directed toincreasing the attractiveness of our core deposit products.  As we continue to execute this strategy weexpect that it will provide the Bank with greater flexibility to react tochanges in the interest rate environment

 

**Asset Quality**

 

**Non-Performing Assets**

 

PSB’s level of non-performing assets decreased$143,000 or 4.87% to $3.9 million at March 31, 2005, from$4.1 million at December 31, 2004. As a matter of policy, the accrual of loan interest is discontinued ifmanagement believes that, after considering economic and business conditionsand collection efforts, the borrower’s financial condition is such thatcollection of interest becomes doubtful. This is normally done when a loan reaches 90 days delinquent.  At this time, all accrued but unpaid interestis reversed.  There are occasional exceptionsif the loans are in the process of collection and the loan is fully secured.

 

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The following table sets forth non-performing assetsas of March 31, 2005 and December 31, 2004:

 
| ** **                                                                              | ** ** | **At March 31,  2005** | ** ** | **At December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| ** **                                                                              | ** ** | **(Dollars in thousands)**  | ** ** |
|                                                                                    |       |                        |       |                           |       |
| Loans past due 90 days or more  as to interest or principal and accruing  interest |       | $                           | —     |                           | $          | — |   |
| Nonaccrual loans                                                                        |       | 2,863                       |       | 3,633                          |       |
|                                                                                    |       |                        |       |                           |       |
| Total nonperforming loans                                                               |       | 2,863                       |       | 3,633                          |       |
| Real estate owned (REO)                                                                 |       | 1,049                       |       | 422                            |       |
| Total nonperforming assets                                                              |       | $                           | 3,912      |                           | $          | 4,055 |   |
|                                                                                    |       |                        |       |                           |       |
| Nonperforming loans to total  loans                                                     |       | 0.81                        | %          | 1.02                           | %          |
|                                                                                    |       |                        |       |                           |       |
| Nonperforming assets to total  assets                                                   |       | 0.73                        | %          | 0.76                           | %          |
|                                                                                    |       |                        |       |                           |       |
| Allowance for loan losses to  total loans                                               |       | 0.90                        | %          | 0.90                           | %          |
|                                                                                    |       |                        |       |                           |       |
| Allowance for loan losses to  nonperforming loans                                       |       | 111.81                      | %          | 86.90                          | %          |
|                                                                                    |       |                        |       |                           |       |
| Allowance for loan losses to  nonperforming assets                                      |       | 81.83                       | %          | 77.85                          | %          |
|                                                                                    |       |                        |       |                           |       |
| Net charge-offs as a percentage  of total loans                                         |       | 0.04                        | %          | 0.04                           | %          |

 

Note: Total loans includes loans heldfor sale

 

## **Item 3**.  Quantitative and Qualitative DisclosuresAbout Market Risk

 

There has been no material change in PSB’s assessmentof its sensitivity to market risk since its presentation in the 2004 AnnualReport on Form 10-K filed with the Securities and Exchange Commission.

 

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

 

PSB’s management conducted an evaluation, under thesupervision and with the participation of PSB’s Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofPSB’s disclosure controls and procedures as of March 31, 2005.  Based on this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that PSB’s disclosure controlsand procedures are effective in alerting them in a timely manner to materialinformation required to be included in PSB’s SEC reports.  In addition, PSB’s management, including theChief Executive Officer and Chief Financial Officer, reviewed PSB’s internalcontrols, and there have been no significant changes in PSB’s internal controlsor in other factors that could significantly affect those controls subsequentto the date of their last evaluation.

 

# **PART II**.  OTHERINFORMATION

#  

## **Item 1**.           LegalProceedings.

 

Following is a summary of the various claims and lawsuits involving PSBBancorp, Inc. (“PSB”) other than the usual ordinary course of businessclaims to enforce liens, foreclosure proceedings on properties in which PSBholds security interests, claims involving the making and servicing of realproperty loans, and other issues incident to PSB’s business.

 

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

 

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A.  On March 6,2002, Carl Lingle, Raymond Silverstein as Trustee under an Irrevocable Trust,Conwell Ltd. Partnership, Gerald Lehrfeld, Joan Lehrfeld, Jay Roseman, and LynnRoseman, purported option holders, brought an action in the United StatesDistrict Court for the Eastern District of Pennsylvania (the “Court”) to have895,240 of the options previously voided by PSB declared valid and enforceable.

 

On March 31, 2004, the Court granted theplaintiffs’ motion for summary judgment. PSB appealed the Court’s decision to the United States Court of Appealsfor the Third Circuit (the “Appeals Court”). Subsequently, on February 15, 2005, the Appeals Court upheld thegrant of summary judgment for the plaintiffs. On February 28, 2005, PSB filed a petition for rehearing with theAppeals Court in which PSB averred that, based on recently discoveredinformation, the court lacked jurisdiction because at least one of theplaintiffs was a Pennsylvania resident and therefore diversity of citizenshipwas absent.

 

On April 1, 2005, the Appeals Court granted PSB’spetition for rehearing, vacated its prior ruling, dismissed the case for lack ofsubject matter jurisdiction and remanded the case to the Court withinstructions to dismiss the underlying case for lack of subject matter.  On April 26, 2005, the Court dismissedthe original case for lack of subject matter jurisdiction (the “Dismissal”).

 

B.   On June 17, 2004, HalShaffer, a purported option holder filed an action in the United StatesDistrict Court for the Eastern District of Pennsylvania seeking among otheractions a declaratory judgment that 342,800 of the options previously declaredinvalid by PSB were valid and enforceable. On February 28, 2005, PSB filed a motion to dismiss which wassubsequently denied by the Court.  On April 25,2005, PSB filed a motion for reconsideration. PSB intends to defend vigorously the action.  However, there can be no assurance regardingthe eventual outcome of this litigation.

 

C.  On September 7, 2004,Conwell Ltd. Partnership, a purported option holder filed an action in theUnited States District Court for the Eastern District of Pennsylvania seekingamong other actions a declaratory judgment that 133,160 of the optionspreviously declared invalid by PSB are valid and enforceable.  The plaintiff filed a motion for summaryjudgment that was denied.  On February 28,2005, PSB filed a motion to dismiss for lack of subject matterjurisdiction.  In response, the plaintifffiled a motion to be allowed to transfer the purported options to LynnRoseman.  Oral argument was held on March 30,2005.  PSB intends to defend vigorouslythe action.  However, there can be noassurance regarding the eventual outcome of this litigation.

 

D.  On December 29, 2004,PSB received a shareholder demand letter (the “Demand Letter”) on behalf ofseveral purported shareholders alleging that certain of PSB’s officers,directors and employees engaged in a pattern and practice of acts of waste ofcorporate assets and failed to make certain required public disclosures.  The purported acts related to failure todisclose certain information in PSB’s Securities Exchange Act of 1934 reportsfiled with the SEC, incomplete or inaccurate financial reporting, certainactions taken by directors related to the merger of PSB and Jade FinancialCorp., and issues related to PSB’s decision to void the FBP options.  On January 20, 2005, the board ofdirectors of PSB appointed a special committee composed of three independentdirectors.  The independent directorsappointed to the special committee are Dennis Wesley, James W. Eastwood, andJames Kenney.  The special committee wascharged with (i) investigating the allegations in the Demand Letter, (ii) preparingand presenting a report to the full board of directors of the results of theirinvestigation, and (iii) making a recommendation to the full board ofdirectors as to whether or not to proceed with a shareholder derivativeaction.  The special committee hasengaged separate legal counsel to assist it in the preparation of its report.

 

E.  On March 17, 2005,Raymond Silverstein, as Trustee under an Irrevocable Trust dated April 1,1993, and Carl Lingle, as shareholders suing derivatively in the name and rightof PSB, filed an action in the United States District Court for the EasternDistrict of Pennsylvania against PSB and each individual member of the board ofdirectors seeking among other things a judgment declaring the 2001 PSB StockIncentive Plan (the “Plan”) and certain options granted pursuant to the Plan tobe null and void.  The plaintiffs contendthat PSB’s board of directors breached their fiduciary duty and engaged inself-dealing by knowingly disavowing 1,317,200 options granted in theacquisition of First Bank of Philadelphia which they knew were valid andsubsequently soliciting and obtaining the approval of PSB’s shareholders forthe Plan to allow for the granting of new options to PSB’s board of directorsand executive management.  On April 29,2005, PSB filed a motion to dismiss the cases. PSB unequivocally denies the allegations contained in the action andintends to defend vigorously the action. However, there can be no assurance regarding the eventual outcome ofthis litigation.

 

F.  On April 8, 2005, PSBfiled a declaratory judgment action in the Court of Common Pleas ofPhiladelphia County against the various purported option holders seeking anorder declaring the disputed options void and invalid.

 

G.  On April 15, 2005, inresponse to the Dismissal, Carl Lingle, Raymond Silverstein, as Trustee underan Irrevocable Trust, Gerald Lehrfeld, Joan Lehrfeld, Jay Roseman and LynnRoseman, purported option holders, filed an action

 

18

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

 

Additional information related to these actions is contained in PSB’spreviously filed reports on Forms 10-K, 10-Q and 8-K.

 

## **Item 2**.           UnregisteredSales of Equity Securities and Use of Proceeds.

##  

None

 

## **Item 3**.           Defaultsupon Senior Securities.

##  

Not Applicable

 

## **Item 4**.           Submissionof Matters to a Vote of Security Holders.

##  

None

 

## **Item 5**.           OtherInformation.

##  

None

 

## **Item 6**.           Exhibits.

##  

(a)  Exhibits.

 

31.1                                                        Certificationof Anthony DiSandro pursuant to Section 312 of the Sarbanes-Oxley Act of2002.

 

31.2                                                        Certificationof John Carrozza pursuant to Section 312 of the Sarbanes-Oxley Act of2002.

 

19

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

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto dully authorized.

 
|              | PSB BANCORP, INC. |
|-------------------|-------------------|
|              |              |   |
|              | By:               | /s/Anthony DiSandro |
|              |              | Anthony DiSandro, |
|              |              | President, Chief Executive Officer, and Director |
|              |              |   |
|              |              |   |
|              | By:               | /s/John Carrozza |
|              |              | John Carrozza, |
|              |              |  Chief  Financial Officer |
|              |              | (Principal Financial Officer and  Chief Accounting Officer) |
|              |              |   |
|              |              |   |
| May 16, 2005 |              |   |

 

20

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**EXHIBIT INDEX**

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

 

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