UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 1998 or
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from .
No. 000-24601
(Commission File Number)
PSB BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2930740
(State of Incorporation) (IRS Employer ID Number)
11 Penn Center Suite 2601
1835 Market Street, Philadelphia, PA 19103
(Address of Principal Executive Offices) (Zip Code)
(215) 979-7900
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares outstanding as of September 30, 1998
COMMON STOCK (No Par Value) 3,101,140
(Title of Class) (Outstanding Shares)
Page 1 of 20 Pages
Exhibit Index on Page 18
PAGE 1
<PAGE>
PSB Bancorp, Inc.*
FORM 10-Q
For the Quarter Ended September 30, 1998
Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Condition 3
as of September 30, 1998(Unaudited) and
December 31, 1997
Consolidated Statement of Income (Unaudited) 5
for the Nine and Three Month Periods Ended
September 30, 1998 and 1997.
Consolidated Statement of Comprehensive Income 7
(Unaudited) for the Nine and Three Month Periods
Ended September 30, 1998 and 1997.
Consolidated Statement of Shareholders' Equity 8
(Unaudited) for the Nine Month Periods Ended
September 30, 1998 and 1997.
Consolidated Statement of Cash Flows (Unaudited) 10
for the Nine Month Periods Ended September 30,
1998 and 1997.
Item 2. Note to Consolidated Financial Statements 12
PART II. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 6. OTHER INFORMATION 20
Exhibits and Reports on Form 8-K
* The registrant is the newly formed holding company for
Pennsylvania Savings Bank and became subject to the
reporting requirements of the Securities Exchange Act of
1934 on July 17, 1998. Prior to such date the registrant
had no operations and therefore the information prior to
September 30, 1998 is information with respect to the
Savings Bank.
PAGE 2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
At September 30, At December 31,
1998 1997
(unaudited)
ASSETS:
Cash and Cash Equivalents:
Cash and due from banks $ 1,321,121 $ 1,193,195
Interest bearing deposits in
other financial institutions 47,865,885 26,695,455
Investments:
Investment securities
available-for-sale, at fair
value 6,413,698 14,401,388
Mortgage-backed securities
available-for-sale, at fair
value 2,614,475 2,933,804
Mortgage-backed securities held-
to-maturity (fair value of
$1,555,086 and $2,851,532) 1,466,758 2,068,059
Investment securities held-to-
maturity (fair value of
$9,053,228 and $12,628,003) 8,996,118 8,219,223
Loans receivable, net 70,506,454 61,915,068
Loans Held for Sale 7,909,618 6,574,585
Real Estate:
Acquired in settlement of loans 824,825 456,528
Office properties and equipment,
net of accumulated depreciation 1,250,216 1,329,145
Federal Home Loan Bank stock, at
cost (Restricted investment
required by law) 572,200 559,900
Accrued interest receivable 1,285,856 1,285,102
Investment in data center, common
stock, at cost 15,000 15,000
Prepaid corporate taxes 298,317 445,092
Excess of acquisition cost over
fair value of assets acquired,
net of accumulated amortization 6,500 7,250
Conversion Costs 0 155,292
Prepaid expenses and other
assets 1,398,360 1,083,865
Total Assets $152,745,401 $129,337,951
LIABILITIES:
Deposits 117,030,334 108,734,107
Securities purchased under
agreements to resell 2,469,888 2,841,733
Advances from borrowers for
taxes 743,331 999,611
Income taxes payable 318,000 308,000
<PAGE 3>
Net deferred taxes 80,797 51,158
Accrued pension cost 145,843 145,843
Accrued interest payable on
savings accounts 287,862 260,363
Accrued expenses and other
liabilities 1,256,650 703,957
Employee stock ownership debt 249,508 295,355
Total Liabilities $122,582,213 $114,340,127
SHAREHOLDERS' EQUITY:
Common stock, $1 par value,
1,194,640 shares issued and
outstanding 0 1,194,640
Common stock, no par value,
3,101,140 shares issued and
outstanding 0
Additional paid-in capital 30,170,573 13,563,087
Employee stock ownership plan (1,538,048) (295,355)
Retained earnings 1,496,495 545,743
Unrealized loss, investments
available for sale 34,168 (10,291)
Total Shareholders' Equity 30,163,188 14,997,824
Total Liabilities and
Shareholders' Equity $152,745,401 $129,337,951
PAGE 4
<PAGE>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest Income:
Interest on loans $4,920,325 $4,118,762* $1,666,190 $1,397,014*
Mortgage-backed securities 220,896 288,484 66,721 91,746
Investment securities 974,255 1,143,199 330,525 400,506
Interest-earning deposits 1,306,267 962,668 562,729 307,695
Total interest income 7,421,743 6,513,113 2,626,165 2,196,961
Interest expense:
Interest on deposits 3,714,147 3,354,666 1,252,620 1,171,059
Interest - other 19,469 23,429 6,170 7,606
Total interest expense 3,733,616 3,378,095 1,258,790 1,178,665
Net interest income 3,688,127 3,135,018 1,367,375 1,018,296
Provision for loan losses 283,066 30,000 100,000 30,000
Net interest income after
provision for loan losses 3,405,061 3,105,018 1,267,375 988,296
Noninterest income:
Gain on sale of loans 604,364 413,203* 221,773 171,987*
Loan fees 11,117 18,358* (11,931) 1,573*
Service charges 266,915 262,548 85,511 88,349
Rental income 26,435 28,504 10,062 7,702
Other income 19,273 35,116 5,055 12,199
Total noninterest income 928,104 757,729 310,470 281,810
Noninterest Expenses:
Compensation and employee
benefits 1,786,368 1,626,170 587,203 539,029
Premises and occupancy costs 512,575 523,311 180,675 171,171
Federal Insurance premiums 50,570 47,767 17,171 15,994
Data processing 114,130 94,960 40,155 32,795
Advertising 90,649 51,683 26,877 17,720
Directors' Fees 158,100 162,600 44,750 46,150
Stationery, printing and postage 80,757 72,782 24,667 20,679
Expenses of real estate owned 1,421 3,806 3,357 768
Other 516,724 490,641 173,441 164,411
Total noninterest expenses 3,311,294 3,073,720 1,098,296 1,008,717
Income before provision for income
taxes 1,021,871 789,027 479,549 261,389
Provision for federal and state
income taxes:
Current 318,000 244,000 153,000 78,000
Deferred tax (benefit)
Total income tax provision 318,000 244,000 153,000 78,000
Net Income $ 703,871 $ 545,027 $ 326,549 $183,389
Earnings per share - basic $ 0.39 $ 0.47 $ 0.18 $0.16
Earnings per share - diluted $ 0.40 $ 0.47 $ 0.18 $0.16
</TABLE>
<PAGE 5>
* Certain "loan fees" items for the nine and three months
ended September 30, 1997 were reclassified as either "gain
on sale of loans" or "Interest on loans".
PAGE 6
<PAGE>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
(unaudited) (unaudited)
Net Income $703,871 $545,027 $326,549 $183,389
Other comprehensive
income, net of tax:
Unrealized gain
(loss), investments
available for sale 44,459 18,029 35,978 47,518
Other comprehensive
income 44,459 18,029 35,978 47,518
Comprehensive Income $748,330 $563,056 $362,527 $230,907
PAGE 7
<PAGE>
PSB BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Employee Accumulated
Additional Stock Retained Other
Common Paid-in Ownership Earnings Comprehensive Comprehensive
Stock Capital Plan (Deficit) Income Total Income
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 1,194,640 $13,563,087 $ (356,483) $ (162,734) $(69,968) $14,168,542
Net Income for the nine
months ended
September 30, 1997 545,027 545,027 545,027
Other comprehensive income,
net of tax:
Change in unrealized
loss on investment and
mortgage-backed
securities available-
for-sale 18,029 18,029 18,029
Principal payments made by
Employee Stock Ownership
Plan 45,846 45,846
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED) $ 1,194,640 $13,563,087 $(310,637) $ 382,293 $(51,939) $14,777,444 $563,056
BALANCE, DECEMBER 31, 1997 $ 1,194,640 $13,563,087 $(295,355) $ 545,743 $(10,291) $14,997,824
Net Income for the nine
months ended
September 30, 1998 703,871 703,871 703,871
Other comprehensive income,
net of tax:
Change in unrealized loss
on investment and
mortgage-backed
securities available-
for-sale 44,459 44,459 44,459
Cash of PSB Mutual Holding
Company from merger of
PSB Mutual Holding
Company and Pennsylvania
Savings Bank upon
completion of Conversion
and Reorganization 246,881 246,881
Principal payments made by
Employee Stock Ownership
Plan 45,847 45,847
Issuance of common stock to
Employee Stock Ownership
Plan upon completion of
Conversion and
Reorganization (1,288,540) (1,288,540)
Exchange of Pennsylvania
Savings Bank common
stock for PSB Bancorp
common stock upon
completion of Conversion
and Reorganization (1,194,640) 1,194,640 0
Issuance of common stock
upon completion of <PAGE 8>
Conversion and
Reorganization 16,107,320 16,107,320
Expenses relating to stock
offering (694,474) (694,474)
BALANCE, SEPTEMBER 30, 1998
(UNAUDITED) $ 0 $30,170,573 $(1,538,048) $1,496,495 $ 34,168 $30,163,188 $748,303
</TABLE>
PAGE 9
<PAGE>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Nine Months Ended
September 30,
1998 1997
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 703,871 $ 545,027
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Amortization of premium/discount
on mortgage-backed securities (6,390) (2,934)
Depreciation and amortization 109,254 92,117
Write-down and expenses of real
estate owned (1,870) 0
Gain on sale of real estate
owned (18,281) (2,877)
Gain on sale of loans (604,364) (413,203)
Change in assets and liabilities
Increase in loans held for
sale (730,669) (578,907)
(Increase) decrease in accrued
interest receivable (754) 26,382
Increase in prepaid expenses (314,495) (205,418)
Decrease in prepaid corporate
taxes 146,775 135,879
Increase in corporate taxes
payable 10,000 102,000
Increase in accrued interest
payable 27,499 57,356
Increase in accrued expenses 552,693 409,380
Total Adjustments (830,602) (380,225)
Net cash provided by (used
in) operating activities (126,731) 164,802
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities,
available for sale - (8,043,395)
Purchase of investment securities,
held-to-maturity (12,000,000) (9,715,000)
Maturities of investment
securities, available-for-sale 8,000,000 1,000,000
Maturities of investment
securities, held-to-maturity 11,220,000 8,155,736
Mortgage-backed security
maturities and principal
repayments 991,913 602,475
Acquisition costs of and proceeds
from the sale of Federal Home
Loan Bank stock (12,300) (26,300)
<PAGE 10>
Proceeds from sale of real estate
owned, net of investments 95,185 -
Increased in capitalized
conversion costs 155,292 (17,500)
Capital expenditures (29,575) (56,042)
Increase in total loans
receivable, net (9,034,717) (5,219,788)
Net cash used in
investing activities (614,202) (13,319,814)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net 8,296,227 5,708,337
Net proceeds from stock offering 14,124,306 -
Proceeds received from merger with
PSB Mutual Holding Company 246,881 -
Change in advances for borrowers'
taxes and insurance (256,280) (244,431)
Change in securities purchased
under agreements to resell (371,845) 1,333,595
Net cash provided by
financing activities 22,039,289 6,797,501
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 21,298,356 (6,357,511)
Cash and Cash equivalents,
beginning of period 27,888,650 31,622,465
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 49,187,006 $ 25,264,954
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and
borrowings $ 3,706,117 $ 3,297,310
Income taxes $ 250,000 $ 80,000
Noncash activities
Loans transferred to real
estate owned $ 443,330 $ -
PAGE 11
<PAGE>
PSB BANCORP, INC. AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(UNAUDITED)
BASIS OF PRESENTATION:
The consolidated financial statements as of and for the
three and nine months period ended September 30, 1997 include the
accounts of the Pennsylvania Savings Bank (the "Savings Bank")
and its wholly-owned subsidiaries, PSA Service Corporation,
Transnational Mortgage Corp. and PSA Financial Corporation. The
Savings Bank became the wholly-owned subsidiary of PSB Bancorp,
Inc. (the "Holding Company") on July 17, 1998 and as a result the
consolidated financial statements as of and for the three and
nine months periods ended September 30, 1998 include the accounts
of PSB Bancorp, Inc. and its wholly-owned subsidiary,
Pennsylvania Savings Bank. The Holding Company's business is
conducted principally through the Savings Bank and its wholly-
owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments considered necessary for fair presentation have
been included. Operating results for the nine months ended
September 30, 1998 are not necessarily indicative of the results
that may be expected for any fiscal year.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Background
Effective July 17, 1998, Pennsylvania Savings Bank(the
"Savings Bank") and PSB Mutual Holding Company ("MHC") completed
the Plan of Conversion from Mutual Holding Company to Stock
Holding Company. Under the Plan of Conversion, the newly formed
holding company, PSB Bancorp. Inc.(" Holding Company") issued
1,610,732 shares of common stock, no par value, at a price of
$10.00 per share. Existing shareholders of Pennsylvania Savings
Bank exchanged their shares for 2.572374 shares of PSB Bancorp,
Inc. shares and the Mutual Holding Company merged with and into
the Savings Bank.
The Holding Company was organized as a Pennsylvania
business corporation on October 3, 1997 at the direction of the
Savings Bank for the purpose of becoming a holding company for
the Savings Bank upon completion of the Conversion and
Reorganization. The Holding Company is subject to regulation by
the Federal Reserve, and its principal business is the ownership
of the Savings Bank. In the future, the Holding Company may
<PAGE 12> acquire or organize other operating subsidiaries,
although there are no current plans, arrangements or
understandings, written or oral, to do so.
The Savings Bank is a Pennsylvania-chartered stock savings bank
headquartered at 11 Penn Center, Suite 2601, 1835 Market Street,
Philadelphia, Pennsylvania 19103. The Savings Bank is a
community-oriented institution offering traditional deposit and
loan products. The Savings Bank conducts business through an
executive/administrative office, (6) full-service offices and a
branch administrative office. The executive/administrative
office, the branch administrative office and five of the full-
service offices are located in Philadelphia, Pennsylvania and one
full-service office is located in Glenside, Montgomery County,
Pennsylvania.
The Savings Bank is primarily engaged in the business of
attracting deposits from the general public in the Savings Bank's
market area and investing such deposits in loans secured by one-
to-four family residential real estate, commercial real estate
loans, commercial business loans, construction loans and
investment and mortgage-backed securities. The Savings Bank's
deposits are insured by the Savings Association Insurance Fund
(the "SAIF") of the FDIC to the extent that such deposits were
assumed from the mutual savings bank in the MHC Reorganization.
Deposits accepted by the Savings Bank after the MHC
Reorganization are insured by the FDIC's Bank Insurance Fund (the
"BIF"), up to applicable limits.
Business Strategy
The Savings Bank's strategy is to maximize profitability by
providing quality deposit and loan products in an efficient
manner as a well-capitalized and independent savings bank.
Generally, the Savings Bank seeks to implement this strategy by
emphasizing retail deposits as its primary source of funds and by
maintaining a substantial part of its assets in locally-
originated residential first mortgage, commercial real estate
loans, commercial business loans, construction loans and consumer
loans, mortgage-backed securities and other liquid investment
securities. The Savings Bank started an expansion of its branch
network by opening a branch in Center City Philadelphia on
June 14, 1996. The Savings Bank plans further expansion of its
branch network in areas contiguous to its current market and then
into the suburbs of Philadelphia by opening branch offices or
acquiring the branches of other institutions. The Savings Bank
is also expanding the operations of Transnational Mortgage Corp.,
its mortgage banking subsidiary, in an effort to increase fee
income. Retail mortgage origination is being expanded by
maintaining a staff of six commissioned sales people to solicit
mortgage loans throughout the Philadelphia metropolitan area and
surrounding counties in Pennsylvania, New Jersey and Delaware;
wholesale mortgage origination is being expanded by originating,
processing and servicing loans for other mortgage companies;
alternative mortgage lending is being expanded through
telemarketing origination programs for B through D quality paper
and FHA streamline programs. The Savings Bank is increasing loan
<PAGE 13> origination through its existing office network and is
increasing origination of other loan products separate from
Transnational Mortgage Corp. such as commercial real estate,
commercial business loans, construction loans and consumer loans.
The Savings Bank's business strategy incorporates the
following elements: (1) increasing assets by expanding its
retail branch network to include other contiguous segments of the
metropolitan Philadelphia market, (2) expanding its mortgage
banking operations throughout the metropolitan Philadelphia area
and the adjacent counties of Pennsylvania, New Jersey and
Delaware, and (3) increasing net interest income and reducing
interest rate risk by emphasizing the origination for portfolio
of commercial real estate, construction, commercial business and
consumer loans which generally bear higher interest rates and
have shorter terms than residential mortgage loans. The Savings
Bank's expansion strategy has resulted in materially increased
operating expenses associated with the lease of the Center City
Philadelphia office space, related equipment expense and salary
and benefit expenses for personnel expansion. Also as expected,
the generation of increased revenues from the new branch and the
mortgage banking operation has lagged recognition of these
additional expenses.
Financial Condition
The Bank's total assets increased $23.41 million or 18.10%
from $129.34 million at December 31, 1997 to $152.75 million at
September 30, 1998. The increase in assets was primarily the
result of higher levels of cash and cash equivalents and net
loans that were partially offset by a decrease in investment
securities.
Net loans increased to $70.51 million at September 30, 1998
from $61.92 million at December 31, 1997. The increase of
$8.59 million, or 13.87%, was the result of modest loan demand
for new mortgage loan originations in the Bank's market area
during the nine month period ended September 30, 1998. Net loans
also increased due to the Bank increasing loan origination of
other loan products such as commercial real estate, commercial
business loans, construction loans and consumer loans.
Total investment securities(including mortgage-backed
securities) decreased $8.13 million, or 29.44%, to $19.49 million
at September 30, 1998, from $27.62 million at December 31, 1997.
The decrease was due to maturity of investment securities during
the nine month period ended September 30, 1998. The Bank
transferred these funds into cash and cash equivalents.
Cash and cash equivalents, including interest-bearing
deposits with banks, increased $21.30 million to $49.19 million
at September 30, 1998, from $27.89 million at December 31, 1997.
This increase was the result of cash provided from proceeds from
the stock conversion, new deposits, maturities of investments and
loan payments net of cash used for the purchase of investments,
capital expenditures and disbursements of loan proceeds.
<PAGE 14>
Total liabilities increased from $114.34 million at
December 31, 1997 to $122.58 million at September 30, 1998. This
$8.24 million, or 7.21% increase, reflected an increase in the
Bank's primary source of funds, saving deposits, which aggregate
$117.03 million at September 30, 1998, an increase of
$8.3 million, or 7.63% from $108.73 million at December 31, 1997.
The increase in deposits for the nine months ended September 30,
1998 is partially due to funds escrowed for the stock conversion.
Shareholders' equity increased by $15.16 million, or
101.07%, from $15 million at December 31, 1997 to $30.16 million
at September 30, 1998. This increase reflects the sale of stock
by PSB Bancorp, Inc. and the Bank's earnings for the nine months
ended September 30, 1998 and a increase in unrealized gains
(losses), net of taxes on investment and mortgage-backed
securities held in the Bank's available for sale portfolio.
Results of Operations for the Nine and Three Month Periods Ended
September 30, 1998 and 1997
General
The Bank's net income is primarily dependent on its net
interest income, which is the difference between interest income
earned on its investments and mortgage-backed securities, other
investment securities and loans, and its cost of funds consisting
of interest paid on deposits. Although the Bank had no
outstanding borrowings from the FHLB of Pittsburgh at
September 30, 1998, the Bank has credit available that it may
access in the future. The Bank's net income also is affected by
its provision for loan losses, as well as by the amount of
noninterest income, including income from fees and service
charges, net gains and losses on sales of mortgage-backed
securities and other investments, and noninterest expense such as
employee compensation and benefits, deposit insurance premiums,
occupancy and equipment costs, and income taxes. Earnings of the
Bank also are affected significantly by general economic and
competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities,
which events are beyond the control of the Bank. In particular,
the general level of market interest rates tends to be highly
cyclical. In periods of high interest rates, earnings of the
Bank are likely to be depressed, which in turn would be likely to
have a detrimental effect on the market value of any investment
in the Bank's common stock.
Net Income. The Bank's net income totaled $704,000 and
$545,000 for the nine months ended September 30, 1998 and 1997,
respectively. This increase in net income was the result of
higher net interest income and noninterest income. Net income
for the quarter ended September 30, 1998 and 1997 was $327,000
and $183,000, respectively.
Interest Income. Total interest income increased by
$910,000, or 13.98%, to $7.42 million for the nine months ended
September 30, 1998, from $6.51 million for the nine months ended
<PAGE 15> September 30, 1997. The increase in interest income
resulted largely from an increase of $802,000 in interest earned
on loans and a $344,000 increase in income earned on deposits
which was offset by a decrease of $237,000 in income earned on
mortgage-backed and investment securities. Higher interest
income on loans resulted from an increase in loans receivable for
the nine month period ended September 30, 1998. Total interest
income increased by $430,000 or 19.55% to $2.63 million for the
quarter ended September 30, 1998 compared to $2.20 million for
the comparable period of 1997 due principally to an increase of
$269,000 in interest earned on loans and a $255,000 increase in
income earned on deposits which was offset by a decrease of
$95,000 in income earned on mortgage-backed and investment
securities.
Interest Expense. Total interest expense increased to
$3.73 million for the nine months ended September 30, 1998, from
$3.38 million for the nine months ended September 30, 1997,
representing an increase of $350,000 or 10.36%. Interest expense
increased by $80,000 or 6.78% to $1.26 million for the quarter
ended September 30, 1998 compared to $1.18 million for the
quarter ended September 30, 1997. The increase for both periods
was due primarily to an increase in deposits.
Net Interest Income. Net interest income after the
provision for possible loan losses for the nine months ended
September 30, 1998, increased to $3.41 million from $3.11 million
for the nine months ended September 30, 1997, an increase of
$300,000, or 9.65%. Net interest income after the provision for
loan losses increased to $1.37 million for the quarter ended
September 30, 1998 from $1.02 million for the quarter ended
September 30, 1997.
Provision for Loan Losses. The Bank makes a provision to
its allowance for loan losses to protect the Bank against
possible but not yet identified losses inherent in the Bank's
loan portfolio. This provision is recognized for financial
reporting purposes as a reduction of income. In making such
provision, management of the Bank considers, among other factors,
economic trends within its market area, concentration of credit
risk and trends affecting the valuation of collateral for the
Bank's loans. During the nine months ended September 30, 1998
and 1997, the Bank had charge-offs against the allowance for
loan losses of $73,000 and $-0-, respectively. During such
periods, the Bank provided $283,000 and $30,000, respectively,
for possible loan losses in order to protect against possible
future losses. During the three months ended September 30, 1998
and 1997, the Bank had charge-offs against the allowance for loan
losses of $73,000 and $-0-, respectively. During such periods,
the Bank provided $100,000 and $30,000, respectively, for
possible loan losses in order to protect against possible future
losses.
Noninterest Income. Noninterest income consists of gain on
sale of loans, loan fees, service charges, rental income and
other income. Noninterest income increased by $170,000, or
22.43%, to $928,000 for the nine months ended September 30, 1998,
<PAGE 16> from $758,000 for the nine months ended September 30,
1997. The principal reasons for the increase in noninterest
income was a $191,000 increase in gain on sale of loans to
$604,000 in 1998 from $413,000 in 1997 due to an increase in
number of loans sold by Transnational Mortgage Corp. in 1998 and
a $4,000 increase in service charges for the nine month period
ended September 30, 1998. This increase was offset by a $2,000
decrease in rental income and a $16,000 decrease in other income
for the nine month period ended September 30, 1998. For the
third quarter 1998, an increase in gain on sale of loans and
rental income was partially offset by a decrease in loan fees,
service charges and other income resulting in noninterest income
of $310,000 for the third quarter 1998 compared to $282,000 for
the third quarter 1997.
Noninterest Expense. Noninterest expense principally
consists of employees' compensation and benefits, deposit
insurance premiums and premises and occupancy costs. Noninterest
expense increased by $240,000, or 7.82%, to $3.31 million for the
nine months ended September 30, 1998, from $3.07 million for the
nine months ended September 30, 1997. The principal reasons for
the increase was a $160,000 increase in compensation and employee
benefits due to normal salary increases, a $19,000 increase in
data processing, a $39,000 increase in advertising, a $8,000
increase in stationery, printing and postage and a $26,000
increase in other expenses. This increase was offset by a
$11,000 decrease in premises and occupancy costs for the nine
month period ended September 30, 1998. Total interest expense
for the third quarter 1998 increased to $1.10 million from
1.01 million for the third quarter 1997. Noninterest expense has
increased in both periods due to cost associated with the Bank's
expansion strategy.
Income Taxes. Income tax provisions for the nine months
ended September 30, 1998 and 1997 of $318,000 and $244,000,
respectively, generally reflect the Bank's pre-tax income at
rates then in effect. The income tax provision for the third
quarter was $153,000 in 1998 and $78,000 in 1997.
Liquidity and Capital Resources
The Bank is required to maintain a sufficient level of
liquid assets, as determined by management and defined and
reviewed for adequacy by the FDIC during its regular
examinations. The FDIC, however, does not prescribe by
regulation a minimum amount or percentage of liquid assets. The
FDIC allows any marketable security, whose sale would not impair
the capital adequacy of the Bank, to be eligible for liquidity.
The Bank's liquidity is quantified through the use of a standard
liquidity ratio of liquid assets(cash and cash equivalents,
investment securities available-for-sale, mortgage-backed
securities available-for-sale and Federal Home Loan Bank stock)
to short-term borrowings plus deposits. Using this formula, the
Bank's liquidity ratio was 50.23% as of September 30, 1998. The
Bank adjusts its liquidity levels in order to meet funding needs
of deposit outflows and loan commitments. The Bank also adjusts
<PAGE 17> liquidity as appropriate to meet its assets and
liability management objectives.
The Bank's primary source of funds are deposits, the
amortization and prepayment of loans and mortgage-backed
securities, maturities of investment securities and other short-
term investments, earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general
interest rate levels, economic conditions, and competition. The
Bank manages the pricing of its deposits to maintain a desired
deposit balance. In addition, the Bank invests excess funds in
short-term interest-earning assets and other assets which provide
liquidity to meet lending requirements and interest rate risk
management objectives. Short-term interest-earning deposits with
the FHLB of Pittsburgh amounted to $47.87 million at
September 30, 1998. For additional information about cash flows
from the Bank's operating, financing and investing activities,
see Statements of Cash Flows included in Item 1 of this report.
A major portion of the Bank's liquidity consists of cash and
cash equivalents, which are a product of its operating, investing
and financing activities. The primary sources of cash were net
income, principal repayments on loans and mortgage-backed
securities, and increases in deposit accounts.
Disclosure Regarding Year 2000 Compliance
The Holding Company and the Savings Bank's Board of
Directors and management is aware of the possible consequences
the Year 2000 ("Y2K") may pose with regard to the computer system
utilized to conduct business on a daily basis. The Y2K presents
several potential risks to the Holding Company and the Savings
Bank:
1. The Banking transactions of the Savings Bank's
customers are processed by an external data processing
service bureau. The failure of the service bureau's
system to function as a result of the millennium date
change could result in the Savings Bank's inability to
properly process customer transactions.
2. Concern on the part of certain depositors that Y2K
related problems could impair access to their deposit
balances following the millennium date change could
result in the Savings Bank experiencing a deposit
outflow prior to December 31, 1999.
3. A number of the Savings Bank's borrowers utilize
computers and computer software to varying degrees in
conjunction with the operation of their businesses.
The customers and suppliers of those businesses may
utilize computers as well. Should the Savings Bank's
borrowers, or the businesses on which they depend,
experience Y2K related computer problems, such
borrowers' cash flow could be disrupted, adversely
<PAGE 18> affecting their ability to repay their loans
with the Savings Bank.
4. Certain utility services, such as electrical power and
telecommunications services could be disrupted if those
services experience Y2K related problems.
The Holding Company and Savings Bank's Board of Directors
and management have addressed the Year 2000 ("Y2K") issue by
developing a Y2K Compliance Plan. This plan involves five
separate phases: awareness, assessment, renovation, validation
and implementation.
During 1997, the Savings Bank completed the systems
assessment phase, identifying each internal and external system
that could potentially be affected by the Y2K issue. Those
systems include the Savings Bank's external data processing
system as well as equipment such as elevators, bank alarms, vault
locks, etc. that may contain imbedded microprocessors. For each
such system, determination was made whether or not the system is
Y2K compliant. Those determinations involved obtaining Y2K
compliant certification from third-party processors and outside
vendors.
The Savings Bank outsources all major data processing
applications related to customers' banking transactions to
Intrieve, Incorporated ("Intrieve"). Under the agreement with
Intrieve, Intrieve is obligated to incur all software related
costs to make its system Y2K compliant. Intrieve has prepared a
detailed schedule of functions to be performed in its compliance
project. As of September 30,1998, Intrieve has completed its
"awareness", "assessment" and "renovation" phases. In October
1998, Intrieve conducted internal testing of its data processing
system. Results of these tests are to be distributed to their
customers in November 1998. On November 8, 1998, the Savings
Bank conducted testing in-house using Intrieve's data processing
system. The Savings Bank performed various banking transactions
on customers' accounts using the date of January 10, 2000. All
transactions were completed successfully. Intrieve expects
completion of the Y2K project in December 1998. The Savings Bank
is obligated to incur only the hardware costs associated with
implementing the changes required by Intrieve, however hardware
costs are not expected to be material.
The Savings Bank expects that all other outside vendors will
complete their Y2K testing by December 31, 1998.
In certain cases, however, such as the potential loss of
electrical power or telecommunications services due to Y2K
problems, testing by the Savings Bank is either not practical or
not possible. In those cases, contingency plans are being
designed that specify how the Savings Bank will deal with each
such potential situation. The Savings Bank plans to develop a
contingency plan which will address failure of the data
processing service bureau system. The Savings Bank has
determined that if the service bureau system were to fail, the
Savings Bank would implement manual systems until such systems
<PAGE 19> could be re-established. The Savings Bank does not
anticipate that such short-term manual systems would have a
material impact upon the operations of the Savings Bank. The
Savings Bank plans to have a written contingency plan completed
by December 31, 1998.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Document
3.1 Articles of Incorporation of PSB
Bancorp, Inc. (incorporated herein by
reference to Exhibit 3.1 of the S-1
Registration Statement of PSB Bancorp,
Inc. as filed with the Securities and
Exchange Commission on May 14, 1998).
3.2 Bylaws of PSB Bancorp, Inc.
(incorporated herein by reference to
Exhibit 3.2 of the S-1 Registration
Statement of PSB Bancorp, Inc. as filed
with the Securities and Exchange
Commission on May 14, 1998).
10.1* Pennsylvania Savings Bank Retirement
Plan (incorporated herein by reference
to Exhibit 10.1 of the S-1 Registration
Statement of PSB Bancorp, Inc. as filed
with the Securities and Exchange
Commission on May 14, 1998).
10.2* Pennsylvania Savings Cash or Deferred
Profit Sharing Plan (incorporated herein
by reference to Exhibit 10.2 of the S-1
Registration Statement of PSB Bancorp,
Inc. as filed with the Securities and
Exchange Commission on May 14, 1998).
10.3* Pennsylvania Savings Bank Profit Sharing
Plan (incorporated herein by reference
to Exhibit 10.3 of the S-1 Registration
Statement of PSB Bancorp, Inc. as filed
with the Securities and Exchange
Commission on May 14, 1998).
10.4* Employment Agreement with Vincent J.
Fumo (incorporated herein by reference
to Exhibit 10.4 of the S-1 Registration
Statement of PSB Bancorp, Inc. as filed
with the Securities and Exchange
Commission on May 14, 1998).
<PAGE 20>
10.5* Employment Agreement with Anthony
DiSandro (incorporated herein by
reference to Exhibit 10.5 of the S-1
Registration Statement of PSB Bancorp,
Inc. as filed with the Securities and
Exchange Commission on May 14, 1998).
10.6* Pennsylvania Savings Bank Employee Stock
Ownership Plan (incorporated herein by
reference to Exhibit 10.6 of the S-1
Registration Statement of PSB Bancorp,
Inc. as filed with the Securities and
Exchange Commission on May 14, 1998).
10.7 Lease Agreement between Eleven Colonial
Penn Plaza Associates and Pennsylvania
Savings Bank, dated as of October 10,
1995(incorporated herein by reference to
Exhibit 10.7 of the S-1 Registration
Statement of PSB Bancorp, Inc. as filed
with the Securities and Exchange
Commission on May 14, 1998).
10.8 Lease Agreement between Eleven Colonial
Penn Plaza Associates and Pennsylvania
Savings Bank, dated as of October 12,
1995 (incorporated herein by reference
to Exhibit 10.8 of the S-1 Registration
Statement of PSB Bancorp, Inc. as filed
with the Securities and Exchange
Commission on May 14, 1998).
____________________________________
* Denotes a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K
None.
PAGE 21
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
November 12, 1998
PSB BANCORP, INC.
(Registrant)
By /s/Anthony DiSandro
Anthony DiSandro
President and Chief Operating
Officer
<PAGE 22>
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