**UNITEDSTATES****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  September 30, 2003,**                                                                                                                                      |
|                         |   |                                                                                                                                                                                              |
|                         |   | **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 itsCharter)

 

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

 

Indicate by checkmark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes ý      No o

 

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

 

Yes o No ý

 

Number of shares outstanding as of November 13, 2003

 
| **Common Stock (no par value)** |   | **4,534,611**        |
|---------------------------------|--------|----------------------|
| (Title of Class)                |   | (Outstanding Shares) |

 

 

----

 

PSB BANCORP, INC.INDEX TO QUARTERLY REPORT ON FORM 10-Q

 
| Part  I Financial Information |                                                                                                                                     |
|-------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                                     |   |
| Item  1.                      | Financial  Statements                                                                                                                    |   |
|                          |                                                                                                                                     |   |
|                          | Consolidated Statement of Financial  Condition (unaudited) as of September 30, 2003 and December 31,  2002                     |   |
|                          |                                                                                                                                     |   |
|                          | Consolidated Statement of Income  (unaudited) for the Three and Nine Months ended September 30, 2003 and  2002                      |   |
|                          |                                                                                                                                     |   |
|                          | Consolidated Statement of Cash Flows  (unaudited) for the Nine Months ended September 30, 2003 and 2002                             |   |
|                          |                                                                                                                                     |   |
|                          | Consolidated Statement of Comprehensive  Income (Loss) (unaudited) For the Three and Nine Months ended  September 30, 2003 and 2002 |   |
|                          |                                                                                                                                     |   |
|                          | Notes to Consolidated Financial Statements                                                                                               |   |
|                          |                                                                                                                                     |   |
| Item 2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                              |   |
|                          |                                                                                                                                     |   |
| Item 3.                       | Quantitative  and Qualitative Disclosure About Market Risk                                                                               |   |
|                          |                                                                                                                                     |   |
| Item 4.                       | Controls  and Procedures                                                                                                                 |   |
|                          |                                                                                                                                     |   |
| Part II                       | Other  Information                                                                                                                       |   |
|                          |                                                                                                                                     |   |
| Signatures                    |                                                                                                                                     |

 

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**Part I****FINANCIALINFORMATION**

 

**Item 1****  Financial Statements**

 

**PSB Bancorp, Inc.Statements of Financial Condition(In Thousands)**

 
|                                                                                                                                                       |   | **September 30,2003** |       | **Dec  31, 2002 ** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|------------|------------------------------|------------|
|                                                                                                                                                       |   | **(unaudited)**            |       | **(audited)**                |       |
| **Assets**                                                                                                                                                 |   |                       |       |                         |       |
| Cash and due from banks                                                                                                                                    |   | $                          | 3,771      |                         | $          | 4,323 |   |
| Interest earning deposits with banks                                                                                                                       |   | 41,674                     |       | 82,321                       |       |
| Federal funds sold                                                                                                                                         |   | 31,722                     |       | 23,625                       |       |
|                                                                                                                                                       |   |                       |       |                         |       |
| **Total cash and cash equivalents**                                                                                                                        |   | **77,167**                 | ** ** | **110,269**                  | ** ** |
|                                                                                                                                                       |   |                       |       |                         |       |
| Loans held-for-sale                                                                                                                                        |   | 45,670                     |       | 18,855                       |       |
| Investment securities available-for-sale,  at fair value                                                                                                   |   | 97,217                     |       | 49,730                       |       |
| Investment securities held to maturity  (fair value $863 and $2,346)                                                                                       |   | 847                        |       | 6,468                        |       |
| Federal Home Loan Bank stock – at cost                                                                                                                |   | 1,273                      |       | 872                          |       |
| Federal Reserve Bank stock – at cost                                                                                                                  |   | 320                        |       | 320                          |       |
|                                                                                                                                                       |   |                       |       |                         |       |
| Loans                                                                                                                                                      |   | 234,937                    |       | 292,233                      |       |
| Less allowance for possible loans losses                                                                                                                   |   | (3,204                     | )          | (3,603                       | )          |
|                                                                                                                                                       |   |                       |       |                         |       |
| **Net Loans**                                                                                                                                              |   | **231,733**                | ** ** | **288,630**                  | ** ** |
|                                                                                                                                                       |   |                       |       |                         |       |
| Accrued interest receivable                                                                                                                                |   | 1,910                      |       | 2,458                        |       |
| Premises and equipment, net                                                                                                                                |   | 3,015                      |       | 2,987                        |       |
| Bank-owned life insurance (BOLI)                                                                                                                           |   | 12,104                     |       | 11,721                       |       |
| Other assets                                                                                                                                               |   | 6,107                      |       | 4,470                        |       |
|                                                                                                                                                       |   | **23,136**                 |       | **21,636**                   | ** ** |
|                                                                                                                                                       |   |                       |       |                         |       |
| **Total Assets**                                                                                                                                           |   | **477,363**                | ** ** | **496,780**                  | ** ** |
| **Liabilities**                                                                                                                                            |   |                       | ** ** |                         | ** ** |
| Deposits                                                                                                                                                   |   |                       | ** ** |                         | ** ** |
| Non-interest bearing                                                                                                                                       |   | 32,101                     |       | 31,790                       |       |
| Interest bearing                                                                                                                                           |   | 393,706                    |       | 410,434                      |       |
|                                                                                                                                                       |   |                       |       |                         |       |
| **Total Deposits**                                                                                                                                         |   | **425,807**                | ** ** | **442,224**                  | ** ** |
|                                                                                                                                                       |   |                       |       |                         |       |
| Securities sold under agreements to  repurchase                                                                                                            |   | 1,096                      |       | 1,075                        |       |
| Advances from borrowers for taxes and  insurance                                                                                                           |   | 2,293                      |       | 3,397                        |       |
| Other liabilities                                                                                                                                          |   | 1,647                      |       | 3,917                        |       |
|                                                                                                                                                       |   | 5,036                      |       | 8,389                        |       |
|                                                                                                                                                       |   |                       |       |                         |       |
| **Total Liabilities**                                                                                                                                      |   | **430,843**                | ** ** | **450,613**                  | ** ** |
| **Shareholder’s Equity**                                                                                                                              |   |                       |       |                         |       |
| Common stock authorized, 15,000,000 shares,  no par value, 4,534,611 shares issued and outstanding on September 30,  2003, and December 31, 2002 |   | 42,105                     |       | 41,985                       |       |
| Retained earnings                                                                                                                                          |   | 6,425                      |       | 4,914                        |       |
| Accumulated other comprehensive income  (loss)                                                                                                             |   | (181                       | )          | 1,277                        |       |
| Employee stock ownership plan                                                                                                                              |   | (1,436                     | )          | (1,631                       | )          |
| Treasury stock, at cost, 72,325 shares on  September 30, 2003, and December 31, 2002                                                             |   | (393                       | )          | (378                         | )          |
| **Total Shareholders’ Equity**                                                                                                                        |   | **46,520**                 | ** ** | **46,167**                   | ** ** |
|                                                                                                                                                       |   |                       |       |                         |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                                        |   | **477,363**                | ** ** | **496,780**                  | ** ** |
|                                                                                                                                                            |        |                            |            |                              |            |  |  |

 

The accompanying notes are an integral part of these financialstatements.

 

1

----

 

**PSB Bancorp, IncConsolidated Statements of Income (In Thousands, Except Per Share Data)**

 
|                                                  |   | **Nine Months Ended  September 30** |       |
|-------------------------------------------------------|--------|------------------------------------------|------------|
|                                                  |   | **(unaudited)**                          |       |
|                                                  |   | **2003**                                 |       | **2002** | ** ** |
|                                                  |   |                                     |       |   |   |
| Interest  Income                                      |   |                                     |       |   |   |
| Loans,  including fees                                |   | $                                        | 17,706     |   | $ | 19,529 |   |
| Investment  securities                                |   | 2,323                                    |       | 3,308 |   |
| Deposit with  banks                                   |   | 879                                      |       | 794 |   |
| **Total Interest Income**                             |   | **20,908**                               | ** ** | **23,631** | ** ** |
|                                                  |   |                                     |       |   |   |
| Interest  Expense                                     |   |                                     |       |   |   |
| Interest on  deposits                                 |   | 7,612                                    |       | 9,960 |   |
| Interest on  borrowings                               |   | 22                                       |       | 223 |   |
| **Total Interest  Expense**                           |   | **7,634**                                | ** ** | **10,183** | ** ** |
|                                                  |   |                                     |       |   |   |
| **Net Interest Income**                               |   | **13,274**                               | ** ** | **13,448** | ** ** |
|                                                  |   |                                     |       |   |   |
| Provision for  Loan Losses                            |   | 45                                       |       | 597 |   |
|                                                  |   |                                     |       |   |   |
| Net interest  income after provision for loan losses  |   | 13,229                                   |       | 12,851 |   |
|                                                  |   |                                     |       |   |   |
| **Non-Interest Income**                               |   | **1,549**                                | ** ** | **2,375** | ** ** |
|                                                  |   |                                     |       |   |   |
| Non-Interest  Expenses                                |   |                                     |       |   |   |
| Salaries and  employee benefits                       |   | 6,667                                    |       | 6,205 |   |
| Occupancy and  equipment                              |   | 1,543                                    |       | 1,221 |   |
| Other  operating                                      |   | 4,329                                    |       | 5,173 |   |
|                                                  |   |                                     |       |   |   |
| Total  non-interest expenses                          |   | **12,539**                               | ** ** | **12,599** | ** ** |
|                                                  |   |                                     |       |   |   |
| Income before  income taxes and cumulative effect     |   | 2,239                                    |       | 2,627 |   |
| Income taxes                                          |   | (728                                     | )          | (902 | ) |
|                                                  |   |                                     |       |   |   |
| Income before  cumulative effect                      |   | 1,511                                    |       | 1,725 |   |
| Cumulative  effect                                    |   | —                                   |       | 1,329 |   |
|                                                  |   |                                     |       |   |   |
| **Net Income**                                        |   | **$**                                    | **1,511**  | ** ** | **$** | **3,054** | ** ** |
|                                                  |   |                                     |       |   |   |
| Net Income per  common share                          |   |                                     |       |   |   |
|                                                  |   |                                     |       |   |   |
| **Basic:**                                            |   |                                     |       |   |   |
| Income before  cumulative effect of accounting change |   | **$**                                    | **0.36**   | ** ** | **$** | **0.41** | ** ** |
| Cummulative  effect of accounting change              |   | **—**                               | ** ** | **$** | **0.32** | ** ** |
| Net Income                                            |   | **$**                                    | **0.36**   | ** ** | **$** | **0.73** | ** ** |
| **Diluted:**                                          |   |                                     | ** ** |   | ** ** |
| Income before  cumulative effect of accounting change |   | **$**                                    | **0.35**   | ** ** | **$** | **0.40** | ** ** |
| Cummulative  effect of accounting change              |   | **$**                                    | **—** | ** ** | **$** | **0.32** | ** ** |
| Net Income                                            |   | **$**                                    | **0.35**   | ** ** | **$** | **0.72** | ** ** |

 

The accompanying notes are an integral part of these financialstatements.

 

2

----

 

**PSBBancorp, IncConsolidated Statements of Income(In Thousands, Except Per Share Data)**

 
|                                                 |   | **Three Months Ended  September 30** |       |
|------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                 |   | **(unaudited)**                           |       |
|                                                 |   | **2003**                                  |       | **2002** |   |
|                                                 |   |                                      |       |   |   |
| Interest  Income                                     |   |                                      |       |   |   |
| Loans,  including fees                               |   | $                                         | 5,550      |   | $ | 6,465 |   |
| Investment  securities                               |   | 905                                       |       | 1,036 |   |
| Deposit with  banks                                  |   | 189                                       |       | 308 |   |
| **Total Interest  Income**                           |   | **6,644**                                 | ** ** | **7,809** | ** ** |
|                                                 |   |                                      |       |   |   |
| Interest  Expense                                    |   |                                      |       |   |   |
| Interest on  deposits                                |   | 2,123                                     |       | 3,224 |   |
| Interest on  borrowings                              |   | 6                                         |       | 49 |   |
| **Total Interest  Expense**                          |   | **2,129**                                 | ** ** | **3,273** | ** ** |
|                                                 |   |                                      |       |   |   |
| **Net Interest Income**                              |   | **4,515**                                 | ** ** | **4,536** | ** ** |
|                                                 |   |                                      |       |   |   |
| Provision for  Loan Losses                           |   | —                                    |       | 166 |   |
|                                                 |   |                                      |       |   |   |
| Net interest  income after provision for loan losses |   | 4,515                                     |       | 4,370 |   |
|                                                 |   |                                      |       |   |   |
| **Non-Interest Income**                              |   | **483**                                   | ** ** | **666** | ** ** |
|                                                 |   |                                      |       |   |   |
| Non-Interest  Expenses                               |   |                                      |       |   |   |
| Salaries and  employee benefits                      |   | 2,401                                     |       | 2,014 |   |
| Occupancy and  equipment                             |   | 544                                       |       | 418 |   |
| Other  operating                                     |   | 1,385                                     |       | 1,703 |   |
|                                                 |   |                                      |       |   |   |
| Total  non-interest expenses                         |   | **4,330**                                 | ** ** | **4,135** | ** ** |
|                                                 |   |                                      |       |   |   |
| Income before  income taxes                          |   | 668                                       |       | 901 |   |
| Income taxes                                         |   | (221                                      | )          | (296 | ) |
|                                                 |   |                                      |       |   |   |
| **Net Income**                                       |   | **$**                                     | **447**    | ** ** | **$** | **605** | ** ** |
|                                                 |   |                                      |       |   |   |
| Net Income per  common share                         |   |                                      |       |   |   |
| **Basic:**                                           |   | **$**                                     | **0.11**   | ** ** | **$** | **0.15** | ** ** |
|                                                 |   |                                      | ** ** |   | ** ** |
| **Diluted:**                                         |   | **$**                                     | **0.10**   | ** ** | **$** | **0.14** | ** ** |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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**PSB Bancorp, Inc. Consolidated Statements of Cash Flows(In Thousands)**

 
|                                                                                         |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                         |   | **2003**                                   |   | **2002** |   |
|                                                                                         |   | **(Unaudited)**                            |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                         |   |                                       |   |   |   |
| Net income                                                                                   |   | $                                          | 1,511  |   | $ | 3,054 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |   |                                       |   |   |   |
| Provision for possible loan losses                                                           |   | 45                                         |   | 597 |   |
| Recovery on loans                                                                            |   | 129                                        |   | — |   |
| Depreciation and amortization                                                                |   | 658                                        |   | 446 |   |
| Amortization of discounts and accretion of  premiums on investment securities                |   | (174                                       | )      | 132 |   |
| Cumulative effect of accounting change                                                       |   | —                                     |   | (1,329 | ) |
| (Write-up) write-down of equity investments                                                  |   | —                                     |   | (13 | ) |
| Gain on sale of real estate                                                                  |   | 24                                         |   | 31 |   |
| Loans held-for-sale                                                                          |   | (26,815                                    | )      | 1,947 |   |
| Deferred income taxes                                                                        |   | —                                     |   | 776 |   |
| ESOP expense                                                                                 |   | 315                                        |   | 399 |   |
| Change in assets and liabilities:                                                            |   |                                       |   |   |   |
| Decrease in accrued interest receivable                                                      |   | 548                                        |   | 27 |   |
| (Increase) decrease in other assets                                                          |   | (1,275                                     | )      | 1,606 |   |
| Increase (decrease) in accrued interest  payable                                             |   | —                                     |   | (10 | ) |
| (Decrease) change in accrued expenses                                                        |   | (2,272                                     | )      | (1,428 | ) |
|                                                                                         |   |                                       |   |   |   |
| Net cash (used in) provided by operating  activities                                         |   | (27,306                                    | )      | 6,235 |   |
|                                                                                         |   |                                       |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |   |                                       |   |   |   |
| Purchase of investment securities,  available-for-sale                                       |   | (85,304                                    | )      | (5,000 | ) |
| Proceeds from maturities and calls of  investment securities                                 |   | 41,402                                     |   | 12,918 |   |
| Purchase of Federal Home Loan Bank stock                                                     |   | (400                                       | )      | (1,029 | ) |
| Net decrease (increase) in loans                                                             |   | 56,615                                     |   | (7,288 | ) |
| Proceeds from sale of real estate owned                                                      |   | 92                                         |   | 423 |   |
| Purchase of premises and equipment                                                           |   | (686                                       | )      | (892 | ) |
| Net cash provided by (used in) investing  activities                                         |   | 11,719                                     |   | (868 | ) |
|                                                                                         |   |                                       |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |   |                                       |   |   |   |
| Net (decrease) increase in deposits                                                          |   | (16,417                                    | )      | 19,462 |   |
| Increase (decrease) in securities sold  under agreements to repurchase                       |   | 21                                         |   | (14 | ) |
| Change in advances for borrowers’ taxes and  insurance                                  |   | (1,104                                     | )      | (205 | ) |
| Change in treasury stock                                                                     |   | (15                                        | )      | — |   |
| Net cash (used in) provided by financing  activities                                         |   | (17,515                                    | )      | 19,243 |   |
|                                                                                         |   |                                       |   |   |   |
| NET (DECREASE)INCREASE IN CASH AND CASH  EQUIVALENTS                                         |   | (33,102                                    | )      | 24,610 |   |
|                                                                                         |   |                                       |   |   |   |
| Cash and cash equivalents, beginning of  period                                              |   | 110,269                                    |   | 54,756 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                     |   | $                                          | 77,167 |   | $ | 79,366 |   |

 

4

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**PSB Bancorp, Inc. Consolidated Statement of Comprehensive Income(Loss)(In Thousands)**

(unaudited)

 
|                                                                   |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|------------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                                                   |   | **2003**                                    |   | **2002**                                   |   | **2003** |   | **2002** |   |
|                                                                   |   | **(unaudited)**                             |   |
| Net income                                                             |   | $                                           | 447    |                                       | $      | 605 |   | $ | 1,511 |   | $ | 3,054 |   |
|                                                                   |   |                                        |   |                                       |   |   |   |   |   |
| Other comprehensive income (loss), net of  tax:                        |   |                                        |   |                                       |   |   |   |   |   |
|                                                                   |   |                                        |   |                                       |   |   |   |   |   |
| Accumulated comprehensive gain (loss),  investments available-for-sale |   | (1,014                                      | )      | 505                                        |   | (1,458 | ) | 1,180 |   |
| Other comprehensive income (loss)                                      |   | (1,014                                      | )      | 505                                        |   | (1,458 | ) | 1,180 |   |
| Comprehensive income (loss)                                            |   | $                                           | (567   | )                                          | $      | 1,110 |   | $ | 53 |   | $ | 4,234 |   |

 

5

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**PSB Bancorp, Inc.Notes To Financial StatementsSeptember 30, 2003(unaudited)**

 

**1.   Basis of Presentation**

 

This quarterly report presents the consolidated financial statements ofPSB Bancorp, Inc.  and its subsidiaries(“PSB”).  PSB’s financial statementsreflect all adjustments and disclosures which management believes are necessaryfor a fair presentation of interim results. The result of operations for the quarter presented does not necessarilyindicate the results that PSB will achieve for all of 2003.  You should read these interim financialstatements in conjunction with the consolidated financial statements andaccompanying notes that are presented in the PSB Bancorp, Inc. Annual Report onForm 10-K for the year ended December 31, 2002.

 

The financial information in this quarterly report has been prepared inaccordance with PSB’s customary accounting practices; these financialstatements have not been audited. Certain information and footnote disclosures required under generallyaccepted accounting principles have been condensed or omitted, as permitted byrules and regulations of the Securities and Exchange Commission.

 

**2.   Business Combinations**

 

On June 29, 2001, PSB acquired Jade Financial Corp. (“Jade.”)  The acquisition was accounted for using thepurchase method.  The acquisition ofJade resulted in PSB recording negative goodwill of approximately $1,752,000.On January 1, 2002, after reducing the carrying value of the acquireddeferred tax asset of Jade by approximately $350,000, PSB recognized, as acumulative effect of an accounting change, approximately $1.3 million ofunamortized negative goodwill, in conjunction with the adoption of SFAS No.142, “Goodwill and Other Intangible Assets.”

 

**3.   Earnings Per Share**

 

The following table illustrates the required disclosure of the reconciliationof the numerators and denominators of the basic and diluted earnings per sharecomputation.  The computation of dilutedearnings per share for all periods excludes 1,371,200 options issued inconnection with the 1999 First Bank of Philadelphia acquisition, which havebeen deemed by management to be invalid.

 

6

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

 

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

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

 

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

 

7

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|                                                                                   |   | **Nine months  ended September 30, 2002** |   |
|----------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                   |   | **Income  (numerator)**                        |   | **Weighted  average shares  (denominator)** |   | **Per share  amount** |   |
|                                                                                   |   | **(In  thousands, except per share data)**     |   |
| Basic earnings per share                                                               |   |                                           |   |   |   |   |   |
|                                                                                   |   |                                           |   |   |   |   |   |
| Income available to common stockholders  before cumulative effect of accounting change |   | $                                              | 1,725  |   | 4,180 |   | $ | 0.43 |   |
|                                                                                   |   |                                           |   |   |   |   |   |   |   |
| cumulative effect of accounting change                                                 |   | $                                              | 1,329  |   |   |   | $ | 0.32 |   |
|                                                                                   |   |                                           |   |   |   |   |   |
| Income available to common Stockholders                                                |   | $                                              | 3,056  |   | 4,180 |   | $ | 0.75 |   |
|                                                                                   |   |                                           |   |   |   |   |   |
| Effect of dilutive securities Stock options                                            |   | —                                         |   | 78 |   | $ | (.01 | ) |
|                                                                                   |   |                                           |   |   |   |   |   |
| Diluted earnings per share                                                             |   |                                           |   |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities            |   | $                                              | 3,056  |   | 4,258 |   | $ | 0.74 |   |

 

No options were anti-dilutive at September 30, 2002

 
|                                                                        |   | **Three  months ended September 30, 2002** | ** ** |
|-----------------------------------------------------------------------------|--------|-------------------------------------------------|------------|
|                                                                        |   | **Income  (numerator)**                         |       | **Weighted  average shares  (denominator)** | ** ** | **Per share  amount** | ** ** |
|                                                                        |   | **(In  thousands, except per share data)**      | ** ** |
| Basic earnings per share                                                    |   |                                            |       |   |   |   |   |
| Income available to common stockholders                                     |   | $                                               | 605        |   | 4,187 |   | $ | 0.15 |   |
| Effect of dilutive securities Stock options                                 |   | —                                          |       | 76 |   | $ | (.01 | ) |
|                                                                        |   |                                            |       |   |   |   |   |
| Diluted earnings per share                                                  |   |                                            |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |   | $                                               | 605        |   | 4,263 |   | $ | 0.14 |   |

 

No options were anti-dilutive at September 30, 2002.

 

8

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**4. Regulatory Matters**

 

On April 14, 2003, PSB and First Penn Bank (the “Bank”) enteredinto a Memorandum of Understanding (“MOU”) with the Federal Reserve Bank ofPhiladelphia (“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 AnnualReport on Form 10-K for the year ended December 31, 2002, includes a moredetailed description of the terms of the MOU.

 

**5. New AccountingPronouncements**

 

In November 2002, the Financial Accounting Standards Board issuedFASB Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  OnJanuary 1, 2003, PSB adopted the disclosure provisions of FIN No. 45 forguarantees issued or modified after December 31, 2002, and adopted theinitial recognition and measurement provisions on January 1, 2003.  Adoption of the initial recognition andmeasurement provisions did not affect PSB’s financial condition or results ofoperations.

 

While certain guarantees are only subject to the disclosure provisionsof this interpretation, others are subject to both the disclosure and initialrecognition and measurement provisions. For guarantees that fall within the scope of the initial recognition andmeasurement provisions, FIN No. 45 requires a guarantor to recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. Under the previous accounting rules, the Bank did not record a liabilitywhen guaranteeing obligations unless it became probable that the Bank wouldhave to perform under the guarantee.

 

The Bank issues financial and performance standby letters of credit,both of which are subject to the disclosure and initial recognition andmeasurement provisions of FIN No. 45. Financial and performance standby lettersof credit are conditional commitments issued by the Bank to assure thefinancial and performance obligations of a customer to a third party. AtSeptember 30, 2003, and December 31, 2002, the Bank was contingentlyliable on financial and performance standby letters of credit totaling $2.3million and $1.6 million, respectively, $1.0 million of which were originatedduring 2003. The Bank’s commitments under standby letters of credit expire atvarious dates through 2005. Amounts due under these letters of credit would bereduced by any proceeds that the Bank would be able to obtain in liquidatingthe collateral for the loans, which varies depending on the customer. The Bankgenerally holds collateral and/or obtains personal guarantees supporting thesecommitments. Collateral held for these commitments at September 30, 2003,was 100%.

 

In January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities (“FIN No. 46”). On October 31,2003, the FASB issued an Exposure Draft related to the consolidation ofVariable Interest Entities, and the interpretation of FIN 46 (“FIN 46Interpretation”). The consolidation requirements, as amended by FASB StaffPosition (FSP) 46-6, “Effective Date of FIN 46”, apply to existing entities inthe first fiscal year or interim period beginning after December 15, 2003.FIN No. 46 also requires a variable interest entity to be consolidated by aCompany if that Company is subject to a majority of the risk of loss from thevariable interest entity’s activities or entitled to receive a majority of theentity’s residual returns,

 

9

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or both.  FIN No. 46 alsorequires disclosures about variable interest entities that a Company is notrequired to consolidate, but in which it has a significant variable interest.Certain of the disclosure requirements apply in all financial statements issuedafter January 31, 2003, regardless of when the variable interest entitywas established.  FIN No. 46 does notmaterially impact the Company.

 

In April 2003, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 149 “Amendment of Statement 133on Derivative Instruments and Hedging Activities” (“SFAS No. 149”).  SFAS No. 149 is generally effective forcontracts entered into or modified after June 30, 2003 and for hedgingrelationships designated after June 30, 2003.  All provisions of this Statement shall be applied prospectively.  Based on the Company’s current businessoperations, the adoption of the provisions of SFAS No. 149 did not materiallyimpact the Company’s financial condition, results of operations, ordisclosures.

 

In May 2003, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 150 “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity”(“SFAS No. 150”).  SFAS No. 150 isgenerally effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise effective at the beginning of the firstinterim period beginning after June 15, 2003.  Based on the Company’s current business operations, theprovisions of SFAS No. 150 did not impact the Company’s financial condition,results of operations, or disclosures.

 

In October 2003, the AICPA issued SOP 03-3 *Accounting for Loans or Certain DebtSecurities Acquired in a Transfer*. SOP 03-3 applies to a loan with the evidence of deterioration of creditquality since origination acquired by completion of a transfer for which it isprobable at acquisition, that the Company will be unable to collect allcontractually required payments receivable. SOP 03-3 requires that the Company recognize the excess of all cashflows expected at acquisition over the investor’s initial investment in theloan as interest income on a level-yield basis over the life of the loan as theaccretable yield.  The loan’scontractual required payments receivable in excess of the amount of its cashflows excepted at acquisition (nonaccretable difference) should not berecognized as an adjustment to yield, a loss accrual or a valuation allowancefor credit risk.  SOP 03-3 is effectivefor loans acquired in fiscal years beginning after December 31, 2004.  Early adoption is permitted.  Management is currently evaluating theprovisions of SOP 03-3.

 

10

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**CAUTIONARYSTATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995**

 

This Report contains certain “forward-looking statements” includingstatements concerning plans, objectives, future events or performance andassumptions and other statements which are other than statements of historicalfact.  PSB wishes to caution readersthat the following important factors, among others, may have affected and couldin the future affect PSB’s actual results and could cause PSB’s actual resultsfor subsequent periods to differ materially from those expressed in anyforward-looking statement made by or on behalf of PSB herein:  (i) the effect of changes in laws and regulations,including federal and state banking laws and regulations, with which PSB mustcomply, and the associated costs of compliance with such laws and regulationseither currently or in the future as applicable; (ii) the effect of changes inaccounting policies and practices, as may be adopted by the regulatory agenciesas well as by the Financial Accounting Standards Board, or of changes in PSB’sorganization, compensation, and benefit plans; (iii) the effect on PSB’scompetitive position within its market area because of the increasingconsolidation within the banking and financial services industries, includingthe increased competition from larger regional and out-of-state bankingorganizations as well as nonbank providers of various financial services; (iv)the effect of changes in interest rates; and (v) the effect of changes in thebusiness cycle and downturns in the local, regional, or national economies.

 

**Item 2****              MANAGEMENT’SDISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**EARNINGS SUMMARY**

 

Throughout this Quarterly Report on Form 10-Q, PSB Bancorp, Inc. andFirst Penn Bank, its subsidiary, are referred to collectively as “PSB.”

 

**Comparison of theNine Months Ended September 30, 2003 and 2002**

 

**Interest Income**

 

For the nine months ended September 30, 2003, total interestincome decreased by $2.7 million compared to the first nine months of2002.  Total interest and dividends oninvestments decreased $985,000 while interest and fees on loans decreased $1.8million and other interest income increased $85,000.  Overall, the decrease in total interest income of $2.7 million isthe result of a decrease in both volume and yield on loans, interest-earningdeposits, and mortgage-backed securities. This decrease was partially offset by an increase in the volume ofinvestment securities.

 

Total interest and fees on loans decreased $1.8 million in the firstthree quarters of 2003 compared to the same period in 2002.  Interest rates have continued to hold steadywithin historically low ranges.  Loangrowth has been sluggish as businesses and consumers have been reluctant toborrow in an uncertain economic environment.

 

11

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Interest and dividends on investments decreased due to the overalldecline in yield and prepayments on mortgage-backed securities caused by theoverall decline in interest rates.  Thenet growth in the volume of investment holdings has generated additionalinterest that has offset some of the negative impact of lower yields and theprepayment of mortgage-backed securities. Management continues to redeploy its available funds from lower yieldingdeposit investments to higher-yielding available-for-sale investmentsecurities.  This effort has resulted ina minimal decrease in the interest rate margin in a difficult interest rateenvironment.

 

**Interest Expense**

 

For the nine months ended September 30, 2003, total interestexpense decreased by $2.5 million or 25% compared to the first three quartersof 2002.  The overall decrease ininterest expense is the result of a $2.3 million decrease in interest paid ondeposits and a $201,000 decrease in interest expense on short-termborrowings.  Historically low interestrates have positively affected interest expense.  The lower rates paid on all deposit accounts are the mostsignificant factor affecting the significant decrease in interest expense.  In addition to demand deposit rates, timedeposit rates have steadily declined over the past two years.  Management actively monitors and adjusts itsrates to attain minimal impact on the PSB’s interest rate spread.

 

**Provision for LoanLosses**

 

The provision for loan losses is based upon management’s quarterlyreview of the loan portfolio.  Thepurpose of the review is to assess loan quality, identify impaired loans,analyze delinquencies, ascertain loan growth, evaluate potential charge-offsand recoveries, and assess general economic conditions in the marketsserved.  Management is committed to an aggressiveprogram of problem loan identification and resolution.

 

The provision for loan losses is a charge to income and increases theallowance for loan losses, the allowance for loan losses is an amount believedby management necessary to absorb inherent losses in the loan portfolio.  The allowance is calculated by applying lossfactors to outstanding loans by type, excluding loans for which a specificallowance has been determined.  Lossfactors are based on management’s consideration of the nature of the portfoliosegments, changes in mix and volume of the loan portfolio, and historical loanloss experience.  In addition,management considers industry standards and trends with respect tononperforming loans and its knowledge and experience with specific lendingsegments.

 

Although management believes that it uses the best informationavailable to make such determinations and that the allowance for loan losses isadequate at September 30, 2003, future adjustments could be necessary ifcircumstances or economic conditions differ substantially from the assumptionsused in making the initial determinations. A downturn in the local economy, employment and delays in receivingfinancial information from borrowers could result in increased levels ofnonperforming assets and charge-offs, increased loan loss provisions, andreductions in income.  Additionally, asan integral part of the examination process, bank regulatory agenciesperiodically review PSB’s loan loss allowance. The banking agencies could require the recognition of additions to theloan loss allowance based on their judgment of information available to them atthe time of their examination.

 

12

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The allowance for loan losses decreased by $399,000 fromDecember 31, 2002, at September 30, 2003.  The ratio of the allowance for loan losses to total loans(excluding loans held-for-sale) for September 30, 2003 andDecember 31, 2002 was 1.4% and 1.2%, respectively.

 

This allowance for loan losses is consistent with the guidelines ofregulators and peer banks.  Management’shas concluded that the allowance for loan losses is sufficient based on itsreview of the overall loan portfolio.

 

The provision for loan losses totaled $45,000 for the nine months endedSeptember 30, 2003.  The provisionfor the same period in 2002 was $597,000. The decrease in the provision for loan losses was based on management’sdetermination, that after analysis of its overall loan portfolio coupled withthe implementation of a new underwriting process, a minimal charge to theprovision for loan losses was appropriate.

 

As of September 30, 2003, charge-offs exceeded recoveries by$441,198 compared to September 30, 2002, when charge-offs exceededrecoveries by $695,000.  Thisimprovement is attributable to a newly instituted loan review process coupledwith the institution of an improved underwriting process.

 

Non-performing loans totaled $5.1 million at September 30,2003.  Non-performing commercial andcommercial real estate loans were $4.6 million and installment loans were $591,000.

 

**Non-Interest Income**

 

Non-interest income for the nine months ended September 30, 2003,decreased $826,000.  The major reasonfor this decrease was management’s decision to undertake a major restructuringof service fees in an attempt to have depositors utilize multiple bank servicesthat would ultimately generate increased fee-based business and increaseoverall fee income.  Additionally, PSBterminated a substantial fee-based account because of a management decisionthat the undertaking did not fit into its strategic business plan.

 

**Non-Interest Expense**

 

For the nine months ended September 30, 2003, non-interestexpenses decreased $60,000 compared to the same period in 2002.

 

Employee salaries and benefits increased $462,000 as a result ofincreased salaries that correspond with the creation and staffing of a newcredit administration department.

 

Occupancy and equipment expense increased $322,000.  Other operating expense decreased by$844,000 primarily attributable to a decrease in one-time costs incurred in2002 associated with the installation of a new core hardware and softwaresystem.

 

**Provision for IncomeTaxes**

 

The income tax provision for the nine-month period endedSeptember 30, 2003, was $728,000 compared to $902,000 for the same periodin 2002.

 

13

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**Comparison of theThree Months Ended September 30, 2003 and 2002**

 

**Interest Income**

 

During the third quarter of 2003 total interest income was $6.6million, a decrease of $1.2 million over the same quarter in 2002.  Interest income on loans decreased $915,000and a decrease of $131,000 occurred in interest and dividends on investments.The reasons previously discussed for the nine-month period ending September 30,2003 are applicable to the changes in total interest income, interest income onloans and interest and dividends on investments for the three-month periodending September 30, 2003.

 

**Interest Expense**

 

Interest expense during the third quarter of 2003 decreased by $1.1million or 35% over interest expense incurred during the third quarter of2002.  Interest on deposits andshort-term borrowings decreased $1.1 million and $43,000, respectively.  For the same reasons noted in the nine-monthcomparison, overall interest expense decreased.

 

**Non-Interest Income**

 

Non-interest income decreased $183,000 to $483,000 during thethree-month period in 2003 compared to $666,000 in 2002.  Non-interest income decreased as a result ofa general decrease in debit card, atm surcharges, and other miscellaneousincome sources.

 

**Non-Interest Expense**

 

Non-interest expenses increased $195,000 during the three-month periodended September 30, 2003.  Salariesand employee benefits increased $387,000 as a result of normal increases insalary levels and the additional staff hired for the newly formed creditadministration department.  Occupancyand equipment expense increased during the third quarter of 2003 compared tothe third quarter of 2002 by $126,000. Other operating expenses decreased during the three-month period in 2003when compared to the same period in 2002 by $318,000.

 

**Provision for LoanLosses**

 

There was no provision for loan losses for the three-month period endedSeptember 30, 2003, based on management’s review and analysis of the loanportfolio.

 

**Provision for IncomeTaxes**

 

The income tax provision for the three-month period endedSeptember 30, 2003, was $221,000 compared to $296,000, for the same periodin 2002.

 

14

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**ASSET/LIABILITYMANAGEMENT**

 

**Assets**

 

At September 30, 2003, total assets were $477.4 million comparedto $496.8 million at December 31, 2002. Cash and due from banks decreased $552,000 during the first nine monthsof 2003.

 

Investment securities totaled $98.1 million at September 30, 2003,a net increase of $41.9 million over the corresponding balance atDecember 31, 2002.  This increasewas a part of management’s strategic plan to shift assets from lower yieldingdeposit investments to higher-yielding longer term investments without affectingthe liquidity of PSB.  During thisperiod, net loans decreased by $56.9 million to $231.7 million.  Loans held for resale increased $26.8million to $45.7 million.

 

**Deposits**

 

At September 30, 2003, deposits totaled $425.8 millionrepresenting a decrease of $16.4 million from total deposits atDecember 31, 2002.  Non-interestbearing demand deposits increased $311,000 while interest-bearing demanddeposits decreased $16.7 million.

 

**Capital**

 

The adequacy of PSB’s capital is reviewed on an ongoing basis withreference to the size, composition, and quality of PSB’s resources andregulatory guidelines.  Management seeksto maintain a level of capital sufficient to support existing assets andanticipated asset growth.

 

Bank holding companies are required to comply with the Federal ReserveBoard’s risk-based capital guidelines. The risk-based capital rules are designed to make regulatory capitalrequirements more sensitive to differences in risk profiles among banks and bankholding companies and to minimize disincentives for holding liquid assets.  Specifically, each is required to maintaincertain minimum dollar amounts and ratios of Total risk-based, Tier Irisk-based and Tier I leverage capital requirements.  In addition to the capital requirements, the Federal DepositInsurance Corporation Improvements Act (FDICIA) established five capitalcategories ranging from “well capitalized” to “critically undercapitalized.” Tobe classified as “well capitalized, “Total risk-based, Tier I risked-based andTier I leverage capital ratios must be at least 10%, 6%, and 5% respectively.

 

At September 30, 2003, PSB was “well capitalized” with a totalcapital ratio of 17.87%, a Tier I capital ratio of 16.72% and a Tier I leverageratio of 9.66%

 

**Liquidity andInterest Rate Sensitivity**

 

The asset/liability committee addresses the liquidity needs of PSB tosee that sufficient funds are available to meet credit demands and depositwithdrawals as well as to the placement of available funds in the investmentportfolio.  In assessing liquidityrequirements, equal consideration is given to the current position as well asthe future outlook.

 

15

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Fundamental objectives of PSB’s asset/liability management process areto maintain adequate liquidity while minimizing interest rate risk.  The maintenance of adequate liquidityprovides PSB with the ability to meet its financial obligations to depositorsand loan customers.  Additionally, itprovides funds for normal operating expenditures and business opportunities asthey arise.  The objective of interestrate sensitivity management is to increase net interest income by managinginterest sensitive assets and liabilities in such a way that they can be repricedin response to changes in market interest rates.

 

PSB, like other financial institutions, must have sufficient fundsavailable to meet its liquidity needs for deposit withdrawals, loan commitmentsand expenses.   In order to control cashflow, PSB estimates future flows of cash from deposits and loan payments.  The primary sources of funds are deposits,principal and interest payments on loans and mortgage-backed securities, aswell as Federal Home Loan Bank borrowings. Funds generated are used principally to fund loans and purchaseinvestment securities.  Managementbelieves PSB has adequate resources to meet its normal funding requirements.

 

Management monitors PSB’s liquidity on both a long and short-termbasis, thereby, providing management necessary information to react to currentbalance sheet trends.  Cash flow needsare assessed and sources of funds are determined.  Funding strategies consider both customer needs and economicalcost.  Both short and long-term fundingneeds are addressed by maturities and sales of available-for-sale investmentsecurities, loan repayments and maturities, and liquidating money marketinvestments such as federal funds sold. The use of these resources, in conjunction with access to creditprovides the core ingredients necessary to satisfy depositor and borrowerneeds.

 

Management monitors and determines the desirable level ofliquidity.  Consideration is given toloan demand, investment opportunities, deposit pricing and growth potential aswell as the current cost of borrowing funds. PSB has a current borrowing capacity at the Federal Home Loan Bank of$174.7 million.   PSB’s managementbelieves that it has sufficient liquidity to satisfy estimated short-term andlong-term funding needs.  PSB had noFederal Home Loan Bank advances as of September 30, 2003.

 

Interest rate sensitivity, which is closely related to liquiditymanagement, is a function of the repricing characteristics of PSB’s portfolioof assets and liabilities. Asset/liability management strives to match maturities and rates betweenloan and investment security assets with the deposit liabilities and borrowingsthat fund them.  Successfulasset/liability management results in a balance sheet structure that can copeeffectively with market rate fluctuations. The matching process is affected by segmenting both assets andliabilities into future time periods (usually 12 months, or less) based uponwhen repricing can be effected. Repriceable assets are netted against repriceable liabilities, for aspecific time period to determine the positive or negative “gap”, ordifference.  Once known, the gap ismanaged based on predictions about future market interest rates.  Intentional mismatching, or gapping, canenhance net interest income if market rates move as predicted.  However, if market rates behave in a mannercontrary to predictions, net interest income will suffer.  Gaps, therefore, contain an element of riskand must be prudently managed.  Inaddition to gap management, PSB has an asset liability management policy thatincorporates a market value at risk calculation that is used to determine

 

16

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the effects of interest rate movements on shareholders’ equity and asimulation analysis to monitor the effects of interest rate changes on PSB’sbalance sheets.

 

There have been no substantial changes in PSB’s gap analyses orsimulation analyses compared to the information provided in PSB’s SEC 10-K forthe period ended December 31, 2002.

 

Generally, management believes PSB is well positioned to respond expeditiouslywhen the market interest rate outlook changes.

 

**Inflation**

 

The asset and liability structure of a financial institution isprimarily monetary in nature; therefore, interest rates rather than inflationhave a more significant impact on PSB’s performance.  Interest rates are not always affected in the same direction ormagnitude as prices of other goods and services, but are reflective of fiscalpolicy initiatives or economic factors that are not measured by a price index.

 

In reference to the attached financial statements, all adjustments areof a normal recurring nature pursuant to Rule 10-01 (b) (8) of RegulationS-X.

 

**Item 3****.  Quantitative and Qualitative DisclosureAbout Market Risk**

 

Market risk for PSB is comprised primarily of interest rate riskexposure and liquidity risk.  Interestrate risk and liquidity risk management is performed at PSB’s level as well asat its subsidiary bank level.  PSB’sinterest rate sensitivity is monitored by management through selected interestrate risk measures produced internally. There have been no substantial changes in PSB’s gap analyses orsimulation analyses compared to the information provided in PSB’s SEC 10-K forthe period ended December 31, 2002. Additional information and details are provided in the InterestSensitivity Section of Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

Generally, management believes PSB is well positioned to respondexpeditiously when the market interest rate outlook changes.

 

**Item 4****.  Controls and Procedures**

 

Within the 90 days prior to the date of this Form 10-Q, PSB carried outan evaluation, under the supervision and with the participation of PSB’smanagement, including PSB’s President and Chief Executive Officer along with PSB’sChief Financial Officer, of the effectiveness of the design and operation ofPSB’s disclosure controls and procedures pursuant to Exchange Act Rule13a-14.  Based upon that evaluation,PSB’s President and Chief Executive Officer along with PSB’s Chief FinancialOfficer concluded that PSB’s disclosure controls and procedures are effectivein timely alerting them to material information relating to PSB (including itsconsolidated subsidiaries) required to be included in PSB’s periodic SECfilings.  There have been no significantchanges in PSB’s internal controls or in other factors that could significantlyaffect internal controls subsequent to the date PSB carried out its evaluation.

 

17

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**Part II****.  OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

None

 

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

 

None

 

**Item 3.  Defaults Upon Senior Securities.**

 

None

 

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

 

None

 

**Item 5.  Other Information**

 

None

 

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

 

(a) Exhibits

 
| **Exhibit No.** |   | **Document**                                                                                                                                                                                                                                                           |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                   |
| 2.1             |   | Agreement and Plan of Reorganization, dated as of March 19,  1999, between PSB Bancorp, Inc. and First Bank of Philadelphia. (incorporated  herein by reference to Exhibit 2.1 of the S-4 Registration Statement of PSB  Bancorp, Inc. filed June 25, 1999). |
|            |   |                                                                                                                                                                                                                                                                   |
| 2.2             |   | Agreement and Plan of Reorganization, dated as of November 2,  2000, between PSB Bancorp, Inc., PSB Merger Sub, Inc. and Jade Financial  Corp. (incorporated herein by reference to Registration Statement of PSB  Bancorp, Inc. filed on January 16, 2001.) |
|            |   |                                                                                                                                                                                                                                                                   |
| 3.1             |   | Articles of Incorporation of PSB Bancorp, Inc. (incorporated herein  by reference to Exhibit 3.1 of the SB-2 Registration Statement of PSB  Bancorp,                                                                                                              |

 

18

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|   |   | Inc. filed October 9, 1997).                                                                                                                                                                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                             |
| 3.2    |   | Bylaws of PSB Bancorp, Inc. (incorporated herein by reference to  Exhibit 3.2 of the SB-2 Registration Statement of PSB Bancorp, Inc.  filed October 9, 1997).                                         |
|   |   |                                                                                                                                                                                                             |
| 10.1*  |   | First Penn Bank’s Retirement Plan (incorporated herein by reference  to Exhibit 10.1 of the SB-2 Registration Statement of PSB Bancorp, Inc.  filed October 9, 1997).                             |
|   |   |                                                                                                                                                                                                             |
| 10.2*  |   | First Penn Bank’s Cash or Deferred Profit Sharing Plan (incorporated  herein by reference to Exhibit 10.2 of the SB-2 Registration Statement  of PSB Bancorp, Inc.  filed  October 9, 1997). |
|   |   |                                                                                                                                                                                                             |
| 10.3*  |   | First Penn Bank’s Profit Sharing Plan (incorporated herein by  reference to Exhibit 10.3 of the SB-2 Registration Statement of PSB  Bancorp, Inc filed October 9, 1997).                          |
|   |   |                                                                                                                                                                                                             |
| 10.4*  |   | Employment Agreement with Vincent J. Fumo (incorporated herein  by reference to Exhibit 7.1 of the SB-2 Registration Statement of PSB  Bancorp, Inc filed October 9, 1997).                       |
|   |   |                                                                                                                                                                                                             |
| 10.5*  |   | Employment Agreement with Anthony DiSandro (incorporated herein by  reference to Exhibit 7.2 of the SB-2 Registration Statement of PSB  Bancorp, Inc filed October 9, 1997).                           |
|   |   |                                                                                                                                                                                                             |
| 10.6*  |   | First Penn Bank’s Employee Stock Ownership Plan (incorporated herein  by reference to Exhibit 10.4 of the SB-2 Registration Statement of PSB  Bancorp, Inc. filed on October 9, 1997).            |
|   |   |                                                                                                                                                                                                             |
| 10.7   |   | Lease Agreement between Eleven                                                                                                                                                                                   |

 

19

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|   |   | Colonial Penn Plaza Associates and First Penn Bank, dated as of  October 10, 1995 (incorporated herein by reference to Exhibit 10.7  of Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed May 5,  1998).                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                              |
| 10.8   |   | Lease Agreement between Eleven Colonial Penn Plaza Associates and  First Penn Bank, dated as of October 12, 1995 (incorporated herein by  reference to Exhibit 10.8 of Form S-1, Amendment No. 3 of PSB  Bancorp, Inc. filed on May 5, 1998). |
|   |   |                                                                                                                                                                                                                                                              |
| 10.9*  |   | First Penn Bank’s Stock Option Plan (incorporated herein by reference  to Exhibit 10.9 of the S-4 Registration Statement of PSB Bancorp, Inc. filed  June 25, 1999).                                                                                    |
|   |   |                                                                                                                                                                                                                                                              |
| 10.10* |   | First Penn Bank’s Management Recognition Plan (incorporated herein by  reference to Exhibit 10.10 of the S-4 Registration Statement of PSB Bancorp,  Inc. filed June 25, 1999).                                                                         |
|   |   |                                                                                                                                                                                                                                                              |
| 10.11* |   | Employment Agreement for John J O’Connell. (incorporated herein by  reference to Exhibit 10.11 of PSB’s Annual Report on Form 10-K filed on  April 1, 2002).                                                                                       |
|   |   |                                                                                                                                                                                                                                                              |
| 10.12* |   | Employment Agreement for Mario L. Incollingo (incorporated herein by  reference to Exhibit 10.12 of PSB’s Annual Report on Form 10-K filed on  April 1, 2002).                                                                                          |
|   |   |                                                                                                                                                                                                                                                              |
| 10.13* |   | PSB Bancorp, Inc. 2001 Stock Incentive Plan (incorporated herein by  reference to Exhibit 10.13 of PSB’s Annual Report on Form 10-K filed on  April 1, 2002).                                                                                           |
|   |   |                                                                                                                                                                                                                                                              |
| 21     |   | Schedule of Subsidiaries (incorporated                                                                                                                                                                                                                       |

 

20

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|   |   | herein by reference to Exhibit 21 of PSB’s Annual Report on Form 10-K  filed on April 1, 2002). |
|--------|--------|-----------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                      |
| 31.1   |   | Certification of Report by Chief Executive Officer.  (filed herewith)                                |
|   |   |                                                                                                      |
| 31.2   |   | Certification of Report by Chief Financial Officer. (filed herewith)                                      |
|   |   |                                                                                                      |
| 32     |   | Certification of Report by Chief Executive Officer and Chief  Financial Officer.  (filed herewith)   |

 

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*            Denotes a managementcontract or compensatory plan or arrangement.

 

(b)           Reports on Form 8-K

 

(1)          On July 31, 2003,PSB filed a Current Report on Form 8-K related to its earnings release.

 

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
| PSB BANCORP, INC.                  |                                                     |
|------------------------------------|----------------------------------------------------------|
| (Registrant)                       |                                                     |
|                               |                                                     |
|                               |                                                     |
| Date:  November 14, 2003 | /s/ Anthony DiSandro                                     |   |
|                               | Anthony DiSandro, President  and Chief Executive Officer |
|                               |                                                     |
|                               |                                                     |
| Date:  November 14, 2003 | /s/ John Carrozza                                        |   |
|                               | John Carrozza, Chief Financial Officer                   |
|                                    |                                                          |  |  |

 

21

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