**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,DC  20549**

 

**FORM 10-Q**

 

**ý****          ****Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**for the quarterly period ended March 31, 2004**

** **

**or**

** **

**o****          ****Transition report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**for the transition period from                         .**

 

**No. 000-24601**

(Commission File Number)

 

**PSBBANCORP, INC.**

(Exact Name of Registrant as Specified in itsCharter)

 

| **Pennsylvania**                              |   | **23-2930740**           |
|-----------------------------------------------|--------|--------------------------|
| (State of Incorporation)                      |   | (IRS Employer ID Number) |
|                                          |   |                     |
| **Suite 2601**                           |   |                     |
| **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 oNo ý

 

Number of shares outstanding as of March 31, 2004

 

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

 

 

----

 

PSB Bancorp, Inc.

FORM 10-Q

For the Quarter Ended March 31, 2004

Contents

 
|         |                                                                                                                         | **Page** |
|--------------|------------------------------------------------------------------------------------------------------------------------------|----------|
|         |                                                                                                                         |     |
| PART I. | FINANCIAL INFORMATION.                                                                                                       | 1        |
|         |                                                                                                                         |     |
| Item 1. | Financial Statements                                                                                                         |     |
|         |                                                                                                                         |     |
|         | Consolidated Statements of Financial  Condition   as of March 31, 2004 (unaudited) and December 31, 2003                | 1        |
|         |                                                                                                                         |     |
|         | Consolidated Statements of Income  (unaudited)  for the Three Month Periods Ended March 31, 2004 and 2003                    | 3        |
|         |                                                                                                                         |     |
|         | Consolidated Statements of Cash Flows  (unaudited)  for the Three Month Periods Ended March 31, 2004 and 2003                | 4        |
|         |                                                                                                                         |     |
|         | Consolidated Statements of Comprehensive  Income  (Unaudited) for the Three Month Periods Ended March 31, 2004 and 2003 | 5        |
|         |                                                                                                                         |     |
|         | Notes to Consolidated Financial Statements                                                                                   | 6        |
|         |                                                                                                                         |     |
| Item 2.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                  | 9        |
|         |                                                                                                                         |     |
| PART II.     | Other Information                                                                                                            | 18       |
|         |                                                                                                                         |     |
|         | Exhibits and Reports on Form 8-K                                                                                        | 18       |

 

----

 

**Par**t I.FINANCIAL INFORMATION****

** **

**Item 1. Financial Statements.**

**PSB BANCORP, **INC**.**

**STATEMENTS OFFINANCIAL CONDITION**

**(In thousandsexcept share data)**

 
|                                                               |   | **March 31,  2004** |    | **December  31, 2003** |   |
|--------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                               |   | **(Unaudited)**     |    | **Audited**            |   |
| Assets                                                             |   |                |    |                   |   |
| Cash and due from banks                                            |   | $                   | 7,226   |                   | $      | 3,084 |   |
| Interest earning deposits with banks                               |   | 39,355              |    | 34,692                 |   |
| Federal funds sold                                                 |   | 30,581              |    | 14,632                 |   |
| Total cash and cash equivalents                                    |   | 77,162              |    | 52,408                 |   |
|                                                               |   |                |    |                   |   |
| Loans held -for- sale                                              |   | 50,766              |    | 51,859                 |   |
| Investment securities available- for- sale,  at fair value         |   | 95,511              |    | 102,882                |   |
| Investment securities held to maturity  (fair value $755 and $790) |   | 717                 |    | 775                    |   |
| Federal Home  Loan Bank Stock - at cost                            |   | 1,131               |    | 1,021                  |   |
| Federal  Reserve Bank Stock - at cost                              |   | 1,116               |    | 320                    |   |
|                                                               |   |                |    |                   |   |
| Loans                                                              |   | 243,033             |    | 240,452                |   |
| Less allowance for possible loans losses                           |   | (3,079              | )       | (3,069                 | )      |
|                                                               |   |                |    |                   |   |
| Net Loans                                                          |   | 239,954             |    | 237,383                |   |
|                                                               |   |                |    |                   |   |
| Accrued  interest receivable                                       |   | 2,036               |    | 2,225                  |   |
| Premises and  equipment, net                                       |   | 2,716               |    | 2,855                  |   |
| Bank -owned  life insurance (BOLI)                                 |   | 12,339              |    | 12,224                 |   |
| Other assets                                                       |   | 6,725               |    | 6,378                  |   |
|                                                               |   |                |    |                   |   |
|                                                               |   | 23,816              |    | 23,682                 |   |
|                                                               |   |                |    |                   |   |
| Total Assets                                                       |   | $                   | 490,173 |                   | $      | 470,330 |   |
|                                                               |   |                |    |                   |   |
| Liabilities                                                        |   |                |    |                   |   |
| Deposits                                                           |   |                |    |                   |   |
| Non-interest bearing                                               |   | 35,557              |    | 32,806                 |   |
| Interest bearing                                                   |   | 400,387             |    | 383,354                |   |
|                                                               |   |                |    |                   |   |
| Total Deposits                                                     |   | 435,944             |    | 416,160                |   |
|                                                               |   |                |    |                   |   |
| Securities sold under agreements to  reproduce                     |   | 1,102               |    | 1,099                  |   |
| Advances from borrowers for taxes and  insurance                   |   | 2,607               |    | 2,744                  |   |
| Other liabilities                                                  |   | 1,929               |    | 3,204                  |   |
|                                                               |   |                |    |                   |   |
|                                                               |   | 5,638               |    | 7,047                  |   |
|                                                               |   |                |    |                   |   |
| Total Liabilities                                                  |   | $                   | 441,582 |                   | $      | 423,207 |   |

 

1

----

 
| Shareholders’ Equity                                                                                                                                               |   |   |    |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|
| Common stock authorized, 15,000,000 shares  no par value, 4,536,654 and 4,530,940 shares issued and outstanding on March  31, 2004, and December 31, 2003, respectively |   | 42,291 |    | 42,179 |   |
| Retained earnings                                                                                                                                                       |   | 7,495  |    | 6,919  |   |
| Accumulated other comprehensive income  (loss)                                                                                                                          |   | 514    |    | (199   | )      |
| Employee stock ownership plan                                                                                                                                           |   | (1,302 | )       | (1,369 | )      |
| Treasury stock, at cost, 72,325 on March  31, 2004, and December 31, 2003, respectively                                                                                 |   | (407   | )       | (407   | )      |
| Total Shareholders’ Equity                                                                                                                                         |   | 48,591 |    | 47,123 |   |
|                                                                                                                                                                    |   |   |    |   |   |
| Total Liabilities and Shareholders’ Equity                                                                                                                         |   | $      | 490,173 |   | $      | 470,330 |   |
|                                                                                                                                                                         |        |        |         |        |        |  |  |

 

The accompanying notes are an integral part of thesefinancial statements.

 

2

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**PSB BANCORP, INC**

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
|                                                 |   | **Three  Months Ended** |   |
|------------------------------------------------------|--------|-------------------------|--------|
|                                                 |   | **March 31,  2004**     |   | **March 31,  2003** |   |
|                                                 |   | **(Unaudited)**         |   |
| Interest Income                                      |   |                    |   |   |   |
| Loans, including fees                                |   | $                       | 5,226  |   | $ | 6,042 |   |
| Investment securities                                |   | 918                     |   | 735 |   |
| Deposits with banks                                  |   | 90                      |   | 330 |   |
|                                                 |   |                    |   |   |   |
| Total Interest Income                                |   | 6,234                   |   | 7,107 |   |
|                                                 |   |                    |   |   |   |
| Interest Expense                                     |   |                    |   |   |   |
| Interest on deposits                                 |   | 1,797                   |   | 2,959 |   |
| Interest on borrowings                               |   | 6                       |   | 10 |   |
|                                                 |   |                    |   |   |   |
| Total interest expense                               |   | 1,803                   |   | 2,969 |   |
|                                                 |   |                    |   |   |   |
| Net interest income                                  |   | 4,431                   |   | 4,138 |   |
|                                                 |   |                    |   |   |   |
| Provision for loan losses                            |   | —                  |   | — |   |
|                                                 |   |                    |   |   |   |
| Net interest income after provision for  loan losses |   | 4,431                   |   | 4,138 |   |
|                                                 |   |                    |   |   |   |
| Non-Interest Income                                  |   | 1,073                   |   | 468 |   |
|                                                 |   |                    |   |   |   |
| Non-Interest Expenses                                |   |                    |   |   |   |
| Salaries and employee benefits                       |   | 2,550                   |   | 2,050 |   |
| Occupancy and equipment                              |   | 575                     |   | 503 |   |
| Other operating                                      |   | 1,533                   |   | 1,379 |   |
|                                                 |   |                    |   |   |   |
| Total Non-Interest Expenses                          |   | 4,658                   |   | 3,932 |   |
|                                                 |   |                    |   |   |   |
| Income before income taxes                           |   | 846                     |   | 674 |   |
| Income Taxes                                         |   | (238                    | )      | (205 | ) |
|                                                 |   |                    |   |   |   |
| Net Income                                           |   | $                       | 608    |   | $ | 469 |   |
|                                                 |   |                    |   |   |   |
| Net Income per Common Share                          |   |                    |   |   |   |
| Basic:                                               |   | $                       | 0.14   |   | $ | 0.11 |   |
|                                                 |   |                    |   |   |   |
| Diluted:                                             |   | $                       | 0.14   |   | $ | 0.11 |   |

 

The accompanying notes are an integral partof these financial statements.

 

3

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**PSB BANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 
|                                                                          |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                          |   | **2004**                           |   | **2003** |   |
|                                                                          |   | **(Unaudited)**                    |   |
| Adjustments to reconcile net income to net  cash                              |   |                               |   |   |   |
| Net Income                                                                    |   | $                                  | 608    |   | $ | 469 |   |
| Adjustments provided by (used in) operating  activities:                      |   |                               |   |   |   |
| Depreciation and amortization                                                 |   | 165                                |   | 247 |   |
| Amortization of discounts and accretion of  premiums on investment securities |   | (49                                | )      | 42 |   |
| Gain on sale of real estate                                                   |   | 2                                  |   | — |   |
| Proceeds from sale and amortization of  loans held for sale                   |   | 6,369                              |   | 10,839 |   |
| Originations of loans held for sale                                           |   | (5,276                             | )      | (17,907 | ) |
| ESOP expense                                                                  |   | 152                                |   | 101 |   |
|                                                                          |   |                               |   |   |   |
| Change in assets and liabilities:                                             |   |                               |   |   |   |
| Decrease in accrued interest receivable                                       |   | 189                                |   | 453 |   |
| (Increase) in other assets                                                    |   | (1,217                             | )      | (1,759 | ) |
| (Decrease) change in accrued expenses                                         |   | (1,275                             | )      | (2,608 | ) |
|                                                                          |   |                               |   |   |   |
| Net cash used in operating activities                                         |   | (332                               | )      | (10,123 | ) |
|                                                                          |   |                               |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                         |   |                               |   |   |   |
| Purchase of investment securities,  available-for-sale                        |   | (5,000                             | )      | — |   |
| Proceeds from maturities and calls of  investment securities                  |   | 13,612                             |   | 9,926 |   |
| Purchase of Federal Home Loan Bank Stock                                      |   | (906                               | )      | (349 | ) |
| Net decrease (increase) in loans                                              |   | (2,581                             | )      | 13,144 |   |
| Proceeds from sale of real estate owned                                       |   | 36                                 |   |   |   |
| Purchase of premises and equipment                                            |   | (26                                | )      | (95 | ) |
|                                                                          |   |                               |   |   |   |
| Net cash provided by investing activities                                     |   | 5,135                              |   | 22,626 |   |
|                                                                          |   |                               |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                         |   |                               |   |   |   |
| Net increase in deposits                                                      |   | 19,784                             |   | 7,584 |   |
| Increase in securities sold under  agreements to repurchase                   |   | 3                                  |   | 14 |   |
| Change in advances for borrowers’ taxes and  insurance                   |   | 137                                |   | (566 | ) |
| Exercised stock options                                                       |   | 27                                 |   | (15 | ) |
| Net cash provided by financing activities                                     |   | 19,951                             |   | 7,017 |   |
|                                                                          |   |                               |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                     |   | 24,754                             |   | 19,520 |   |
|                                                                          |   |                               |   |   |   |
| Cash and cash equivalents, beginning of  period                               |   | 52,408                             |   | 110,269 |   |
|                                                                          |   |                               |   |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                      |   | $                                  | 77,162 |   | $ | 129,789 |   |

 

4

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**PSB BANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENT OF COMPREHENSIVEINCOME**

**(in thousands)**

 
|                                                              |   | **Three  Months Ended  March 31** |   |
|-------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                              |   | **2004**                          |   | **2003** |   |
|                                                              |   | **(Unaudited)**                   |   |
| Net Income                                                        |   | $                                 | 608    |   | $ | 469 |   |
| Other comprehensive income, Net of tax:                           |   |                              |   |   |   |
|                                                              |   |                              |   |   |   |
| Accumulated comprehensive (loss),  investments available for sale |   | (713                              | )      | (59 | ) |
|                                                              |   |                              |   |   |   |
| Other comprehensive (loss) income                                 |   | (713                              | )      | (59 | ) |
|                                                              |   |                              |   |   |   |
| Comprehensive (loss) Income                                       |   | (105                              | )      | 410 |   |
|                                                                   |        |                                   |        |  |  |  |  |

 

5

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PSB BANCORP, INC.NOTES TO FINANCIAL STATEMENTSMarch 31, 2004(UNAUDITED)

 

# **1.**             Basis of Presentation

# ** **

This quarterly reportpresents the consolidated financial statements of PSB Bancorp, Inc. (referredto as “PSB” or the "Company") and its subsidiaries.

 

PSB’s financialstatements reflect all adjustments and disclosures which management believesare necessary for a fair presentation of interim results.  The result of operations for the quarterpresented does not necessarily indicate the results that PSB will achieve forall of 2003.  You should read theseinterim financial statements in conjunction with the consolidated financialstatements and accompanying notes that are presented in the PSB Bancorp, Inc.Annual Report on Form 10-K for the year ended December 31, 2003.

 

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

 

# **2.**             Variable InterestEntities

# ** **

In January 29, 1999, theCompany purchased 1,600,000 shares of Series A Convertible Preferred Stock,$.01 par value per share, (the "Preferred Stock") of McGuire PerformanceSolutions, Inc. ("MPS"). PSB purchased the shares for $.78125 pershare for a total cost of $1,250,000. In 2000, MPS changed its name to IronBridge Holdings, Inc. ("Iron Bridge") and formed two newsubsidiaries, one adopting the MPS name and the other, Avanti Capital, Inc, aregistered investment advisory company. During the year ended December 31,2001, and 2000, the Company purchased an additional 375,000 shares and 500,000shares, respectively, of the Preferred Stock for $1.00 per share for a totalcost $875,000. On December 27, 2002, the founding shareholders of Iron Bridgepurchased from PSB 304,350 shares of preferred stock for $0.88 per share, whichwas the average cost per share paid by PSB for these shares. PSB sold theseshares to reduce its holdings in Iron Bridge so they would not be required toconsolidate Iron Bridge under current accounting literature. The Company owns87.7% of the Preferred Stock, which represents a 49.9% fully diluted ownershipinterest in Iron Bridge. The Iron Bridge subsidiary, MPS, is a nationallyrecognized firm delivering cost-effective solutions for high performance totalbalance sheet management to banks, thrifts, credit unions and other financialinstitutions.

 

In the first quarter of2004 the Company adopted FASB interpretation No. 46(R) Consolidation ofVariable Interest Entities ("FIN 46(R)"). In applying FIN 46(R) theCompany, as the largest shareholder and virtually Iron Bridge's only financialresource, has the ability to exert significant control over Iron Bridge, andwould absorb a majority of Iron Bridge’s expected losses. Therefore, it was theCompany's conclusion that in accordance with FIN 46(R), Iron Bridge is avariable interest entity and thus the Company is required to consolidate IronBridge as of March 31, 2004.

 

The consolidation of IronBridge resulted in the Company recording goodwill of $1,387,000 and minorityinterest of $215,000. The Company accounts for goodwill in accordance with SFAS142, "Goodwill and Other Intangible Assets".  Goodwill is now subject to impairmenttesting at least annually to determine whether write-downs of the recordedbalances are necessary. The Company tests for impairment based on the goodwillmaintained at each defined reporting unit. A fair value is determined for eachreporting unit based on at least one of three various market valuationmethodologies. If the fair value of the reporting unit exceeds its their bookvalue, no write-down of recorded goodwill is necessary. If the fair value of areporting unit is less, an expense may be required on the Company's books towrite down the related goodwill to the proper carrying value. As of March 31,2004, the Company completed its transitional testing, which determined that noimpairment write-off was necessary. No assurance can be given that futuregoodwill impairment tests will not result in a charge to earnings.

 

**3.**             **Pension Plans**

 

Net periodic definedbenefit pension expense for the three months ended March 31, 2004 and 2003included the following components:

 
|                                             |   | **2004** |   | **2003** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|
| Service cost                                     |   | $        | — |     | $      | — |   |
| Interest cost                                    |   | 15,590   |   | 15,920   |   |
| Expected return on plan assets                   |   | 12,920   |   | 14,388   |   |
| Amortization of transition amount                |   | 1,544    |   | 1,544    |   |
| Amortization of prior service cost               |   | —   |   | —   |   |
| Amortization of unrecognized net actuarial  loss |   | —   |   | —   |   |
| Net periodic benefit expense                     |   | $        | 4,214  |     | $      | 3,076 |   |

 

We currently expect tocontribute approximately $20,865 to our pension plan in 2004. We are currentlyevaluating the impact of the Pension Funding Equity Act enacted in April 2004on our projected funding. We made no contributions to the plan in the threemonths ended March 31, 2004.

 

 

6

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**4.**             **Earnings Per Share**

** **

The following tableillustrates the required disclosure of the reconciliation of the numerators anddenominators of the basic and diluted EPS computation.  The computation of diluted earnings pershare excludes 1,371,200 options for the respective three month periods endedMarch 31, 2004 and 2003.  PSB iscontesting the validity of these options associated with the First Bank ofPhiladelphia merger in 1999 in a federal court.  As previously reported on March 31, 2004 the U.S. District Courtgranted the plaintiffs' motion for summary judgment validating 895,240 sharesof these options.  PSB Bancorp has filedan appeal of this decision.  Until theappeal process is concluded, management believes the options should be excludedfrom the computation of diluted earnings per share.

 
|                                                                        |   | **Three  months ended March 31, 2004** |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                        |   | **Income  (numerator)**                     |   | **Weighted  average shares  (denominator)** |   | **Per share  amount** |   |
|                                                                        |   | **(In  thousands, except per share data)**  |   |
| Basic earnings per share                                                    |   |                                        |   |   |   |   |   |
|                                                                        |   |                                        |   |   |   |   |   |
| Income available to common stockholders                                     |   | $                                           | 608    |   | 4,269 |   | $ | 0.14 |   |
| Effect of dilutive securities                                               |   | —                                      |   | 145 |   | — |   |
|                                                                        |   |                                        |   |   |   |   |   |
| Diluted earnings per share                                                  |   |                                        |   |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |   | $                                           | 608    |   | 4,414 |   | $ | 0.14 |   |

 

No options wereanti-dilutive at March 31, 2004.

 
|                                                                        |   | **Three  months ended March 31, 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                                     |   | $                                           | 469    |   | 4,209 |   | $ | 0.11 |   |
| Effect of dilutive securities                                               |   | —                                      |   | 81 |   | — |   |
|                                                                        |   |                                        |   |   |   |   |   |
| Diluted earnings per share                                                  |   |                                        |   |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |   | $                                           | 469    |   | 4,290 |   | $ | 0.11 |   |

 

**5.**             **Accounting for Stock-Based Compensation**

 

The Company follows SFASNo. 123, "Accounting for Stock-Based Compensation," as amendedby SFAS No. 148, which allows an entity to use a fair value-based methodfor valuing stock-based compensation, which measures compensation cost at thegrant date based on the fair value of the award. Compensation is then recognizedover the service period, which is usually the vesting period. Alternatively,the statement permits entities to elect accounting for employee stock optionsand similar instruments under Accounting Principles Board (APB) OpinionNo. 25, "Accounting for Stock Issued to Employees." TheCompany's stock option plans are accounted for under APB Opinion No. 25.Entities that continue to account for stock options using APB OpinionNo. 25 are required to make pro forma disclosures of net income andearnings per share, as if the fair value-based method of accounting defined inSFAS No. 123 had been applied.

 

At March 31, 2004, theCompany's four Option Plans provide for the grant of (i) options to purchasecommon stock intended to qualify as incentive stock options (Incentive StockOption) under Section No. 422 of the Code, and (ii) options that do not doqualify (Nonqualified Stock Options). Pursuant to the Option Plans, 1,653,315shares of Common Stock (subject to adjustment) are reserved for issuance by theCompany upon exercise of stock options to be granted to certain officers andemployees of the Company from time to time under the Option Plans. As of March31, 2004, 308,315 were granted. The purpose of the Option Plans is to givecertain directors, officers and employees an opportunity to acquire commonstock and thereby help the Company attract, retain and motivate key employeesand officers. The following table illustrates the effect on net income andearnings per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123 to stock-based compensation:

 
|                                                                                             |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                             |   | **2004**                           |   | **2003** |   |
| Net income                                                                                       |   |                               |   |   |   |
| As reported                                                                                      |   | $                                  | 608    |   | $ | 469 |   |
| Less stock-based compensation costs  determined under the fair value-based method for all awards |   | (16                                | )      | (16 | ) |
| Pro forma                                                                                        |   | $                                  | 592    |   | $ | 453 |   |
|                                                                                             |   |                               |   |   |   |
| Basic earnings per share                                                                         |   |                               |   |   |   |
| As reported                                                                                      |   | $                                  | 0.14   |   | $ | 0.11 |   |
| Pro forma                                                                                        |   | $                                  | 0.14   |   | $ | 0.11 |   |
| Diluted earnings per share                                                                       |   |                               |   |   |   |
| As reported                                                                                      |   | $                                  | 0.14   |   | $ | 0.11 |   |
| Pro forma                                                                                        |   | $                                  | 0.13   |   | $ | 0.11 |   |

 

There were no optionsgranted in the three-month period ended March 31, 2004 and 2003.

 

No options wereanti-dilutive at March 31, 2004 and 2003.

 

# **6.**             Letters of Credit

 

The Bank issues financialand performance standby letters of credit, both of which are subject to thedisclosure and initial recognition and measurement provisions of FIN No.45.  Financial and performance standbyletters of credit are conditional commitments issued by the Bank to assure thefinancial and performance obligations of a customer to a third party.  At March 31, 2004, and December 31, 2003,the Bank was contingently liable on financial and performance standby lettersof credit totaling $2.6 million and $2.3 million, respectively, $150,000 ofwhich were originated during 2004.

 

# **7.**             Regulatory Matters

# ** **

On April 14, 2003, PSBand the Bank entered into a Memorandum of Understanding (MOU) with the FederalReserve Bank of Philadelphia (Federal Reserve).  PSB and the Bank do not believe that the existence of the MOU orits provisions have had a material adverse effect on their consolidatedfinancial position or results of operations. PSB’s Annual Report on Form 10-K for the year ended December 31,2003, includes a more detailed description of the terms of the MOU.

 

# **8.**             New AccountingPronouncements

# ** **

The SEC recently releasedStaff Accounting Bulletin No. 105, Application of Accounting Principles to LoanCommitments. SAB 105 provides guidance about the measurement of loancommitments recognized at fair value under FASB Statement No. 133, Accounting forDerivative Instruments and Hedging Activities. SAB 105 also requires companiesto disclose their accounting policy for those loan commitments includingmethods and assumptions used to estimate fair value and associated hedgingstrategies. SAB 105 is effective for all loan commitments accounted for asderivatives that are entered into after March 31, 2004. The adoption of SAB 105is not expected to have a material effect on our consolidated financialstatements.

 

The Company adopted FASBissued Interpretation No. 46, *Consolidationof Variable Interest Entities*(FIN 46). In general, a variableinterest entity (VIE) is a corporation, partnership, trust or any other legalstructure used for business purposes that either (a) does not have equityinvestors with voting rights or (b) has equity investors that do not providesufficient financial resources for the entity to support its activities. FIN 46requires certain VIEs to be consolidated by the primary beneficiary if theinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. The consolidation requirements of FIN 46 apply immediately to interestentities created after January 31, 2003. We adopted the provisions of FIN 46effective February 1, 2003 and such adoption did not have a material impact onour consolidated financial statements since we had no VIEs that were createdafter January 31, 2003. In December 2003, the FASB issued FIN 46(R) withrespect to VIEs created before January 31, 2003, which among other thingsrevised the implementation date to the first fiscal year or interim periodended after March 15, 2004, with the exception of special purpose entities(SPEs). The Company currently has no SPEs. The Company adopted the provisionsunder the revised interpretation in the first quarter 2004 which required theCompany to consolidate its investment in Iron Bridge Holdings, Inc. (Iron Bridge).Prior to FIN 46 and 46(R), the Company accounted for its investment in IronBridge under the equity method of accounting. This investment in Iron Bridge ismore fully discussed in note 2 to the consolidated financial statements.

 

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On March 31, 2004,the Financial Accounting Standards Board (FASB) issued a proposed Statement, *Share-BasedPayment an Amendment of FASB Statements No. 123 and APB No. 95*,that addresses the accounting for share-based payment transactions in which anenterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. Under the FASB’s proposal, all forms ofshare-based payments to employees, including employee stock options, would betreated the same as other forms of compensation by recognizing the related costin the income statement.  The expense ofthe award would generally be measured at fair value at the grant date.  Current accounting guidance requires thatthe expense relating to so-called fixed plan employee stock options only bedisclosed in the footnotes to the financial statements. The proposed Statementwould eliminate the ability to account for share-based compensationtransactions using APB Opinion No. 25, Accounting for Stock Issued toEmployees.  The Company is currentlyevaluating this proposed statement and its effects on its results ofoperations.

 

# **9.**             Reclassifications

# ** **

Certain 2003 amounts havebeen reclassified to conform to the 2004 presentation.

 

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**Item2.  Management’s Discussion And AnalysisOf The Financial Condition And Results Of Operations**.

 

**RESULTSOF OPERATIONS**

 

**General**

 

PSB’s results of operations depend primarily on theBank’s net interest income, which is the difference between interest income oninterest-earning assets, and interest expense on its interest-bearing liabilities.  The Bank’s interest-earning assets consistprimarily of loans receivable and investment securities, while itsinterest-bearing liabilities consist primarily of deposits and borrowings.  The Bank’s net income is also affected byits provision for loan losses and its level of non-interest income as well asby its non-interest expense, such as salary and employee benefits, occupancycosts and charges relating to non-performing and other classified assets.

 

**Impactof Inflation**

 

The financial statements and related financial datapresented herein have been prepared in accordance with generally acceptedaccounting principles which require the measurement of financial position andoperating results in terms of historical dollars without considering changes inthe relative purchasing power of money over time due to inflation. The primaryimpact of inflation on the operation of the Bank is reflected in increasedoperating costs. Unlike most industrial companies, virtually all of the assetsand liabilities of a financial institution are monetary in nature. As a result,interest rates have a more significant impact on a financial institution’sperformance than the effects of inflation. Interest rates do not necessarilymove in the same direction or in the same magnitude as the price of goods andservices.

 

**Allowancefor Credit Losses**

 

The balance in the allowance for loan losses isdetermined based on management’s review and evaluation of the loan portfolio inrelation to past loss experience, the size and composition of the portfolio,current economic events and conditions, and other pertinent factors, includingmanagement’s assumptions as to future delinquencies, recoveries andlosses.  Increases to the allowance forloan and lease losses are made by charges to the provision for creditlosses.  Recoveries of previouslycharged-off amounts are credited to the allowance for credit losses.

 

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

 

9

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**PerformanceOverview**

 

PSB’s net income for the first quarter of 2004 was$608,000 or $0.14 on a basic and diluted per share basis, compared to net incomeof $469,000 or $0.11 per basic and diluted share for 2003.  The results for the first quarter of 2004were effected primarily as a result of a relatively stable interest rateenvironment, the maturity and repricing of higher yielding earning assets atlower rates, and accelerated prepayments on mortgage-backed securities andloans.

 

The Bank’s net interest margin continues to bepositively affected by the overall reduction of cost of funds and the investingof Fed Funds sold into higher interest-earning assets. The Bank’s net interestmargin improved by 56 basis points from 3.47% for the three months ended March31, 2004 to 4.03% for the same period in 2003.

 

**NetIncome**

 

PSB’s net income totaled $608,000 and $468,000 for thethree months ended March 31, 2004 and 2003, respectively.  PSB’s basic and diluted earnings per sharefor the three months ended March 31, 2004 and 2003 were $0.14 and $.0.11respectively.

 

The increase in earnings for the three month periodsended March 31, 2004 was attributable to investing the Bank’s excess liquidityin short term, higher yielding investments, reducing our cost of deposits andincreased loan production.

 

Management continues to follow strategies to enhancethe growth of consumer home equity, and home equity lines of credit. Thecommercial real estate and construction loan departments are currently becomingmore competitive in the uncertain interest rate market without the bankassuming additional credit risk.

 

**NetInterest Income and Average Balances**

 

Net interest income is a key component of PSB’sprofitability and is managed in coordination with PSB’s interest ratesensitivity position.  Net interestincome for the first quarter of 2004 was $4.4 million compared to $4.1 million,or a 7.08% increase from the first quarter of 2003. This increase is primarilya result of

 

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a reduction in the bank’s cost of funds. The netinterest margin for the first quarter of 2004 was 4.03%, an increase of 56basis points from the first quarter of 2003 net interest margin of 3.47%.

 

Overall, average total interest-earning assetsprovided a yield of 5.67% for the three months ended March 31, 2004, comparedto 5.98% for the same period in 2003. The average yield for the three months ended March 31, 2004 decreasedslightly primarily due to a decline in the average yield on our loan portfolio,interest-earning deposits and investment securities.  Average total loans of $296.0 million for the three months endedMarch 31, 2004 and provided a yield of 7.06% for the period, compared toaverage total loans of $304.4 million for the three months ended March 31,2003, which provided a yield of 7.94% for the period.

 

Average total interest-bearing liabilities decreasedfrom $423.4 million to $385.5 million or 8.97% for the three months ended March31, 2004 compared to the three-month period ended March 31, 2003.  The average rate on total interest-bearingliabilities decreased 94 basis points from 2.81% for the three months endedMarch 31, 2003 to 1.87% for the three months ended March 31, 2004. 

 

**Provisionfor Loan Losses**

 

The provision for loan losses represents the chargeagainst earnings that is required to fund the allowance for loan losses.  PSB determines the level of the allowancefor loan losses through a regular review of the loan portfolio.  Management’s evaluation of the adequacy ofthe allowance for loan losses is based upon an examination of the portfolio aswell as such factors as declining trends, the volume of loan concentrations,adverse situations that may affect the borrower’s ability to pay, prior lossexperience within the portfolio, current economic conditions and the results ofthe most recent regulatory examinations. PSB had had no provision for loan losses during the three months endedMarch 31, 2004 and 2003 respectively. Additionally, PSB had charge-offs againstthe allowance for loan losses of $64,003 and $40,000 during the three monthperiods ended March 31, 2004 and 2003, respectively and recoveries against theallowance for loan losses of $54,000 and $150,000 during the three monthperiods ended March 31, 2004 and 2003, respectively.

 

**AverageBalance Sheets and Rate/Yield Analysis**

 

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

 
|                                                                  |   | **Three  Months Ended March 31,** |    |
|-----------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                  |   | **2004**                          |    | **2003** |   |
|                                                                  |   | **Average  Balance**              |    | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
|                                                                  |   | **(Dollars  in Thousands)**       |    |
| ASSETS                                                                |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                              |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits                                             |   | $                                 | 43,039  |   | $ | 90 |   | 0.84 | % | $ | 120,786 |   | $ | 330 |   | 1.09 | % |
| Investment securities                                                 |   | 54,103                            |    | 336 |   | 2.48 |   | 11,528 |   | 137 |   | 4.75 |   |
| Mortgage-backed securities                                            |   | 46,896                            |    | 582 |   | 4.96 |   | 38,777 |   | 598 |   | 6.17 |   |
| Net loans                                                             |   | 295,995                           |    | 5,226 |   | 7.06 |   | 304,420 |   | 6,042 |   | 7.94 |   |
|                                                                  |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                                         |   | 440,033                           |    | $ | 6,234 |   | 5.67 | % | 475,511 |   | $ | 7,107 |   | 5.98 | % |
|                                                                  |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets                                            |   | 40,341                            |    |   |   |   |   | 14,926 |   |   |   |   |   |
| Total assets                                                          |   | $                                 | 480,374 |   |   |   |   |   | $ | 490,437 |   |   |   |   |   |
|                                                                  |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| LIABILITIES                                                           |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                         |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Now checking accounts                                                 |   | $                                 | 26,602  |   | $ | 33 |   | 0.50 | % | $ | 20,350 |   | $ | 85 |   | 1.67 | % |
| Money market accounts                                                 |   | 68,371                            |    | 215 |   | 1.26 |   | 68,672 |   | 358 |   | 2.09 |   |
| Savings deposits                                                      |   | 91,019                            |    | 269 |   | 1.18 |   | 93,191 |   | 476 |   | 2.04 |   |
| Certificates                                                          |   | 198,442                           |    | 1,280 |   | 2.58 |   | 240,093 |   | 2,040 |   | 3.42 |   |
|                                                                  |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Total deposits                                                        |   | 384,434                           |    | 1,797 |   | 0.93 |   | 422,306 |   | 2,959 |   | 2.81 |   |
| Borrowed money                                                        |   | 1,101                             |    | 6 |   | 2.18 |   | 1,087 |   | 10 |   | 3.68 |   |
|                                                                  |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                                    |   | 385,535                           |    | 1,803 |   | 1.87 | % | 423,393 |   | 2,969 |   | 2.81 | % |
|                                                                  |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing liabilities                                      |   | 46,983                            |    |   |   |   |   | 20,485 |   |   |   |   |   |
| Total liabilities                                                     |   | 432,518                           |    |   |   |   |   | 443,878 |   |   |   |   |   |
| Retained earnings or shareholders’ equity                        |   | 47,856                            |    |   |   |   |   | 46,559 |   |   |   |   |   |
| Total liabilities and retained earnings or  shareholders’ equity |   | $                                 | 480,374 |   |   |   |   |   | $ | 490,437 |   |   |   |   |   |
|                                                                  |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                   |   |                              |    | $ | 4,431 |   |   |   |   |   | $ | 4,138 |   |   |   |
|                                                                  |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                                                  |   |                              |    |   |   | 3.80 | % |   |   |   |   | 3.17 | % |
| Net yield on interest-earning assets                                  |   |                              |    |   |   | 4.03 | % |   |   |   |   | 3.47 | % |
| Ratio of interest-earning assets to  interest- bearing liabilities    |   |                              |    |   |   | 1.14 | x |   |   |   |   | 1.12 | x |

 

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**Allowancefor Loan Losses**

 

The allowance for loan losses is established through aprovision for loan losses charged to expense. Loans are charged against theallowance for possible loan losses when management believes that thecollectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate toabsorb loan losses on existing loans that may become uncollectible based onevaluations of the collectibility of loans and prior loan loss experience.  The evaluations take into consideration suchfactors as changes in the nature and volume of the loan portfolio, overallportfolio quality, review of specific problem loans and current economicconditions that may affect the borrower’s ability to pay.  These estimates are particularly susceptibleto changes that may result in a material adjustment to the allowance for loanlosses.  As adjustments becomeidentified, they are reported in earnings for the period in which they becomeknown.  Management believes that itmakes an informed judgment based upon available information.

 

It is the objective of PSB’s evaluation process toestablish the following components of the allowance for loan losses:  a specific allocation for certain identifiedloans, a general allocation for pools of loans based on risk rating, and ageneral allocation for inherent loan portfolio losses.  Management performs current evaluations of itscriticized and classified loan portfolios and assigns specific reserves thatreflect the current risk to PSB.  As ageneral rule, special mention assets will have a minimum reserve of 3%,substandard assets will have a minimum reserve of 15%, and doubtful assets willhave a minimum reserve of 50%.  Ageneral reserve allocation is applied for pools of loans based on risk ratingfor all loans not specifically reserved for as described previously. Themethodology used to calculate the provision is consistent with the guidanceprovided in SAB No. 102. Management reviews the adequacy its allowance on anongoing basis and will provide, as management may deem necessary, foradditional provisions in future periods.

 

**Non-interestIncome**

 

Non-interest income consists of gain on sale of loans,loan fees, service charges, rental income and other income.  Non-interest income increased by $605,000,or 129.27%, to $1,073,000 for the three months ended March 31, 2004, from$468,000 for the three months ended March 31, 2003. The increase for the threemonth period ended March 31, 2004 was a result of consolidation of IronBridge’s income as part of the adoption of Fin 46(R) in the first quarter of2004.  This is more fully discussed inNote 2 to the consolidated financial statements.

 

**Non-interestExpense**

 

The following table provides a summary of non-interestexpense, by category of expense, for the three months ended March 31, 2004 and2003 (in thousands):

 

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|                             |   | **Three  months ended March 31,** |   |
|----------------------------------|--------|-----------------------------------|--------|
|                             |   | **2004**                          |   | **2003** |   |
|                             |   |                              |   |   |   |
| Salaries and employment benefits |   | $                                 | 2,550  |   | $ | 2,050 |   |
| Rent and occupancy               |   | 575                               |   | 503 |   |
| Professional fees                |   | 181                               |   | 276 |   |
| FDIC insurance                   |   | 48                                |   | 18 |   |
| General insurance                |   | 84                                |   | 63 |   |
| Advertising                      |   | 34                                |   | 38 |   |
| Data processing fees             |   | 107                               |   | 56 |   |
| Director fees                    |   | 69                                |   | 76 |   |
| Other operating                  |   | 1,010                             |   | 852 |   |
| Total                            |   | $                                 | 4,658  |   | $ | 3,932 |   |

 

Non-interest expense principally consists ofemployees’ compensation and benefits, deposit insurance premiums, and premisesand occupancy costs.  Non-interestexpense increased by 18.46%, from $4.0 million for the three months endedMarch 31, 2003 to $4.7 million for the three months ended March 31,2004. The principal reason for the increase in non-interest expense for thethree months was a result of consolidation of Iron Bridge’s expenses as part ofthe adoption of Fin 46(R) in the first quarter of 2004.  This is more fully discussed in Note 2 tothe consolidated financial statements.

 

**Provisionfor Income Taxes**

 

Income tax provisions for the three month period endedMarch 31, 2004, were $238,000 compared to $205,000 for the same period in 2003.

 

**Liquidityand Interest Rate Sensitivity**

 

The maintenance of adequate liquidity and themitigation of interest rate risk are integral to the management of PSB’sbalance sheet.  Liquidity represents theability to meet potential cash outflows resulting from deposit customers whoneed to withdraw funds or borrowers who need available credit.  Interest rate sensitivity focuses on theimpact of fluctuating interest rates and the re-pricing characteristics of ratesensitive assets and liabilities on net interest income.

 

PSB’s asset/liability management committee monitorsthe level of short-term assets and liabilities to maintain an appropriatebalance between liquidity, risk and return. Liquidity is derived from various sources which include increases incore deposits, sales of certificates of deposits, the amortization andprepayment of loans and mortgage-backed securities, and maturities ofinvestment securities and other short-term investments.  The liquidity position of PSB is alsostrengthened by a $161 million credit facility with the Federal Home Loan Bank(“FHLB”).  Advances are secured by allFHLB stock and qualifying mortgage loans. PSB had no outstanding borrowingsfrom the FHLB as of March 31, 2004.

 

Maximizing cash flow over time is crucial to themaintenance of adequate liquidity. PSB’s total cash flow is a product of its operating activities,investing activities and financing activities. During the three months ended March 31, 2004, net cash used in operatingactivities was $332,000, compared to $10.1 million for the same period of2003.  During the three months endedMarch 31, 2004, net cash provided by investing activities was $5.1 million,compared to $22.6 million for the same period of 2003.  Financing activities used net cash of $20.0million during the three months ended March 31, 2004, compared to $7.0 million

 

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for the same period of 2003.  The net result of these items was a $24.8 million increase incash and cash equivalents for the three months ended March 31, 2004, comparedto a $19.5 million increase in cash and cash equivalents for the same period of2003.

 

Interest rate sensitivity is closely related toliquidity since each is directly affected by the maturity of assets andliabilities.  Rate sensitivity alsodeals with exposure to fluctuations in interest rates and its effect on netinterest income.  The primary functionof PSB’s interest rate sensitivity management is to reduce exposure to interestrate risk through an appropriate balance between interest-earning assets andinterest-bearing liabilities.  The goalis to minimize fluctuations in the net interest margin of PSB due to general changesin interest rates.

 

The blending of fixed and floating-rate loans andinvestments to match the re-pricing and maturity characteristics of the variousfunding sources is a continuous process in an attempt to minimize anyfluctuations in net interest income. The composition of the balance sheet isdesigned to minimize any significant fluctuation in net interest income and tomaximize liquidity.  Management believesthat the accessibility to FHLB borrowings will provide the flexibility toassist in keeping fluctuations in net interest income under control and tomaintain an adequate liquidity position.

 

**CapitalAdequacy**

 

PSB is required to maintain minimum ratios of Tier Iand total capital to total “risk weighted” assets and a minimum Tier I leverageratio, as defined by banking regulators. PSB’s liquidity is quantified throughthe use of a standard liquidity ratio of liquid assets (cash and cashequivalents, investment securities available-for-sale, mortgage-backedsecurities available-for-sale and Federal Home Loan Bank stock) to short-term borrowingsplus deposits. At March 31, 2004, PSB was required to have a minimum Tier I andtotal capital ratios of 6.0% and 10.0%, respectively, and a minimum Tier Ileverage ratio of 4.0%.  PSB’s actualTier I and total capital ratios at March 31, 2004, were 15.43% and 16.45%,respectively, and PSB’s Tier I leverage ratio was 9.74%. These ratios exceedthe requirements for classification as a “well capitalized” institution, theindustry’s highest capital category.

 

On March 31, 2004, PSB was in compliance withregulatory capital requirements as shown in the following table:

 
|                            |   | **Well  Capitalized  Ratios** |   | **At March  31,  2004** |    | **At  December 31,  2003** |   |
|---------------------------------|--------|-------------------------------|--------|-------------------------|---------|----------------------------|--------|
|                            |   |                          |   | **PSB**                 |    | **Bank**                   |   | **PSB** |   | **Bank** |   |
|                            |   |                          |   |                    |    |                       |   |   |   |   |   |
| Tier I Capital                  |   |                          |   | $                       | 46,667  |                       | $      | 38,173 |   | $ | 45,918 |   | $ | 37,394 |   |
| Tier II Capital                 |   |                          |   | 3,079                   |    | 3,079                      |   | 3,069 |   | 3,069 |   |
|                            |   |                          |   |                    |    |                       |   |   |   |   |   |
| Total Qualifying Capital        |   |                          |   | $                       | 49,746  |                       | $      | 41,252 |   | $ | 48,987 |   | $ | 40,463 |   |
|                            |   |                          |   |                    |    |                       |   |   |   |   |   |
| Risk Adjusted Total Assets      |   |                          |   | $                       | 302,428 |                       | $      | 299,318 |   | $ | 302,032 |   | $ | 300,301 |   |
|                            |   |                          |   |                    |    |                       |   |   |   |   |   |
| Tier I Risk Based Capital Ratio |   | 6.00                          | %      | 15.43                   | %       | 12.75                      | %      | 15.20 | % | 12.45 | % |
| Total Risk Based Capital Ratio  |   | 10.00                         | %      | 16.45                   | %       | 13.78                      | %      | 16.22 | % | 13.47 | % |
| Leverage Ratio                  |   | 5.00                          | %      | 9.74                    | %       | 8.00                       | %      | 9.72 | % | 7.94 | % |
|                            |   |                          |   |                    |    |                       |   |   |   |   |   |
| Average Assets                  |   |                          |   | 479,002                 |    | 477,016                    |   | 472,474 |   | 470,766 |   |

 

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**FINANCIALCONDITION**

 

**General**

 

PSB’s total assets increased $19.9 million or4.22% from $470.3 million at December 31, 2003, to $490.2 million atMarch 31, 2004. PSB’s assets were funded primarily by increases in deposits,which totaled $435.9 million at the end of the first three months, comparedwith $416.2 million at year-end 2003, an increase of $19.7 million, or 4.7% in2004.

 

At March 31, 2004, PSB’s net loan portfolio totaled$240.0 million compared to $237.4 million at December 31, 2003.

 

The increase is primarily attributable to an increasein the volume of commercial and consumer loans as indicated in the tablesbelow.

 

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

 
|                          |   | **At March  31,  2004** |    | **At  December 31,  2003** |   |       |   |        |   |
|-------------------------------|--------|-------------------------|---------|----------------------------|--------|------------|--------|-------------|--------|
|                          |   | **Amount**              |    | **Percent**                |   | **Amount** |   | **Percent** |   | **Variance** |   | **% Change** |   |
|                          |   |                    |    |                       |   |       |   |        |   |   |   |   |   |
| Real Estate Loans:            |   |                    |    |                       |   |       |   |        |   |   |   |   |   |
| One-to four-family*           |   | $                       | 65,297  |                       | 26.83  | %          | $      | 65,385      |   | 27.15 | % |   | (88 | ) | -0.13 | % |
| Construction loans            |   | 15,733                  |    | 6.46                       | %      | 18,444     |   | 7.66        | %      | (2,711 | ) | -14.70 | % |
| Five or more family residence |   | 15,283                  |    | 6.28                       | %      | 14,055     |   | 5.84        | %      | 1,228 |   | 8.74 | % |
| Nonresidential                |   | 99,168                  |    | 40.75                      | %      | 97,011     |   | 40.29       | %      | 2,157 |   | 2.22 | % |
|                          |   |                    |    |                       |   |       |   |        |   |   |   |   |   |
| Commercial loans              |   | 24,213                  |    | 9.95                       | %      | 21,854     |   | 9.06        | %      | 2,359 |   | 10.79 | % |
| Consumer loans                |   | 23,683                  |    | 9.73                       | %      | 24,062     |   | 10.00       | %      | (379 | ) | -1.58 | % |
|                          |   |                    |    |                       |   |       |   |        |   |   |   |   |   |
| Total loans                   |   | $                       | 243,377 |                       | 100.00 | %          | $      | 240,811     |   | 100.00 | % | $ | 2,566 |   | 1.07 | % |
|                          |   |                    |    |                       |   |       |   |        |   |   |   |   |   |
| Less:                         |   |                    |    |                       |   |       |   |        |   |   |   |   |   |
| Unearned fees and discounts   |   | $                       | 344     |                       |   |       | $      | 359         |   |   |   |   |   |   |   |
| Undisbursed loan proceeds     |   | —                  |    |                       |   | —     |   |        |   |   |   |   |   |
| Allowance for loan losses     |   | 3,079                   |    |                       |   | 3,069      |   |        |   |   |   |   |   |
|                          |   |                    |    |                       |   |       |   |        |   |   |   |   |   |
| Net Loans                     |   | $                       | 239,954 |                       |   |       | $      | 237,383     |   |   |   |   |   |   |   |

 

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* Does not include loans held-for-sale

 

Total investment securities (including mortgage-backedsecurities) decreased $7.4 million, or 7.17%, to $96.2 million atMarch 31, 2004, from $103.7 million at December 31, 2003.

 

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Cash and cash equivalents, including interest-earningdeposits with banks, increased $24.8 million or 47.33% to$77.2 million at March 31, 2004, from $52.4 million atDecember 31, 2003.

 

Total liabilities increased $18.4 million or4.35% to $441.6 million at March 31, 2004 from $423.2 million atDecember 31, 2003.  This increaseprimarily reflects an increase in deposits of approximately $19.8 million, asof March 31, 2004.

 

We have implemented a disciplined asset and liabilitymanagement process in the first quarter of 2004 to manage our deposit and loanpricing.  Through this process we havesignificantly lowered our cost of deposits which has resulted in a 4.03% netinterest margin for the first quarter and reduced interest rate risk.  Our strategies have been directed toincrease the attractiveness of our core deposit products.  As we continue to execute this strategy itwill provide the bank with greater flexibility to react to changes in theinterest rate environment

 

**AssetQuality**

 

**DelinquentLoans**

 

When a borrower fails to make a required payment on aloan, PSB attempts to cure the deficiency by contacting the borrower and seekingpayment.  Contacts are generally made onthe 15th day after a payment is due. In most cases, deficiencies are cured promptly.  If a delinquency extends beyond30 days, the loan and payment history is carefully reviewed, additionalnotices are sent to the borrower and efforts are made to collect the loan.  While PSB generally prefers to work withborrowers to resolve such problems, when the account becomes 90 daysdelinquent, PSB does institute foreclosure or other proceedings, as necessary,to minimize any potential loss.

 

**Non-PerformingAssets**

 

PSB’s level of non-performing assets decreased$674,000 or 12.09% to $4.9 million at March 31, 2004, from $5.6 million atDecember 31, 2003.  As a matter ofpolicy, the accrual of loan interest is discontinued if management believesthat, after considering economic and business conditions and collectionefforts, the borrower’s financial condition is such that collection of interestbecomes doubtful.  This is normally donewhen a loan reaches 90 days delinquent. At this time, all accrued but unpaid interest is reversed.  There are occasional exceptions if the loansare in the process of collection and the loan is fully secured.

 

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

 
|                                                                              |   | **At March  31,  2004**     |   | **At  December 31,  2003** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------|--------|----------------------------|--------|
|                                                                              |   | **(Dollars  in thousands)** |   |
| Loans past due 90 days or more as to  interest or principal and accruing interest |   | $                           | — |                       | $      | — |   |
| Nonaccrual loans                                                                  |   | 4,564                       |   | 5,203                      |   |
|                                                                              |   |                        |   |                       |   |
| Total nonperforming loans                                                         |   | 4,564                       |   | 5,203                      |   |
| Real estate owned (REO)                                                           |   | 339                         |   | 374                        |   |
|                                                                              |   |                        |   |                       |   |
| Total nonperforming assets                                                        |   | $                           | 4,903  |                       | $      | 5,577 |   |
|                                                                              |   |                        |   |                       |   |
| Nonperforming loans to total loans                                                |   | 1.88                        | %      | 2.16                       | %      |
| Nonperforming assets to total assets                                              |   | 1.00                        | %      | 1.19                       | %      |
| Allowance for loan losses to total loans                                          |   | 1.27                        | %      | 1.28                       | %      |
| Allowance for loan losses to non-performing  loans                                |   | 67.46                       | %      | 58.99                      | %      |
| Allowance for loan losses to non-performing  assets                               |   | 60.80                       | %      | 55.03                      | %      |
| Net charge-offs as a percentage of total  loans                                   |   | 0.02                        | %      | 0.24                       | %      |

 

16

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**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

There has been no material change in PSB’s assessmentof its sensitivity to market risk since its presentation in the 2002 AnnualReport on Form 10-K filed with the Securities and Exchange Commission.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

PSB’s management conducted an evaluation, under thesupervision and with the participation of the PSB’s Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofthe PSB’s disclosure controls and procedures as of March 31, 2004. Based onthis evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that PSB’s disclosure controls and procedures are effective inalerting them in a timely manner to material information required to beincluded in PSB’s SEC reports. In addition, PSB’s management, including theChief Executive Officer and Chief Financial Officer, reviewed PSB’s internalcontrols, and there have been no significant changes in PSB’s internal controlsor in other factors that could significantly affect those controls subsequentto the date of their last evaluation.

 

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**Part II.  OTHER INFORMATION**

** **

**Item1.   Legal Proceedings**.

 

**None**

 

**Item2.   Changes in Securities and Use ofProceeds**.

 

**None**

** **

**Item3.   Defaults upon Senior Securities**.

 

**NotApplicable**

** **

**Item4.   Submission of Matters to a Vote ofSecurity Holders**.

 

**Item5.   Other Information**.

 

**None**

 

**Item6.   Exhibits and Reports on Form 8-K**.

 
| (a)    | Exhibits.           |
|--------|---------------------|
|   |                |
|   | 31.1                | Certification of Anthony DiSandro pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |                |   |
|   | 31.2                | Certification of John Carrozza pursuant to Section  302 of the Sarbanes-Oxley Act of 2002. |
|   |                |   |
|   | 32                  | Certification Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |                |
| (b)    | Reports on Form 8-K |
|   |                |
|   | (1)                 | Report on Form 8-K filed on March 11, 2004,  reporting PSB’s results of operations and financial condition for the year  ended December 31, 2003. |

 

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SIGNATURES

 

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

 
|         | PSB  BANCORP, INC |
|--------------|-------------------|
|         |              |
|         | By:               | /s/Anthony  DiSandro |
|         |              | Anthony DiSandro, |
|         |              | President, Chief Executive |
|         |              | Officer, and Director |
|         |              |   |
|         |              |   |
|         | By:               | /s/John  Carrozza |
|         |              | John Carrozza, |
|         |              | Acting Chief Financial Officer |
|         |              | (Principal Financial Officer and |
|         |              | Chief Accounting Officer) |
|         |              |   |
|         |              |   |
| May 17, 2004 |              |   |

 

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**Exhibit Index.**

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

 

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