**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

**FORM 10-Q**

 
| **ý**                                             | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934 for the  quarterly period ended June 30, 2004 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 File  Number)                              |
|                                                   |
| **PSB  BANCORP, INC.**                                 |
| (Exact Name of Registrant as Specified in its Charter) |

 

| **Pennsylvania**                                    |   | **23-2930740**           |
|-----------------------------------------------------|--------|--------------------------|
| (State of Incorporation)                            |   | (IRS Employer ID Number) |
|                                                |
| **1835 Market Street, Philadelphia, PA 19103** |
| (Address of Principal Executive Offices)            |
|                                                |
| **(215) 979-7900**                                  |
| (Registrant’s Telephone  Number)               |

 

Indicate by checkmark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filing requirementsfor the past 90 days.

 

Yes  ý   No  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act.)

 

Yes  o   No  ý

 

Number of shares outstanding asof August 4, 2004

 

| **Common Stock (no par value)** |   | **4,536,654**        |
|---------------------------------|--------|----------------------|
| (Title of Class)                |   | (Outstanding Shares) |

 

 

----

 

**PSB BANCORP, INC.**

**FORM 10-Q**

**FOR THE QUARTER ENDEDJUNE 30, 2004**

 

**TABLE OF CONTENTS**

 
| PART I. | FINANCIAL INFORMATION |                                                                                                                           |
|--------------|-----------------------|--------------------------------------------------------------------------------------------------------------------------------|
|         |                  |                                                                                                                           |   |
|         | Item 1.          | Financial Statements                                                                                                           |   |
|         |                  |                                                                                                                           |   |
|         |                  | Consolidated Statements of Financial Condition as of June 30, 2004  (unaudited) and December 31, 2003                     |   |
|         |                  |                                                                                                                           |   |
|         |                  | Consolidated Statements of Income (unaudited) for the Three and Six  Month Periods Ended June 30, 2004 and 2003                |   |
|         |                  |                                                                                                                           |   |
|         |                  | Consolidated Statements of Cash Flows  (unaudited) for the Six Month Periods Ended June 30, 2004 and 2003                      |   |
|         |                  |                                                                                                                           |   |
|         |                  | Consolidated Statements of Comprehensive  Income (unaudited) for the Three and Six Month Periods Ended June 30, 2004  and 2003 |   |
|         |                  |                                                                                                                           |   |
|         |                  | Notes to Consolidated Financial Statements                                                                                     |   |
|         |                  |                                                                                                                           |   |
|         | Item 2.               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                    |   |
|         |                  |                                                                                                                           |   |
|         | Item 3.               | Quantitative and Qualitative Disclosures  about Market Risk                                                                    |   |
|         |                  |                                                                                                                           |   |
|         | Item 4.               | Controls and Procedures                                                                                                        |   |
|         |                  |                                                                                                                           |   |
| PART II.     | OTHER INFORMATION     |                                                                                                                           |
|         |                  |                                                                                                                           |   |
|         | Item 1.               | Legal Proceedings                                                                                                              |   |
|         |                  |                                                                                                                           |   |
|         | Item 2.               | Changes in 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 and Reports on Form 8-K                                                                                          |   |

 

----

 

# **PART I. **FINANCIAL INFORMATION

 

**Item1.  Financial Statements.**

 

**PSB BANCORP, INC. ANDSUBSIDIARY**

**STATEMENTS OF FINANCIAL****CONDITION**

**(In thousands except share data)**

 
|                                                                                                                                                                  |   | **June 30,  2004** |    | **Dec 31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------|--------|
|                                                                                                                                                                  |   | **(Unaudited)**    |    | **(Audited)**     |   |
| Assets                                                                                                                                                                |   |               |    |              |   |
| Cash and due from banks                                                                                                                                               |   | $                  | 5,223   |              | $      | 3,084 |   |
| Interest earning deposits with banks                                                                                                                                  |   | 39,331             |    | 34,692            |   |
| Federal funds sold                                                                                                                                                    |   | 26,268             |    | 14,632            |   |
|                                                                                                                                                                  |   |               |    |              |   |
| Total cash and cash equivalents                                                                                                                                       |   | 70,822             |    | 52,408            |   |
|                                                                                                                                                                  |   |               |    |              |   |
| Loans held-for-sale                                                                                                                                                   |   | 62,618             |    | 51,859            |   |
| Investment securities available-for-sale,  at fair value                                                                                                              |   | 90,539             |    | 102,882           |   |
| Investment securities held to maturity  (fair value $689 and $790)                                                                                                    |   | 676                |    | 775               |   |
| Federal Home Loan Bank stock – at cost                                                                                                                           |   | 1,267              |    | 1,021             |   |
| Federal Reserve Bank stock – at cost                                                                                                                             |   | 1,116              |    | 320               |   |
|                                                                                                                                                                  |   |               |    |              |   |
| Loans                                                                                                                                                                 |   | 254,774            |    | 240,452           |   |
| Less allowance for possible loans losses                                                                                                                              |   | (2,974             | )       | (3,069            | )      |
| Net loans                                                                                                                                                             |   | 251,800            |    | 237,383           |   |
| Accrued interest receivable                                                                                                                                           |   | 2,005              |    | 2,225             |   |
| Premises and equipment, net                                                                                                                                           |   | 2,690              |    | 2,855             |   |
| Bank-owned life insurance                                                                                                                                             |   | 12,459             |    | 12,224            |   |
| Other assets                                                                                                                                                          |   | 6,795              |    | 6,378             |   |
|                                                                                                                                                                  |   | 23,949             |    | 23,682            |   |
| Total assets                                                                                                                                                          |   | 502,787            |    | 470,330           |   |
|                                                                                                                                                                  |   |               |    |              |   |
| Liabilities                                                                                                                                                           |   |               |    |              |   |
| Deposits                                                                                                                                                              |   |               |    |              |   |
| Non-interest bearing                                                                                                                                                  |   | 36,763             |    | 32,806            |   |
| Interest bearing                                                                                                                                                      |   | 411,802            |    | 383,354           |   |
|                                                                                                                                                                  |   |               |    |              |   |
| Total deposits                                                                                                                                                        |   | 448,565            |    | 416,160           |   |
|                                                                                                                                                                  |   |               |    |              |   |
| Securities sold under agreements to  repurchase                                                                                                                       |   | 1,106              |    | 1,099             |   |
| Advances from borrowers for taxes and  insurance                                                                                                                      |   | 3,066              |    | 2,744             |   |
| Other liabilities                                                                                                                                                     |   | 2,177              |    | 3,204             |   |
|                                                                                                                                                                  |   | 6,349              |    | 7,047             |   |
| Total liabilities                                                                                                                                                     |   | 454,914            |    | 423,207           |   |
|                                                                                                                                                                  |   |               |    |              |   |
| Shareholder’s equity                                                                                                                                             |   |               |    |              |   |
| Common stock authorized, 15,000,000 shares  no par value, 4,536,654 and 4,530,940 shares issued and outstanding on June  30, 2004 and December 31, 2003, respectively |   | 42,370             |    | 42,179            |   |
| Retained earnings                                                                                                                                                     |   | 8,052              |    | 6,919             |   |
| Accumulated other comprehensive income                                                                                                                                |   | (886               | )       | (199              | )      |
| Employee stock ownership plan                                                                                                                                         |   | (1,233             | )       | (1,369            | )      |
| Treasury stock, at cost, 72,325 and 75,996  on June 30, 2004 and December 31, 2003, respectively                                                                      |   | (430               | )       | (407              | )      |
|                                                                                                                                                                  |   |               |    |              |   |
| Total shareholders’ equity                                                                                                                                       |   | 47,873             |    | 47,123            |   |
|                                                                                                                                                                  |   |               |    |              |   |
| Total liabilities and shareholders’ equity                                                                                                                       |   | $                  | 502,787 |              | $      | 470,330 |   |

 

The accompanying notes are an integral part of these financialstatements

 

1

----

 

**PSB BANCORP, INC. ANDSUBSIDIARY**

**CONSOLIDATED STATEMENTS OF****INCOME**

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

 
|                                                 |   | **Three  months ended  June 30,** |   |
|------------------------------------------------------|--------|----------------------------------------|--------|
|                                                 |   | **2004**                               |   | **2003** |   |
|                                                 |   | **(Unaudited)**                        |   |
| Interest income                                      |   |                                   |   |   |   |
| Loans, including fees                                |   | $                                      | 5,881  |   | $ | 6,114 |   |
| Investment securities                                |   | 888                                    |   | 683 |   |
| Deposits with banks                                  |   | 160                                    |   | 360 |   |
| Total interest income                                |   | 6,929                                  |   | 7,157 |   |
|                                                 |   |                                   |   |   |   |
| Interest expense                                     |   |                                   |   |   |   |
| Interest on deposits                                 |   | 1,937                                  |   | 2,530 |   |
| Interest on borrowings                               |   | 5                                      |   | 6 |   |
| Total interest expense                               |   | 1,942                                  |   | 2,536 |   |
|                                                 |   |                                   |   |   |   |
| Net interest income                                  |   | 4,987                                  |   | 4,621 |   |
|                                                 |   |                                   |   |   |   |
| Provision for loan losses                            |   | 0                                      |   | 45 |   |
|                                                 |   |                                   |   |   |   |
| Net interest income after provision for  loan losses |   | 4,987                                  |   | 4,576 |   |
|                                                 |   |                                   |   |   |   |
| Non-interest income operating                        |   | 473                                    |   | 598 |   |
|                                                 |   |                                   |   |   |   |
| Other non-operating income                           |   | 601                                    |   | — |   |
|                                                 |   |                                   |   |   |   |
| Non-interest expenses                                |   |                                   |   |   |   |
| Salaries and employee benefits                       |   | 2,463                                  |   | 2,216 |   |
| Occupancy and equipment                              |   | 578                                    |   | 496 |   |
| Other operating                                      |   | 1,735                                  |   | 1,565 |   |
| Total non-interest expenses                          |   | 4,776                                  |   | 4,277 |   |
|                                                 |   |                                   |   |   |   |
| Other non-operating expenses                         |   | 536                                    |   | — |   |
|                                                 |   |                                   |   |   |   |
| Income before income taxes                           |   | 749                                    |   | 897 |   |
| Income taxes                                         |   | 225                                    |   | 302 |   |
|                                                 |   |                                   |   |   |   |
| Net income                                           |   | $                                      | 524    |   | $ | 595 |   |
|                                                 |   |                                   |   |   |   |
| Net income per common share                          |   |                                   |   |   |   |
| Basic:                                               |   | $                                      | 0.12   |   | $ | 0.14 |   |
|                                                 |   |                                   |   |   |   |
| Diluted:                                             |   | $                                      | 0.10   |   | $ | 0.14 |   |

 

The accompanying notes are an integral part of these financialstatements

 

2

----

 

**PSB BANCORP, INC. ANDSUBSIDIARY**

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
|                                                 |   | **Six months  ended  June 30,** |   |
|------------------------------------------------------|--------|--------------------------------------|--------|
|                                                 |   | **2004**                             |   | **2003** |   |
|                                                 |   | **(Unaudited)**                      |   |
| Interest income                                      |   |                                 |   |   |   |
| Loans, including fees                                |   | $                                    | 11,107 |   | $ | 12,156 |   |
| Investment securities                                |   | 1,806                                |   | 1,418 |   |
| Deposits with banks                                  |   | 250                                  |   | 690 |   |
| Total interest income                                |   | 13,163                               |   | 14,264 |   |
|                                                 |   |                                 |   |   |   |
| Interest expense                                     |   |                                 |   |   |   |
| Interest on deposits                                 |   | 3,734                                |   | 5,489 |   |
| Interest on borrowings                               |   | 11                                   |   | 16 |   |
| Total interest expense                               |   | 3,745                                |   | 5,505 |   |
|                                                 |   |                                 |   |   |   |
| Net interest income                                  |   | 9,418                                |   | 8,759 |   |
|                                                 |   |                                 |   |   |   |
| Provision for loan losses                            |   | 0                                    |   | 45 |   |
|                                                 |   |                                 |   |   |   |
| Net interest income after provision for  loan losses |   | 9,418                                |   | 8,714 |   |
|                                                 |   |                                 |   |   |   |
| Non-interest income operating                        |   | 1,013                                |   | 1,066 |   |
|                                                 |   |                                 |   |   |   |
| Other non-operating income                           |   | 1,134                                |   | — |   |
|                                                 |   |                                 |   |   |   |
| Non-interest expenses                                |   |                                 |   |   |   |
| Salaries and employee benefits                       |   | 4,629                                |   | 4,266 |   |
| Occupancy and equipment                              |   | 1,143                                |   | 999 |   |
| Other operating                                      |   | 3,041                                |   | 2,944 |   |
| Total non-interest expenses                          |   | 8,813                                |   | 8,209 |   |
|                                                 |   |                                 |   |   |   |
| Other non-operating expense                          |   | 1,157                                |   | — |   |
|                                                 |   |                                 |   |   |   |
| Income before income taxes                           |   | 1,595                                |   | 1,571 |   |
| Income taxes                                         |   | 463                                  |   | 507 |   |
|                                                 |   |                                 |   |   |   |
| Net income                                           |   | $                                    | 1,132  |   | $ | 1,064 |   |
|                                                 |   |                                 |   |   |   |
| Net income per common share                          |   |                                 |   |   |   |
|                                                 |   |                                 |   |   |   |
| Basic:                                               |   | $                                    | 0.26   |   | $ | 0.25 |   |
|                                                 |   |                                 |   |   |   |
| Diluted:                                             |   | $                                    | 0.22   |   | $ | 0.25 |   |

 

The accompanying notes are an integral part of these financialstatements

 

3

----

 

**PSB BANCORP, INC. ANDSUBSIDIARY**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

**(In thousands)**

 
|                                                                          |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                          |   | **2004**                        |   | **2003** |   |
|                                                                          |   | **(Unaudited)**                 |   |
| CASH FLOW FROM OPERATING ACTIVITIES                                           |   |                            |   |   |   |
| Adjustments to reconcile net income to net  cash                              |   |                            |   |   |   |
| Net Income                                                                    |   | $                               | 1,132  |   | $ | 1,064 |   |
| Adjustments used in operating activities:                                     |   |                            |   |   |   |
| Provision for possible loan losses                                            |   | —                          |   | 45 |   |
| Depreciation and amortization                                                 |   | 384                             |   | 441 |   |
| Amortization of discounts and accretion of  premiums on investment securities |   | 72                              |   | 79 |   |
| Gain on sale of real estate                                                   |   | (27                             | )      | (1 | ) |
| Proceeds from sale and amortization of  loans held for sale                   |   | 7,719                           |   | 26,983 |   |
| Originations of loans held for sale                                           |   | (18,493                         | )      | (31,388 | ) |
| ESOP expense                                                                  |   | 301                             |   | 205 |   |
|                                                                          |   |                            |   |   |   |
| Change in assets and liabilities:                                             |   |                            |   |   |   |
| Decrease in accrued interest receivable                                       |   | 220                             |   | 642 |   |
| (Increase) in other assets                                                    |   | (137                            | )      | (1,481 | ) |
| (Decrease) in accrued expenses                                                |   | (1,027                          | )      | (2,426 | ) |
|                                                                          |   |                            |   |   |   |
| Net cash used in operating activities                                         |   | (9,856                          | )      | (5,837 | ) |
|                                                                          |   |                            |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                         |   |                            |   |   |   |
| Purchase of investment securities,  available-for-sale                        |   | (9,765                          | )      | (35,006 | ) |
| Proceeds from sale of investment securities                                   |   | 10,000                          |   | — |   |
| Proceeds from maturities and calls of  investment securities                  |   | 10,614                          |   | 24,096 |   |
| Purchase of Federal Home Loan Bank Stock                                      |   | (1,042                          | )      | (351 | ) |
| Net (increase) decrease in loans                                              |   | (14,224                         | )      | 37,397 |   |
| Proceeds from sale of real estate owned                                       |   | 170                             |   | — |   |
| Purchase of premises and equipment                                            |   | (221                            | )      | (489 | ) |
|                                                                          |   |                            |   |   |   |
| Net cash (used in) provided by investing  activities                          |   | (4,468                          | )      | 25,683 |   |
|                                                                          |   |                            |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                         |   |                            |   |   |   |
| Net increase (decrease) in deposits                                           |   | 32,405                          |   | (5,850 | ) |
| Increase in securities sold under  agreements to repurchase                   |   | 7                               |   | 17 |   |
| Change in advances for borrowers’ taxes and  insurance                   |   | 322                             |   | (304 | ) |
| Exercised stock options                                                       |   | 27                              |   | — |   |
| Change in treasury stock                                                      |   | (23                             | )      | 15 |   |
| Net cash provided by (used in) financing activities                           |   | 32,738                          |   | (6,152 | ) |
|                                                                          |   |                            |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                     |   | 18,414                          |   | 13,694 |   |
|                                                                          |   |                            |   |   |   |
| Cash and cash equivalents, beginning of  period                               |   | 52,408                          |   | 110,269 |   |
|                                                                          |   |                            |   |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                      |   | $                               | 70,822 |   | $ | 123,963 |   |

 

The accompanying notes are an integral part of these financialstatements

 

4

----

 

**PSB BANCORP, INC. ANDSUBSIDIARY**

**CONSOLIDATEDSTATEMENT OF COMPREHENSIVE INCOME**

**(In thousands)**

 
|                                                            |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                            |   | **2004**                         |   | **2003**                       |   | **2004** |   | **2003** |   |
|                                                            |   | **(Unaudited)**                  |   |
| Net income                                                      |   | $                                | 524    |                           | $      | 595 |   | $ | 1,132 |   | $ | 1,064 |   |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Other comprehensive income, net of tax:                         |   |                             |   |                           |   |   |   |   |   |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Accumulated comprehensive loss, investments  available for sale |   | (1,400                           | )      | (385                           | )      | (687 | ) | (444 | ) |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Comprehensive income                                            |   | $                                | (876   | )                              | $      | 210 |   | $ | 445 |   | $ | 620 |   |

 

The accompanying notes are an integral part of these financialstatements

 

5

----

 

**PSB BANCORP, INC.**

**NOTES TO FINANCIAL STATEMENTS**

**JUNE 30, 2004**

**(Unaudited)**

 

**1.   Basisof Presentation**

 

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

 

PSB’sfinancial statements reflect all adjustments and disclosures which managementbelieves are necessary for a fair presentation of interim results.  The results of operation for the quarterpresented does not necessarily indicate the results that PSB will achieve forall of 2004.  You should read these interimfinancial statements in conjunction with the consolidated financial statementsand accompanying notes that are presented in the PSB Bancorp, Inc. AnnualReport on Form 10-K for the year ended December 31, 2003.

 

The financialinformation in this quarterly report has been prepared in accordance with PSB’scustomary accounting practices; these financial statements have not beenaudited.  Certain information andfootnote disclosures required under generally accepted accounting principleshave been condensed or omitted, as permitted by rules and regulations of theSecurities and Exchange Commission.

 

**2.   PensionPlans**

 

Net periodicdefined benefit pension expense for the three months ended June 30, 2004 and2003 included the following components (in thousands):

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

 

We currentlyexpect to contribute approximately $0.00 to our pension plan with respect to2004. We are currently evaluating the impact of the Pension Funding Equity Actenacted in April 2004 on our projected funding. We made contributions of $20,865 to the plan in the three month period ended June 30, 2004, for the prioryear.

 

 

6

----

 

**3.   EarningsPer Share (EPS)**

 

PSB hasappealed the U.S. District Court for the Eastern District of Pennsylvania’sruling in favor of the plaintiffs’ motion for summary judgment regarding thevalidity of 895,240 stock options previously declared void by PSB.  Pending the outcome of the appeal, PSB andthe plaintiffs have entered into an agreement whereby shares of PSB common stockhave been 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.

 

The followingtable illustrates the required disclosure of the reconciliation of thenumerators and denominators of the basic and diluted EPS computation.  The computation of dilutive earnings pershare now includes 895,240 shares of the 1,371,200 options which were issued inconnection with the 1999 First Bank of Philadelphia acquisition and wereoriginally deemed invalid by management. These shares are considered to be contingently issuable shares and arerequired to be included in the calculation of diluted EPS and excluded from thecalculation of basic EPS for the three and six month period ended June 30,2004 as they are currently held in escrow and all or part may be returnedpending the outcome of the appeal of the court ruling which rendered theoptions valid.

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

 

There were 2,128 options that were anti-dilutivefor the six months ended June 30, 2004.

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

 

There were no options that were anti-dilutive for the three monthsended June 30, 2004.

 

7

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|                                                                        |   | **Six months  ended June 30, 2003**  |       |
|-----------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                        |   | **Income  (numerator)**                   |       | **Weighted  average shares  (denominator)** |   | **Per share  amount** |   |
|                                                                        |   | **(In thousands, except per share data)** | ** ** |
| Basic earnings per share                                                    |   |                                      |       |   |   |   |   |
|                                                                        |   |                                      |       |   |   |   |   |
| Income available to common stockholders                                     |   | $                                         | 1,064      |   | 4,223 |   | $ | 0.25 |   |
|                                                                        |   |                                      |       |   |   |   |   |
| Effect of dilutive stock options                                            |   | —                                    |       | 83 |   | — |   |
|                                                                        |   |                                      |       |   |   |   |   |
| Diluted earnings per share                                                  |   |                                      |       |   |   |   |   |
|                                                                        |   |                                      |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |   | $                                         | 1,064      |   | 4,306 |   | $ | 0.25 |   |

 

No optionswere anti-dilutive at June 30, 2003.

 
|                                                                        |   | **Three  months ended June 30, 2003** |       |
|-----------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                        |   | **Income  (numerator)**                    |       | **Weighted  average shares  (denominator)** |   | **Per share  amount** |   |
|                                                                        |   | **(In thousands, except per share data)**  | ** ** |
| Basic earnings per share                                                    |   |                                       |       |   |   |   |   |
|                                                                        |   |                                       |       |   |   |   |   |
| Income available to common stockholders                                     |   | $                                          | 595        |   | 4,216 |   | $ | 0.14 |   |
|                                                                        |   |                                       |       |   |   |   |   |
| Effect of dilutive stock options                                            |   | —                                     |       | 83 |   | — |   |
|                                                                        |   |                                       |       |   |   |   |   |
| Diluted earnings per share                                                  |   |                                       |       |   |   |   |   |
|                                                                        |   |                                       |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |   | $                                          | 595        |   | 4,299 |   | $ | 0.14 |   |

 

No optionswere anti-dilutive at June 30, 2003.

 

**4.   Stock-BasedCompensation**

 

For the threeand six months ended June 30, 2004, there were 1,020,000 stock optionsgranted.  The fair value of each optiongranted during this period was $2.27 and was estimated on the date of grantusing the Black Scholes pricing model with the following

 

8

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assumptions:  no dividend yield, expected volatility27.00%, a risk-free interest rate of 3.30% and an expected life of3.00 years.

 

Hadcompensation costs for the first six months been determined based on the fairvalue of the options at the grant dates consistent with the method SFASNo. 123 “Accounting for Stock-Based Compensation,” the Company’s netincome and earnings per share, basic and diluted, would have been as reduced tothe pro forma amounts indicated below for the three and six month periodsended June 30, 2004:

 
|                                        |   | **For the  Three Months  Ended June 30,** |   | **For the  Six Months  Ended June 30,** |   |
|---------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
| **(In thousands except per share  data)**   |   | **2004**                                  |   | **2003**                                |   | **2004** |   | **2003** |   |
|                                        |   |                                      |   |                                    |   |   |   |   |   |
| Net Income as Reported                      |   | $                                         | 524    |                                    | $      | 595 |   | $ | 1,132 |   | $ | 1,064 |   |
| Less:   Stock-Based Compensation Costs |   | (2,334                                    | )      | (16                                     | )      | (2,350 | ) | (32 | ) |
| Pro forma Net (Loss) Income                 |   | (1,810                                    | )      | 579                                     |   | (1,218 | ) | 1,032 |   |
| Earnings Per Share Basic:                   |   |                                      |   |                                    |   |   |   |   |   |
| As Reported                                 |   | $                                         | 0.12   |                                    | $      | 0.14 |   | $ | 0.26 |   | 0.25 |   |
| Pro forma                              |   | $                                         | (0.42  | )                                       | $      | 0.14 |   | $ | (0.28 | ) | 0.25 |   |
| Earnings Per Share Diluted:                 |   |                                      |   |                                    |   |   |   |   |   |
| As Reported                                 |   | $                                         | 0.10   |                                    | $      | 0.14 |   | $ | 0.22 |   | 0.25 |   |
| Pro forma                                   |   | $                                         | (0.41  | )                                       | $      | 0.14 |   | $ | (0.27 | ) | 0.25 |   |
|                                             |        |                                           |        |                                         |        |  |  |  |  |  |  |  |  |

 

**5.   RegulatoryMatters**

 

On April 14,2003, PSB and the Bank entered into a Memorandum of Understanding (MOU) withthe Federal Reserve Bank of Philadelphia (Federal Reserve).  PSB and the Bank do not believe that theexistence of the MOU or its provisions will have a material adverse effect ontheir consolidated financial position or results of operations.  PSB’s Annual Report on Form 10-K forthe year ended December 31, 2003, includes a more detailed description ofthe terms of the MOU.

 

**6.   NewAccounting Pronouncements**

 

The SECrecently released Staff Accounting Bulletin No. 105, Application of AccountingPrinciples to Loan Commitments. SAB 105 provides guidance about the measurementof loan commitments recognized at fair value under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities. SAB 105 alsorequires companies to disclose their accounting policy for those loancommitments including methods and assumptions used to estimate fair value andassociated hedging strategies. SAB 105 is effective for all loan commitmentsaccounted for as derivatives that are entered into after March 31, 2004. Theadoption of SAB 105 is not expected to have a material effect on ourconsolidated financial statements.

 

9

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The Companyadopted FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities*(FIN46). In general, a variable interest entity (VIE) is a corporation,partnership, trust or any other legal structure used for business purposes thateither (a) does not have equity investors with voting rights, or (b) has equityinvestors that do not provide sufficient financial resources for the entity tosupport its activities. FIN 46 requires certain VIEs to be consolidated by theprimary beneficiary if the investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. The consolidation requirements of FIN 46 applyimmediately to variable interest entities created after January 31, 2003. Weadopted the provisions of FIN 46 effective February 1, 2003 and such adoptiondid not have a material impact on our consolidated financial statements sincewe had no VIEs that were created after January 31, 2003. In December 2003, theFASB issued FIN 46(R) with respect to VIEs created before January 31, 2003,which among other things revised the implementation date to the first fiscalyear or interim period ended after March 15, 2004, with the exception ofspecial purpose entities (SPEs). The Company currently has no SPEs. The Companyadopted the provisions under the revised interpretation in the first quarter2004 which required the Company to consolidate its investment in Iron BridgeHoldings, Inc. (Iron Bridge). Prior to FIN 46 and 46(R), the Company accountedfor its investment in Iron Bridge under the equity method of accounting. Thisinvestment in Iron Bridge is more fully discussed in note 7 to the consolidatedfinancial statements.

 

OnMarch 31, 2004, the Financial Accounting Standards Board (FASB) issued aproposed Statement, *Share-Based Payment and Amendment of FASB StatementsNo. 123 and APB No. 95,*that addressed the accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for (a) equity instruments of the enterprise or (b)liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of stock options.  Under the proposed Statement, share-basedpayment transactions would be treated the same as other forms of compensationby recognizing the related cost in the income statement.  The expense of the award would generally bemeasured at fair value at the grant date. Current accounting guidance requires that the expense relating toso-called fixed plan employee stock options only be disclosed in the footnotesof the financial statements.  Theproposed Statements would eliminate the ability to account for share-basedcompensation transactions using APB Opinion No. 25, Accounting for Stock Issuedto Employees.  The Company is currentlyevaluating this proposed statement and its effects on its results of operations.

 

In November2003, the Emerging Issues Tax Force (“EITF”) of the FASB issued EITFAbstract 03-1, *The Meaning of Other-Than-Temporary Impairment andits Application to Certain Investments*(EITF 03-1).  The quantitative and qualitative disclosureprovisions of EITF 03-1 were effective for years ending afterDecember 15, 2003 and were included in the Corporation’s 2003Form 10-K.  In March 2004, the EITFissued a Consensus on Issue 03-1 requiring that the provisions ofEITF 03-1 be applied for reporting periods beginning after June 15,2004 to investments accounted for under SFAS No. 115 and 124.  EITF 03-1 establishes a three-stepapproach for determining whether an investment is considered

 

10

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impaired,whether that impairment is other-than temporary, and the measurement of animpairment loss.  The Corporation is inthe process of determining the impact that this EITF will have on its financialstatements.

 

**7.   VariableInterest Entities**

 

InJanuary 29, 1999, the Company purchased 1,600,000 shares of Series AConvertible Preferred Stock, $.01 par value per share, (the “Preferred Stock”)of McGuire Performance Solutions, Inc. (“MPS”).  PSB purchased the shares for $.78125 per share for a total costof $1,250,000.  In 2000, MPS changed itsname to Iron Bridge Holdings, Inc. (“Iron Bridge”) and formed two newsubsidiaries, one adopting the MPS name and the other, Avanti Capital, Inc, aregistered investment advisory company. During the year ended December 31, 2001, and 2000, the Companypurchased an additional 375,000 shares and 500,000 shares, respectively, of thePreferred Stock for $1.00 per share for a total cost $875,000.  On December 27, 2002, the foundingshareholders of Iron Bridge purchased from PSB 304,350 shares of preferredstock for $0.88 per share, which was the average cost per share paid by PSB forthese shares.  PSB sold these shares toreduce its holdings in Iron Bridge so they would not be required to consolidateIron Bridge under current accounting literature.  The Company owns 87.7% of the Preferred Stock, which represents a49.9% fully diluted ownership interest in Iron Bridge.  The Iron Bridge subsidiary, MPS, is anationally recognized firm delivering cost-effective solutions for highperformance total balance sheet management to banks, thrifts, credit unions andother financial institutions.

 

In the firstquarter of 2004 the Company adopted FASB interpretation No. 46(R)Consolidation of Variable Interest Entities (“FIN 46(R)”).  In applying FIN 46(R), it was determinedthat the Company, as the largest shareholder and virtually Iron Bridge’s onlyfinancial resource, would absorb a majority of Iron Bridge’s expectedlosses.  Therefore, it was the Company’sconclusion that in accordance with FIN 46(R), Iron Bridge is a variableinterest entity and thus the Company was required to consolidate Iron Bridgeduring the first quarter of 2004.

 

Theconsolidation of Iron Bridge as of June 30, 2004, resulted in the Companyrecording goodwill of $1,405,957 and minority interest of $154,691.  The Company accounts for goodwill inaccordance with SFAS 142, “Goodwill and Other Intangible Assets”.  Goodwill is now subject to impairmenttesting at least annually to determine whether write-downs of the recorded balancesare necessary.  The Company tests forimpairment based on the goodwill maintained at each defined reportingunit.  A fair value is determined foreach reporting unit based on at least one of three various market valuationmethodologies. If the fair value of the reporting unit exceeds its then bookvalue, no write-down of recorded goodwill is necessary.  If the fair value of a reporting unit isless, an expense may be required on the Company’s books to write down therelated goodwill to the proper carrying value. As of June 30, 2004, the Company completed its transitionaltesting, which determined that no impairment write-off was necessary.  No assurance can be given that futuregoodwill impairment tests will not result in a charge to earnings.

 

11

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**8.   Reclassifications**

 

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

 

12

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## **Item 2. Management’s Discussion and Analysis of the Financial Condition andResults of Operations.**

 

**RESULTS OF OPERATIONS**

 

**General**

 

PSB’s results of operations depend primarilyon the Bank’s net interest income, which is the difference between interestincome on interest-earning assets, and interest expense on its interest-bearingliabilities.  The Bank’sinterest-earning assets consist primarily of loans receivable and investmentsecurities, while its interest-bearing liabilities consist primarily ofdeposits and borrowings.  The Bank’s netincome is also affected by its provision for loan losses and its level ofnon-interest income as well as by its non-interest expense, such as salary,employee benefits, occupancy costs, and charges relating to non-performing andother classified assets.

 

**Impactof Inflation**

 

The financial statements and related financialdata presented herein have been prepared in accordance with generally acceptedaccounting principles which require the measurement of financial position andoperating results in terms of historical dollars without considering changes inthe relative purchasing power of money over time due to inflation.  The primary impact of inflation on theoperation of the Bank is reflected in increased operating costs.  Unlike most industrial companies, virtuallyall of the assets and liabilities of a financial institution are monetary innature.  As a result, interest rateshave a more significant impact on a financial institution’s performance thanthe effects of inflation.  Interestrates do not necessarily move in the same direction or in the same magnitude asthe price of goods and services.

 

**CritialAccounting Policies, Judgments and Estimates**

 

**Allowancefor Credit Losses**

 

PSB uses the reserve method of accounting forloan losses.  The balance in theallowance for loan losses is determined based on management’s review andevaluation of the loan portfolio in relation to past loss experience, the sizeand composition of the portfolio, current economic events and conditions, andother pertinent 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.  Recoveriesof previously charged-off amounts are credited to the allowance for loanlosses.

 

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

 

13

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the allowance for loan lossesbased on their judgments about information available to them at the time oftheir examination.

 

**PerformanceOverview**

 

PSB’s net income for the second quarter of2004 was $524,000 or $0.10 on a diluted per share basis, compared to net incomeof $595,000 or $0.14 per diluted share for the second quarter of2003.  The decrease in net income forthe second quarter of 2004 is primarily a result of a significant increase innon-interest expense associated with the consolidation of Iron Bridge Holdings,a variable interest entity.  SeeNote 7 to PSB’s financial statements.

 

Net interest margin increased by40 basis points from 3.81% for the three months ended June 30, 2004to 4.19% for the same period in 2003. The Bank successfully deployed its excess liquidity into higher yieldingassets, increasing the yield on these funds without, in management’s opinion,incurring excessive interest or credit risk.

 

**NetIncome**

 

PSB’s net income totaled $524,000 and$595,000 for the three months ended June 30, 2004 and 2003,respectively.  PSB’s basic and dilutedearnings per share for the three months ended June 30, 2004 were $0.12 and$0.10 respectively, compared to $0.14 and $0.14 per share for the three monthsended June 30, 2003.

 

PSB’s net income for the six months endedJune 30, 2004, totaled $1.1 million matching the $1.1 millionfor the same period in 2003.  PSB’sbasic and diluted earnings per share for the six months ended June 30,2004 were $0.26 and $0.22 respectively, compared to $0.25 and $0.25 for thebasic and diluted earnings for the six months ended June 30, 2003.

 

**NetInterest Income and Average Balances**

 

Net interest income is a key component ofPSB’s profitability and is managed in coordination with PSB’s interest ratesensitivity position.  Net interestincome for the second quarter of 2004 was $5.0 million compared to$4.6 million, for the second quarter of 2003 representing an 8.70%increase.  Net interest income for thesix month period ended June 30, 2004 was $9.4 million compared to$8.8 million for the same period in 2003, or a 6.82% increase.  This increase is primarily attributable toan overall lower cost of funds that increased the interest rate spread for theperiod.

 

Overall, average total interest-earningassets provided a yield of 5.82% for the three months ended June 30, 2004,compared to 5.90% for the same period in 2003. Average total loans were $308.3 million for the three months endedJune 30, 2004, and provided a yield of 7.63% for the period, compared toaverage total loans of $292.3 million for the three months endedJune 30, 2003, which provided a yield of 8.37% for the period.

 

Average total interest-bearing liabilitiesdecreased from $422.8 million to $415.0 million or 1.84% for thethree months ended June 30, 2004 compared to the three-month period endedJune 30, 2003.  The average rate ontotal interest-bearing liabilities decreased 53 basis points

 

14

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from 2.40% for the three monthsended June 30, 2003 to 1.87% for the three months ended June 30,2004.  The decrease in interest-bearingliabilities resulted from decreases in money market, savings account deposits,and certificates of deposit.  Thedecrease in the overall rate paid on interest-bearing liabilities was due toPSB’s ability to decrease the rate paid on all of its interest-bearingliabilities because of a management decision to reduce its interest-bearingdeposits until more attractive opportunities to deploy these deposits becomeavailable to the Bank.

 

Overall, average total interest-earningassets provided a yield of 5.75% for the six months ended June 30, 2004,compared to 5.94% for the same period in 2003. Average total loans of $302.1 million for the six months endedJune 30, 2004, provided a yield of 7.35%, compared to average total loansof $298.4 million for the six months ended June 30, 2003, thatprovided a yield of 8.15%.  The increasein average total loans was primarily due to an increase in multi-familyresidential mortgage loans, nonresidential mortgage loans and commercial loans.

 

Average total interest-bearing liabilitiesdecreased from $423.1 million to $400.3 million or 5.70% for the sixmonths ended June 30, 2004 compared to the six months ended June 30,2003.  The primary reason for the changein total interest-bearing liabilities was a decrease in money market, savingsdeposits, and certificates of deposit. The average rate on interest-bearing liabilities for the six month periodending June 30, 2004, decreased 73 basis points from 2.60% for thesix months ended June 30, 2003, to 1.87% for the six months endedJune 30, 2004.

 

**Provision for Loan Losses**

 

The provision for loanlosses represents the charge against earnings that is required to fund theallowance for loan losses.  PSB determines the level of the allowancefor loan losses through a regular review of the loanportfolio.  Management’s evaluation of the adequacy of the allowancefor loan losses is based upon an examination of the portfolio as well as suchfactors as declining trends, the volume of loan concentrations, adversesituations that may affect the borrower’s ability to pay, prior loss experiencewithin the portfolio, current economic conditions and the results of the mostrecent regulatory examinations.  PSBmade no provision for loan losses during the six months ended June 30, 2004 andmade a provision of $45,000 for the six months ended June 30, 2003.Additionally, PSB had charge-offs against the allowance for loan losses of$192,000 and $322,000 and recoveries of $98,000 and $84,000 during the sixmonth periods ended June 30, 2004 and 2003, respectively.

 

15

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**AverageBalance Sheets and Rate/Yield Analysis**

 

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

 
|                                                              |   | **Three Months Ended June 30,** |    |
|-------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                              |   | **2004**                             |    | **2003** |   |
|                                                              |   | **Average  Balance**                 |    | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/****Rate** |   |
|                                                              |   | **(Dollars in thousands)**           |    |
| **ASSETS**                                                        |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                          |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits                                         |   | $                                    | 67,608  |   | $ | 160 |   | 0.95 | % | $ | 141,118 |   | $ | 360 |   | 1.02 | % |
| Investment securities                                             |   | 49,003                               |    | 416 |   | 3.40 |   | 19,308 |   | 184 |   | 3.81 |   |
| Mortgage-backed securities                                        |   | 51,447                               |    | 472 |   | 3.67 |   | 32,315 |   | 499 |   | 6.18 |   |
| Loans                                                             |   | 308,271                              |    | 5,881 |   | 7.63 |   | 292,283 |   | 6,114 |   | 8.37 |   |
| Total interest-earning assets                                     |   | 476,329                              |    | $ | 6,929 |   | 5.82 | % | 485,024 |   | $ | 7,157 |   | 5.90 | % |
| Noninterest-earning assets                                        |   | 20,240                               |    |   |   |   |   | 10,367 |   |   |   |   |   |
| Total assets                                                      |   | $                                    | 496,569 |   |   |   |   |   | $ | 495,391 |   |   |   |   |   |
|                                                              |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                                   |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                     |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Now checking accounts                                             |   | $                                    | 26,313  |   | $ | 34 |   | 0.52 | % | $ | 23,043 |   | $ | 44 |   | 0.76 | % |
| Money market accounts                                             |   | 71,114                               |    | 201 |   | 1.13 |   | 76,049 |   | 274 |   | 1.44 |   |
| Savings deposits                                                  |   | 92,840                               |    | 247 |   | 1.06 |   | 95,317 |   | 341 |   | 1.43 |   |
| Certificates                                                      |   | 223,649                              |    | 1,455 |   | 2.60 |   | 227,279 |   | 1,871 |   | 3.29 |   |
| Total deposits                                                    |   | 413,916                              |    | 1,937 |   | 1.87 | % | 421,688 |   | 2,530 |   | 2.40 |   |
| Borrowed money                                                    |   | 1,105                                |    | 5 |   | 1.81 |   | 1,091 |   | 6 |   | 2.20 |   |
| Total interest-bearing  liabilities                               |   | 415,021                              |    | $ | 1,942 |   | 1.87 | % | 422,779 |   | $ | 2,536 |   | 2.40 | % |
| Non-interest-bearing  liabilities                                 |   | 33,316                               |    |   |   |   |   | 25,765 |   |   |   |   |   |
| Total liabilities                                                 |   | 448,337                              |    |   |   |   |   | 448,544 |   |   |   |   |   |
| Shareholders’ equity                                         |   | 48,232                               |    |   |   |   |   | 46,847 |   |   |   |   |   |
|                                                              |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and  shareholders’ equity                  |   | $                                    | 496,569 |   |   |   |   |   | $ | 495,391 |   |   |   |   |   |
| Net interest income                                               |   |                                 |    | $ | 4,987 |   |   |   |   |   | $ | 4,621 |   |   |   |
| Interest rate spread                                              |   |                                 |    |   |   | 3.95 | % |   |   |   |   | 3.50 | % |
| Net yield on interest-earning  assets                             |   |                                 |    |   |   | 4.19 | % |   |   |   |   | 3.81 | % |
|                                                              |   |                                 |    |   |   |   |   |   |   |   |   |   |   |
| Ratio of interest-earning  assets to interest-bearing liabilities |   |                                 |    |   |   | 1.15 | x |   |   |   |   | 1.15 | x |

 

16

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|                                                              |   | **Six Months Ended June 30,** |    |
|-------------------------------------------------------------------|--------|------------------------------------|---------|
|                                                              |   | **2004**                           |    | **2003** |   |
|                                                              |   | **Average  Balance**               |    | **Interest** |   | **Yield/****Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/****Rate** |   |
|                                                              |   | **(Dollars in thousands)**         |    |
| **ASSETS**                                                        |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                          |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits                                         |   | $                                  | 55,324  |   | $ | 250 |   | 0.90 | % | $ | 130,952 |   | $ | 690 |   | 1.05 | % |
| Investment securities                                             |   | 51,553                             |    | 752 |   | 2.92 |   | 15,418 |   | 321 |   | 4.16 |   |
| Mortgage-backed securities                                        |   | 49,172                             |    | 1,054 |   | 4.29 |   | 35,546 |   | 1,097 |   | 6.17 |   |
| Loans                                                             |   | 302,133                            |    | 11,107 |   | 7.35 |   | 298,351 |   | 12,156 |   | 8.15 |   |
| Total interest-earning assets                                     |   | 458,182                            |    | $ | 13,163 |   | 5.75 | % | 480,267 |   | $ | 14,264 |   | 5.94 | % |
| Noninterest-earning assets                                        |   | 29,663                             |    |   |   |   |   | 9,700 |   |   |   |   |   |
| Total assets                                                      |   | $                                  | 487,845 |   |   |   |   |   | $ | 489,967 |   |   |   |   |   |
|                                                              |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES**                                                   |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                     |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Now checking accounts                                             |   | $                                  | 26,458  |   | $ | 67 |   | 0.51 | % | $ | 21,696 |   | $ | 127 |   | 1.17 | % |
| Money market accounts                                             |   | 69,743                             |    | 416 |   | 1.19 |   | 72,360 |   | 614 |   | 1.70 |   |
| Savings deposits                                                  |   | 91,930                             |    | 516 |   | 1.12 |   | 94,254 |   | 827 |   | 1.75 |   |
| Certificates                                                      |   | 211,045                            |    | 2,735 |   | 2.59 |   | 233,686 |   | 3,921 |   | 3.36 |   |
| Total deposits                                                    |   | 399,176                            |    | 3,734 |   | 1.87 |   | 421,996 |   | 5,489 |   | 2.60 |   |
| Borrowed money                                                    |   | 1,103                              |    | 11 |   | 1.99 |   | 1,089 |   | 16 |   | 2.94 |   |
| Total interest-bearing  liabilities                               |   | 400,279                            |    | $ | 3,745 |   | 1.87 | % | 423,085 |   | $ | 5,505 |   | 2.60 | % |
| Non-interest-bearing  liabilities                                 |   | 39,704                             |    |   |   |   |   | 20,184 |   |   |   |   |   |
| Total liabilities                                                 |   | 439,983                            |    |   |   |   |   | 443,269 |   |   |   |   |   |
| Shareholders’ equity                                         |   | 47,862                             |    |   |   |   |   | 46,698 |   |   |   |   |   |
|                                                              |   |                               |    |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and  shareholders’ equity                  |   | $                                  | 487,845 |   |   |   |   |   | $ | 489,967 |   |   |   |   |   |
| Net interest income                                               |   |                               |    | $ | 9,418 |   |   |   |   |   | $ | 8,759 |   |   |   |
| Interest rate spread                                              |   |                               |    |   |   | 3.87 | % |   |   |   |   | 3.34 | % |
| Net yield on interest-earning  assets                             |   |                               |    |   |   | 4.11 | % |   |   |   |   | 3.65 | % |
| Ratio of interest-earning  assets to interest-bearing liabilities |   |                               |    |   |   | 1.14 | x |   |   |   |   | 1.14 | x |

 

**Allowancefor Loan Losses**

 

The allowance for loan losses is establishedthrough a provision for loan losses charged to expense.  Loans are charged against the allowance forpossible loan losses when management believes that the collectibility of theprincipal is unlikely.  The allowance isan amount that management believes will be adequate to absorb loan losses onexisting loans that may become uncollectible based on evaluations of thecollectibility of loans and prior loan loss experience.  The evaluations take into consideration suchfactors as changes in the nature and volume of the loan portfolio, overallportfolio quality, review of specific problem loans and current economicconditions that may affect the borrower’s ability to pay.  These estimates are particularly susceptibleto changes that may result in a material adjustment to the allowance for loanlosses.

 

17

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As adjustments becomeidentified, they are reported in earnings for the period in which they becomeknown.  Management believes that itmakes an informed judgment based upon available information.

 

It is the objective of PSB’s evaluationprocess to establish the following components of the allowance for loanlosses:  a specific allocation forcertain identified loans, a general allocation for pools of loans based on riskrating, and a general allocation for inherent loan portfolio losses.  Management performs current evaluations ofits criticized and classified loan portfolios and assigns specific reservesthat reflect the current risk to PSB.  Ageneral reserve allocation is applied for pools of loans based on risk ratingfor all loans not specifically reserved for as described previously.  The methodology used to calculate theprovision is consistent with the guidance provided in SAB No. 102.  Management reviews the adequacy of itsallowance on an ongoing basis and will provide, as management may deemnecessary, for additional provisions in future periods.

 

The Company accounts for its impaired loansin accordance with SFAS No. 114, “Accounting by Creditors for Impairment of aLoan,” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of aLoan - 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 measureimpairment based on the fair value of the collateral when the creditordetermines that foreclosure is probable.

 

**Non-interestIncome**

 

Non-Interest income consists of servicecharges, rental income, other income and gain on the sale of loans, and aresult of the consolidation of Iron Bridge’s income as part of the adoption ofFIN 46(R).  Non-Interest income portionfor the Bank decreased $125,000, or 20.90%, to $473,000 for the three monthsended June 30, 2004, from $598,000 for the same period in the prior year.  It decreased by $53,000, or 4.97%, to 1.0million for the six month ending June 30, 2004 from 1.1 million in the priorcomparative period.  The amount ofnon-operating income listed separately on the Consolidated Statements of Incomefor the three and six months periods ended June 30, 2004 was $601,000 and $1.1million resulting from an accounting change that required that PSB consolidatethe financial results of Iron Bridge as part of the adoption of FIN 46(R).  The investment in Iron Bridge is more fullydescribed in Note 7 to the Consolidated Financial Statements.

 

**Non-interestExpense**

 

Non-interest expense for the Bank increased$449,000, or 11.66%, to $4.8 million for the three months endedJune 30, 2004, from $4.3 million for the same period in the prioryear.  It increased by $604,000, or 7.35%,to $8.8 million for the six months ending June 30, 2004 from$8.2 million in the prior comparative period.  The principal reason for the increase in non-interest expense inboth the three and six month comparative periods was an increase in salariesand

 

18

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employee benefits.  The amountof non-operating expense listed separately on the Consolidated Statements ofIncome for the three and six month periods ended June 30, 2004 was$536,000 and $1.1 million resulting from an accounting change thatrequired that PSB consolidate the financial results of Iron Bridge as part ofthe adoption of FIN 46(R).  Theinvestment in Iron Bridge is more fully described in Note 7 to the ConsolidatedFinancial Statements.

 

The following table provides a summary ofnon-interest expense, by category of expense, for the six months endedJune 30, 2004, and 2003:

 
|                             |   | **Six months  ended June 30,** |   |
|----------------------------------|--------|-------------------------------------|--------|
|                             |   | **2004**                            |   | **2003** |   |
|                             |   | **(In  thousands)**                 |   |
|                             |   |                                |   |   |   |
| Salaries and employment benefits |   | $                                   | 4,629  |   | $ | 4,266 |   |
| Rent and occupancy expense       |   | 1,143                               |   | 999 |   |
| Professional fees                |   | 422                                 |   | 585 |   |
| FDIC insurance expense           |   | 120                                 |   | 36 |   |
| General insurance                |   | 153                                 |   | 108 |   |
| Advertising                      |   | 153                                 |   | 87 |   |
| Data processing fees             |   | 106                                 |   | 125 |   |
| Director fees                    |   | 137                                 |   | 151 |   |
| Other operating expense          |   | 1,950                               |   | 1,852 |   |
| Other non-operating expense      |   | 1,157                               |   | — |   |
| Total                            |   | $                                   | 9,970  |   | $ | 8,209 |   |

 

**Provisionfor Income Taxes**

 

Income tax provisions for the three and sixmonth periods ended June 30, 2004 were $225,000 and $463,000,respectively, compared to $302,000 and $507,000, respectively, for the same periodsin 2003.

 

**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 theuse of 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 committeemonitors the level of short-term assets and liabilities to maintain anappropriate balance between liquidity, risk, and return.  Liquidity is derived from various sourceswhich include increases in core deposits, sales of certificates of deposits,the amortization and prepayment of loans and mortgage-backed securities, andmaturities of investment securities and other short-term investments.  The liquidity position of PSB is alsostrengthened by a $183 million credit facility with the Federal Home LoanBank (“FHLB”).  Advances are secured byFHLB stock and qualifying mortgage loans. PSB had no outstanding borrowings fromthe FHLB as of June 30, 2004.

 

19

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Maximizing cash flow over time is crucial tothe maintenance of adequate liquidity. PSB’s total cash flow is a product of its operating activities,investing activities and financing activities. During the six months ended June 30, 2004, net cash used inoperating activities was $9.9 million, compared to net cash used inoperating activities of $5.8 million for the same period of 2003.  During the six months ended June 30,2004, net cash used in investing activities was $4.5 million, compared tonet cash provided by investing activities of $25.7 million for the sameperiod of 2003.  Financing activitiesprovided net cash of $32.7 million during the six months ended June 30,2004, compared to $6.2 million in net cash used in financing activitiesfor the same period of 2003.  The netresult of these items was a $18.4 million increase in cash and cashequivalents for the six months ended June 30, 2004, compared to a$13.7 million increase in cash and cash equivalents for the same period of2003.

 

**InterestRate Sensitivity**

 

Interest rate sensitivity focuses on theimpact of fluctuating interest rates and the re-pricing characteristics of ratesensitive assets and liabilities on net interest income.  Interest rate sensitivity is closely relatedto liquidity since each is directly affected by the maturity of assets andliabilities.  Rate sensitivity alsodeals with exposure to fluctuations in interest rates and its effect on net interestincome.  The primary function of PSB’sinterest rate sensitivity management is to reduce exposure to interest raterisk through an appropriate balance between interest-earning assets andinterest-bearing liabilities.  The goalis to minimize fluctuations in the net interest margin of PSB due to generalchanges in interest rates.

 

The blending of fixed and floating-rate loansand investments to match the re-pricing and maturity characteristics of thevarious funding sources is a continuous process in an attempt to minimize anysignificant fluctuations in net interest income.  The composition of the balance sheet is designed to minimize anysignificant fluctuation in net interest income and to maximize liquidity.  Management believes that the accessibilityto FHLB borrowings will provide the flexibility to assist in keepingfluctuations in net interest income under control and to maintain an adequateliquidity position.

 

**CapitalAdequacy**

 

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 June 30, 2004, 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 June 30, 2004, were 14.88% and 15.81%, respectively, and PSB’sTier I leverage ratio was 9.55%. These ratios exceed the requirements for classification as a “wellcapitalized” institution, the industry’s highest capital category.

 

20

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On June 30, 2004, PSB was in compliancewith regulatory capital requirements as shown in the following table:

 
|                            |   | **Well  Capitalized**       |   | **At June  30, 2004** |    | **At December  31, 2003** |   |
|---------------------------------|--------|-----------------------------|--------|-----------------------|---------|---------------------------|--------|
|                            |   | **Ratios**                  |   | **PSB**               |    | **Bank**                  |   | **PSB** |   | **Bank** |   |
|                            |   | **(Dollars  in thousands)** |   |
| Tier I  Capital                 |   |                        |   | $                     | 47,304  |                      | $      | 38,804 |   | $ | 45,918 |   | $ | 37,394 |   |
| Tier II  Capital                |   |                        |   | 2,974                 |    | 2,974                     |   | 3,069 |   | `3,069 |   |
| Total  Qualifying Capital       |   |                        |   | $                     | 50,278  |                      | $      | 41,778 |   | $ | 48,987 |   | $ | 40,463 |   |
|                            |   |                        |   |                  |    |                      |   |   |   |   |   |
| Risk  Adjusted Total Assets     |   |                        |   | $                     | 317,919 |                      | $      | 314,982 |   | $ | 302,032 |   | $ | 300,301 |   |
|                            |   |                        |   |                  |    |                      |   |   |   |   |   |
| Tier I Risk Based Capital Ratio |   | 6.00                        | %      | 14.88                 | %       | 12.32                     | %      | 15.20 | % | 12.45 | % |
| Total Risk Based Capital Ratio  |   | 10.00                       | %      | 15.81                 | %       | 13.26                     | %      | 16.22 | % | 13.47 | % |
| Leverage Ratio                  |   | 5.00                        | %      | 9.55                  | %       | 7.87                      | %      | 9.72 | % | 7.94 | % |
|                            |   |                        |   |                  |    |                      |   |   |   |   |   |
| Average  Assets                 |   |                        |   | $                     | 495,146 |                      | $      | 493,081 |   | $ | 472,474 |   | $ | 470,766 |   |
|                            |   |                        |   |                  |    |                      |   |   |   |   |   |

 

**FINANCIAL CONDITION**

 

**General**

 

PSB’s total assets increased$32.5 million from $470.3 at December 31, 2003, to$502.8 million, as of June 30, 2004 an increase of 6.9%.  Net loans outstanding grew by$14.4 million or 6.1% and accounted for the majority of the asset growthduring the first half of 2004.  Theincrease in loans was funded by an increase in deposits.  Total deposits equaled $448.6 million,an increase of $32.4 million or 7.8% during the first half of 2004.

 

At June 30, 2004, PSB’s net loan portfoliototaled $251.8 million compared to $237.4 million atDecember 31, 2003.  The increasedbusiness development efforts as part of the banks overall strategic plan,coupled with quality, consistent underwriting, competitive pricing and fees ledto an increase in the volume of five or more family residential mortgage loans,non-residential mortgage loans and commercial loans as indicated in the tablesbelow.

 

The following tables summarize the loanportfolio of PSB by loan category and amount at June 30, 2004, compared toDecember 31, 2003, respectively. From time to time, TransNational Mortgage Corp., a subsidiary of PSB,has originated and sold mortgage loans to third party investors within PSB’sfinancial reporting periods.  Similarly,student loans are frequently originated and sold within PSB’s financialreporting periods.  Such mortgage andstudent loans are not reflected in the financial tables and financialstatements pertaining to a particular period to the extent that such loans weresold prior to any period end. The loan categories correspond to PSB’s generalclassifications (Dollars in thousands):

 

21

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|                            |   | **At June  30,** |    | **At  December 31,** |   |       |   |        |   |
|---------------------------------|--------|------------------|---------|---------------------------|--------|------------|--------|-------------|--------|
|                            |   | **2004**         |    | **2003**                  |   |       |   |        |   |
|                            |   | **Amount**       |    | **Percent**               |   | **Amount** |   | **Percent** |   | **Variance** |   | **% Change** |   |
| Real Estate Loans(1):           |   |             |    |                      |   |       |   |        |   |   |   |   |   |
| One-to-four family(2)           |   | $                | 62,421  |                      | 24.47  | %          | $      | 65,385      |   | 27.15 | % | $ | (2,964 | ) | -4.53 | % |
| Construction loans              |   | 15,117           |    | 5.93                      | %      | 18,444     |   | 7.66        | %      | (3,327 | ) | -18.04 | % |
| Five or more family residential |   | 17,295           |    | 6.78                      | %      | 14,055     |   | 5.84        | %      | 3,240 |   | 23.05 | % |
| Nonresidential                  |   | 110,526          |    | 43.33                     | %      | 97,011     |   | 40.29       | %      | 13,515 |   | 13.93 | % |
|                            |   |             |    |                      |   |       |   |        |   |   |   |   |   |
| Commercial loans                |   | 26,248           |    | 10.29                     | %      | 21,854     |   | 9.08        | %      | 4,394 |   | 20.11 | % |
| Consumer loans                  |   | 23,489           |    | 9.20                      | %      | 24,062     |   | 9.99        | %      | (573 | ) | -2.38 | % |
| Total loans                     |   | $                | 255,096 |                      | 100.00 | %          | $      | 240,811     |   | 100.00 | % | $ | 14,285 |   | 5.93 | % |
|                            |   |             |    |                      |   |       |   |        |   |   |   |   |   |
| Less:                           |   |             |    |                      |   |       |   |        |   |   |   |   |   |
| Unearned fees and discounts     |   | $                | 322     |                      |   |       | $      | 359         |   |   |   |   |   |   |   |
| Undisbursed loan proceeds       |   | —           |    |                      |   | —     |   |        |   |   |   |   |   |
| Allowance for loan losses       |   | 2,974            |    |                      |   | 3,069      |   |        |   |   |   |   |   |
| Net Loans                       |   | $                | 251,800 |                      |   |       | $      | 237,383     |   |   |   |   |   |   |   |

 

----

(1)           Real Estate Loans represent loans secured by real estate

 

(2)           Does not include loans held for sale

 
| Total loans with: |   |   |    |   |   |   |   |    |   |   |   |   |   |
|-------------------|--------|--------|---------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|
| Fixed rates       |   | $      | 168,538 |   | 66.07  | %      | $      | 157,235 |   | 65.29  | %      |   |   |   |   |
| Adjustable rate   |   | 86,558 |    | 33.93  | %      | 83,576 |   | 34.71   | %      |   |   |   |   |
| Total loans       |   | $      | 255,096 |   | 100.00 | %      | $      | 240,811 |   | 100.00 | %      |   |   |   |   |

 

Total investment securities decreased$12.4 million, or 12.0%, to $91.2 million at June 30, 2004, from$103.7 million at December 31, 2003.

 

Cash and cash equivalents, includinginterest-earning deposits with banks, increased $18.4 million or 35.1% to$70.8 million at June 30, 2004, from $52.4 million atDecember 31, 2001.

 

Total liabilities increased$31.7 million or 7.7% to $454.9 million at June 30, 2004 from$423.2 million at December 31, 2003.  This increase primarily reflects an increase in time deposits asof June 30, 2004.

 

The Bank implemented a disciplined asset andliability management process to manage our deposit and loan pricing.  Through this process we have significantlylowered our cost of deposits and reduced interest rate risk.  Our strategies have been directed toincreasing the attractiveness of our core deposit products.  As we continue to execute this strategy itwill provide the Bank with greater flexibility to react to changes in theinterest rate environment

 

22

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**AssetQuality**

 

**Non-PerformingAssets**

 

PSB’s level of non-performing assetsdecreased $746,000 or 13.4% to $4.84 million at June 30, 2004, from$5.6 million at December 31, 2003. 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 unpaidinterest is reversed.  There areoccasional exceptions if the loans are in the process of collection and theloan is fully secured.

 

The following table sets forth non-performingassets as of June 30, 2004 and December 31, 2003:

 
|                                                                              |   | **At June 30,**            |   | **At December 31,** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------|--------|---------------------|--------|
|                                                                              |   | **2004**                   |   | **2003**            |   |
|                                                                              |   | **(Dollars in thousands)** |   |
|                                                                              |   |                       |   |                |   |
| Loans past due 90 days or more  as to interest or principal and accruing interest |   | $                          | — |                | $      | — |   |
| Nonaccrual loans                                                                  |   | 4,600                      |   | 5,203               |   |
|                                                                              |   |                       |   |                |   |
| Total nonperforming loans                                                         |   | 4,600                      |   | 5,203               |   |
| Real estate owned (REO)                                                           |   | 231                        |   | 374                 |   |
| Total nonperforming assets                                                        |   | $                          | 4,831  |                | $      | 5,577 |   |
|                                                                              |   |                       |   |                |   |
| Nonperforming loans to total  loans                                               |   | 1.81                       | %      | 2.16                | %      |
|                                                                              |   |                       |   |                |   |
| Nonperforming assets to total  assets                                             |   | 0.96                       | %      | 1.19                | %      |
|                                                                              |   |                       |   |                |   |
| Allowance for loan losses to  total loans                                         |   | 1.21                       | %      | 1.28                | %      |
|                                                                              |   |                       |   |                |   |
| Allowance for loan losses to  nonperforming loans                                 |   | 64.65                      | %      | 58.99               | %      |
|                                                                              |   |                       |   |                |   |
| Allowance for loan losses to  nonperforming assets                                |   | 61.56                      | %      | 55.03               | %      |
|                                                                              |   |                       |   |                |   |
| Net charge-offs as a percentage  of total loans                                   |   | 0.08                       | %      | 0.32                | %      |
|                                                                              |   |                       |   |                |   |

 

Note:      Total loans includes loans held for sale

 

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

## ** **

There has been no material change in PSB’sassessment of its sensitivity to market risk since its presentation in the 2003Annual Report on Form 10-K filed with the Securities and ExchangeCommission.

 

23

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

## ** **

PSB’s management conducted an evaluation,under the supervision and with the participation of PSB’s Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of PSB’s disclosure controls and procedures as of June 30, 2004.Based on this evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that PSB’s disclosure controls and procedures are effectivein alerting them in a timely manner to material information required to beincluded in PSB’s SEC reports.  Inaddition, PSB’s management, including the Chief Executive Officer and ChiefFinancial Officer, reviewed PSB’s internal controls, and there have been nosignificant changes in PSB’s internal controls or in other factors that couldsignificantly affect those controls subsequent to the date of their lastevaluation.

 

24

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# **PART II. **OTHERINFORMATION

# ** **

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

## ** **

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

 

## **Item 2.**           Changes in Securities and Use of Proceeds.

## ** **

None

 

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

## ** **

Not Applicable

 

## **Item 4.**           Submission of Matters to a Vote of SecurityHolders.

 

The Annual Meeting of Shareholders was heldon May 7, 2004. 

 

The following proposals were adopted by themargins indicated: 

 

1. To elect two Class II directors to holdoffice for three years from the date of election and until their successors areelected and qualified. 

 

|            |   | **Number of  Shares** |   |
|-----------------|--------|-----------------------|--------|
|            |   | **For**               |   | **Withheld** |   |
| Vincent J. Fumo |   | 3,884,833             |   | 1,008,579 |   |
| James E. Kenney |   | 3,900,271             |   | 498,109 |   |

 

2. To adopt an amendment to the articles ofincorporation to eliminate the separate classes of directors with staggeredterms of office.

 

| For                     |   | 876,537   |   |
|-------------------------|--------|-----------|--------|
| Against                 |   | 2,023,511 |   |
| Abstain/Broker non-vote |   | 1,481,747 |   |

 

25

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

## ** **

None

 

## **Item 6.**           Exhibits and Reports on Form 8-K.

## ** **

|   | (a)    | Exhibits.                 |
|--------|--------|---------------------------|
|   |   |                      |
|   |   | 31.1                      | Certification  of Anthony DiSandro pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|   |   |                      |   |
|   |   | 31.2                      | Certification  of John Carrozza pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                      |   |
|   |   | 32                        | Certification  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |   |                      |   |
|   | (b)    | Reports on  Form 8-K |
|   |   |                      |
|   |   | (1)                       | Current  Report on Form 8-K, dated April 2, 2004, reporting events related  to a legal proceeding involving PSB. |
|   |   |                      |   |
|   |   | (2)                       | Current  Report on Form 8-K, dated May 12, 2004, reporting PSB’s earnings  for the three month period ended March 31, 2004 |

#####  

##### 26

##### 

#####  

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on 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) |

 

August 16, 2004

 

27

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**EXHIBIT INDEX**

** **
| **Exhibit No.** |   | **Document**                                                                                                              |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                      |
| 31.1            |   | Certification  of Anthony DiSandro pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                            |
|            |   |                                                                                                                      |
| 31.2            |   | Certification  of John Carrozza pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                |
|            |   |                                                                                                                      |
| 32              |   | Certification  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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