PSB BANCORP INC, S-4, 1999-06-25

PSB BANCORP INC
S-4, 1999-06-25
SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED

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As filed with the Securities and Exchange Commission on June 25,
1999
Registration No. __________
_________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________

FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________________________________

PSB BANCORP, INC.
(Exact name of registrant as specified in its charter)

Pennsylvania 6035 23-2930740
(State or other jurisdic- (Primary Standard (I.R.S. Employer
of incorporation or Industrial Class- Identification
organization) ification Code No. No.)

11 Penn Center, Suite 2601
1835 Market Street
Philadelphia, Pennsylvania 19103
(215) 979-7900
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

Anthony DiSandro
President and Chief Operating Officer
PSB Bancorp, Inc.
11 Penn Center, Suite 2601
1835 Market Street
Philadelphia, Pennsylvania 19103
(215) 979-7900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:

Jeffrey P. Waldron, Esquire L. Garrett Dutton Jr., Esquire
David R. Payne, Esquire J. Bradley Boericke, Esquire
Stevens & Lee Pepper Hamilton, LLP
One Glenhardie Corporate Center 3000 Two Logan Square
1275 Drummers Lane 18th & Arch Street
Wayne, Pennsylvania 19087-0236 Philadelphia, Pennsylvania 19103
(610) 293-4976 (215) 981-4041

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes
effective.

If the securities being registered on this Form are being offered
in connection with the formation of a holding company and there
is compliance with General Instruction G, check the following
box: [ ]

If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering.[ ]

___________________________

The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

_________________________________________________________________

[Letterhead of PSB Bancorp, Inc.]

PSB BANCORP, INC.
Philadelphia, Pennsylvania

__________________, 1999

Dear Shareholder:

You are cordially invited to attend the 1999 annual meeting
of shareholders of PSB Bancorp, Inc. which will be held _________
_________________________________________________________________
_______, located at ____________________________________________,
Pennsylvania, at _________ p.m., local time, on ________________,
1999.

At the annual meeting, you will be asked to:

1. approve and adopt the Agreement and Plan of
Reorganization, dated March 19, 1999, between PSB Bancorp, Inc.
and First Bank of Philadelphia (attached as Annex A to the
accompanying joint proxy statement/prospectus), providing for the
acquisition by PSB of First Bank through a merger of Pennsylvania
Savings Bank with and into First Bank;

2. approve the adjournment of the PSB Bancorp, Inc. annual
meeting, if necessary, to permit further solicitation of proxies
if there are not sufficient votes present to approve the
Agreement and Plan of Reorganization;

3. vote for the election of directors;

4. ratify the selection of Stockton Bates, LLP as the
auditors for the year ending December 31, 1999;

5. approve an amendment to the Articles of Incorporation
of PSB Bancorp, Inc. providing for new voting requirements
necessary to approve a sale, merger or similar transaction.

6. approve and adopt the 1998 PSB Bancorp, Inc. Employee
Stock Option Plan; and

7. approve and adopt the 1998 PSB Bancorp, Inc. Management
Recognition Plan.

The proposed merger is described in the accompanying joint
proxy statement/prospectus and its annexes. Please read all of
these materials carefully.

PSB Bancorp, Inc.'s Board of Directors recommends that you
vote FOR each proposal to be considered at the PSB annual
meeting.

Because of the significance of these matters to our company,
your participation in the annual meeting, in person or by proxy,
is especially important. We hope you will be able to attend the
meeting. However, whether or not you anticipate attending in
person, we urge you to complete, sign and return the enclosed
proxy card promptly to ensure that your shares will be
represented at the annual meeting. If you attend the annual
meeting, you will, of course, be entitled to vote in person.

Thank you very much for your continued interest and support.
We look forward to seeing you at the meeting.

Sincerely,

Anthony DiSandro
President and
Chief Operating Officer

PSB BANCORP, INC.
11 Penn Center, Suite 2601
1835 Market Street
Philadelphia, Pennsylvania 19103
(215) 979-7900

____________________

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held on __________________, 1999

NOTICE IS HEREBY GIVEN that the annual meeting of
shareholders, including any adjournment or postponement, of PSB
BANCORP, INC., a Pennsylvania business corporation, will be held
_________ _______________________________________________________
_________________, located at ___________________________________
_________, Pennsylvania, at _________ p.m., local time, on
________________, __________________, 1999, to consider the
following matters:

1. To approve and adopt the Agreement and Plan of
Reorganization, dated March 19, 1999, between PSB Bancorp,
Inc. and First Bank of Philadelphia (attached as Annex A to
the accompanying joint proxy statement/prospectus),
providing for the acquisition by PSB of First Bank through
the merger of Pennsylvania Savings Bank with and into First
Bank.

2. To vote on adjournment of the PSB annual meeting,
if necessary, to permit further solicitation of proxies if
there are not sufficient votes at the time of the meeting to
approve the Agreement and Plan of Reorganization.

3. To elect two (2) Class I directors to hold office
for three years from the date of election.

4. To approve the selection of Stockton Bates, LLP as
the auditors for fiscal year 1999.

5. To approve an Amendment to the Articles of
Incorporation of PSB Bancorp, Inc.

6. To adopt the 1998 PSB Bancorp, Inc. Employee Stock
Option Plan.

7. To adopt the 1998 PSB Bancorp, Inc. Management
Recognition Plan.

8. To consider such other matters as may properly be
brought before the PSB annual meeting.

Only those PSB shareholders of record at the close of
business on ______ __, 1999, are entitled to notice of, and to
vote at, the PSB annual meeting.

Each share of PSB common stock outstanding will entitle
the holder to one vote on each matter which may properly come
before the PSB annual meeting.

By order of the Board of Directors

___________________________________
Roseanne Pauciello,
Corporate Secretary

_____ __, 1999

PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL
IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE. IF
YOU ATTEND THE PSB ANNUAL MEETING,
YOU MAY VOTE IN PERSON EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY CARD.

[LETTERHEAD OF FIRST BANK OF PHILADELPHIA]

__________________, 1999

Dear Shareholder:

You are cordially invited to attend the annual meeting of
shareholders of First Bank of Philadelphia to be held on
__________________, __________________, 1999, at _________ a.m.,
local time, at _____________________________________________,
Pennsylvania.

At the First Bank annual meeting, shareholders will be asked
to:

(i) approve and adopt the Agreement and Plan of
Reorganization, dated March 19, 1999, between PSB Bancorp, Inc.
and First Bank of Philadelphia (attached as Annex A to the
accompanying joint proxy statement/prospectus), providing for the
acquisition by PSB of First Bank through the merger of
Pennsylvania Savings Bank with and into First Bank;

(ii) approve the adjournment of the First Bank annual
meeting, if necessary, to permit further solicitation of proxies
if there are not sufficient votes present at the time of the
meeting to approve the Agreement and Plan of Reorganization;

(iii) vote for the election of directors.

The attached joint proxy statement/prospectus contains
important information concerning the merger. We urge you to give
it your careful attention.

The Board of Directors of First Bank has carefully
considered and approved the Agreement and Plan of Reorganization
and believes that the agreement and reorganization is in the best
interests of First Bank and its shareholders. Accordingly, your
board of directors unanimously has approved and recommends that
you vote FOR approval of the agreement and plan of reorganization
and FOR the adjournment proposal. In addition, the board of
directors recommends that you vote FOR the slate of nominees for
director.

Your vote is important regardless of the number of shares
you own. Whether or not you plan to attend the First Bank annual
meeting, the Board of Directors of First Bank urges you to
complete, sign, date, and return the enclosed proxy card promptly
in the enclosed postage-paid envelope. This will not prevent you
from voting in person at the First Bank annual meeting but will
assure that your vote is counted if you are unable to attend.

On behalf of the Board of Directors and our employees, I
wish to thank you for your continued support. We appreciate your
interest.

Sincerely,

Carl A. Lingle
President and
Chief Executive Officer

FIRST BANK OF PHILADELPHIA
1624 Walnut Street
Philadelphia, Pennsylvania 19102

____________________

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held on ____ __, 1999
____________________

NOTICE IS HEREBY GIVEN that an annual meeting of
shareholders including any adjournment or postponement, of First
Bank of Philadelphia ("First Bank"), a Pennsylvania banking
corporation, will be held on ________________, ____ __, 1999, at
__________, local time, at _______________________________,
Pennsylvania, to consider and vote upon the following matters,
all as more fully described in the accompanying joint proxy
statement/prospectus:

1. To approve and adopt the Agreement and Plan
of Reorganization, dated March 19, 1999, between PSB
Bancorp, Inc. and First Bank of Philadelphia (attached as
Annex A to the accompanying joint proxy statement/
prospectus), providing for the acquisition by PSB of First
Bank through the merger of Pennsylvania Savings Bank with
and into First Bank.

2. The adjournment of the First Bank annual
meeting, if necessary, to permit further solicitation of
proxies in the event there are not sufficient votes at the
time of the First Bank annual meeting to approve the
Agreement and Plan of Reorganization.

3. The election of directors.

4. The transaction of such other business as may
properly be brought before the First Bank annual meeting.

The Board of Directors of First Bank has determined
that an affirmative vote on each proposal to be considered at the
First Bank annual meeting is in the best interests of First Bank
and its shareholders and unanimously recommends a vote "FOR" each
proposal.

The Board of Directors of First Bank has fixed the
close of business on ______ __, 1999 as the record date for
determining shareholders entitled to notice of, and to vote at,
the First Bank annual meeting.

Your vote is important regardless of the number of
shares you own. Whether or not you plan to attend the First Bank
annual meeting, the Board of Directors of First Bank urges you to
complete, sign, date, and return the enclosed proxy card as soon
as possible in the enclosed postage-paid envelope. This will not
prevent you from voting in person at the First Bank annual
meeting but will assure that your vote is counted if you are
unable to attend.

Please do not send in any certificates for your shares
at this time.

BY ORDER OF THE BOARD OF DIRECTORS

______________________, Secretary

________________________________________________________________

PSB BANCORP, INC. AND FIRST BANK OF PHILADELPHIA

JOINT PROXY STATEMENT
____________________

PROSPECTUS

PSB BANCORP, INC.

2,818,994 Shares
Common Stock
No Par Value Per Share

________________________________________________________________

This joint proxy statement/prospectus is being
furnished to shareholders of PSB Bancorp, Inc., a Pennsylvania
business corporation, and to shareholders of First Bank of
Philadelphia, a Pennsylvania banking corporation, in connection
with the solicitation of proxies by the respective Boards of
Directors of PSB and First Bank for use at the respective annual
meetings of PSB and First Bank shareholders, including any
adjournments or postponements thereof. The First Bank annual
meeting will be held on ___________, 1999 and PSB's annual
meeting will be held on ________, 1999.

This joint proxy statement/prospectus relates to up to
2,818,994 shares of common stock, no par value, of PSB which may
be issued upon the acquisition of First Bank of Philadelphia by
PSB Bancorp Inc. through the merger of Pennsylvania Savings Bank,
a wholly owned subsidiary of PSB, with and into First Bank,
pursuant to an Agreement and Plan of Reorganization, dated March
19, 1999.

This joint proxy statement/prospectus constitutes both:

(i) the joint proxy statement of each of PSB and First
Bank relating to the solicitation of proxies by their respective
Boards of Directors for use at the annual meetings to be held for
the purpose of considering and voting upon (a) the agreement;
(b) an adjournment, if necessary to solicit additional proxies if
there are not sufficient votes at the time of the meetings to
approve the agreement; (c) the election of directors; and (d)
certain other matters with respect to PSB.

(ii) the prospectus of PSB with respect to the PSB
common stock to be issued in the acquisition.

For convenience of reference, matters common to both
First Bank and PSB are addressed first in this joint proxy
statement/prospectus. Information relating to the other matters
to be considered at the PSB annual meeting can be found in this
joint proxy statement/prospectus under the caption "PSB ANNUAL
MEETING -- OTHER MATTERS."

This joint proxy statement/prospectus and the
accompanying form of proxy are first being mailed on or about
_________ __, 1999.

Holders of First Bank common stock are entitled to
dissenters' rights of appraisal in connection with the
reorganization. See "MATTER I: APPROVAL OF THE AGREEMENT AND
PLAN OF REORGANIZATION -- DISSENTERS' RIGHTS OF APPRAISAL."

PSB Bancorp, Inc.'s common stock is traded on the
National Market System of the NASDAQ Stock Market. The trading
symbol for PSB Bancorp, Inc. is "PSBI."

Neither the Securities Exchange Commission nor any
state securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of the
prospectus. Any representation to the contrary is a criminal
offense.

The shares of PSB common stock offered hereby are not
savings accounts, deposits, or other obligations of a Bank or
Savings Association and are not insured by the Federal Deposit
Insurance Corporation or any other governmental agency.

________________

The date of this joint proxy statement/prospectus is
____ __, 1999.

TABLE OF CONTENTS

Page

CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION . . . . . . . 1

QUESTIONS AND ANSWERS ABOUT THE MERGER. . . . . . . . . . . . . . . . . . 3

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

PRO FORMA COMBINED FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . 12
Pro Forma Unaudited Combined Condensed Balance Sheet as
of March 31, 1999 . . . . . . . . . . . . . . . . . . . . . . 12
Pro Forma Statements of Income for the Quarter ended
March 31, 1999 and the Years Ended December 31,
1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . 15

THE MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Date, Time and Place. . . . . . . . . . . . . . . . . . . . . . . . 20
Matters To Be Considered at the PSB Annual Meeting. . . . . . . . . 20
Matters To Be Considered at the First Bank Annual
Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Votes Required. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Voting of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . 22
Revocability of Proxies . . . . . . . . . . . . . . . . . . . . . . 23
Record Date; Stock Entitled to Vote; Quorum . . . . . . . . . . . . 23
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . 23

APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION. . . . . . . . . . . 25
Background of the Merger. . . . . . . . . . . . . . . . . . . . . . 25
First Bank Reasons for the Merger . . . . . . . . . . . . . . . . . 28
Effect of the Merger. . . . . . . . . . . . . . . . . . . . . . . . 28
Exchange Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Consolidation of Operations . . . . . . . . . . . . . . . . . . . . 30
Opinion of First Bank Independent Financial Advisor . . . . . . . . 30
Opinion of PSB Independent Financial Advisor. . . . . . . . . . . . 36
Effective Date of the Merger. . . . . . . . . . . . . . . . . . . . 43
Exchange of First Bank Stock Certificates . . . . . . . . . . . . . 43
Conditions to the Merger. . . . . . . . . . . . . . . . . . . . . . 44
Bank Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . 45
Business Pending the Merger . . . . . . . . . . . . . . . . . . . . 46
No Solicitation of Transactions . . . . . . . . . . . . . . . . . . 48
Amendment; Waivers. . . . . . . . . . . . . . . . . . . . . . . . . 48
Termination; Effect of Termination. . . . . . . . . . . . . . . . . 49
Employee Benefits and Severance Benefits. . . . . . . . . . . . . . 50
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . 51
Material Federal Income Tax Consequences. . . . . . . . . . . . . . 51
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Resale of PSB Common Stock. . . . . . . . . . . . . . . . . . . . . 53
Dissenters' Rights of Appraisal . . . . . . . . . . . . . . . . . . 53

FINANCIAL INTERESTS OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . . 55
Deferred Compensation Plan Payments . . . . . . . . . . . . . . . . 55
Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Indemnification; Directors and Officers Insurance . . . . . . . . . 56

CERTAIN RELATED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . 57
Stock Option Agreement. . . . . . . . . . . . . . . . . . . . . . . 57

INFORMATION WITH RESPECT TO PSB . . . . . . . . . . . . . . . . . . . . . 60

DESCRIPTION OF PSB CAPITAL SECURITIES . . . . . . . . . . . . . . . . . . 60
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Special Charter and Pennsylvania Corporate Law
Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . 61

COMPARISON OF SHAREHOLDER RIGHTS. . . . . . . . . . . . . . . . . . . . . 64
Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . . 66
Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . 66
Antitakeover Provisions . . . . . . . . . . . . . . . . . . . . . . 66
Required Shareholder Vote . . . . . . . . . . . . . . . . . . . . . 66
Amendment of Bylaws . . . . . . . . . . . . . . . . . . . . . . . . 67
Mandatory Tender Offer Provision. . . . . . . . . . . . . . . . . . 67
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . 68
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . 69

INFORMATION WITH RESPECT TO FIRST BANK. . . . . . . . . . . . . . . . . . 70

ADJOURNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Nomination and Election of Directors - PSB. . . . . . . . . . . . . 70
Executive Officers Who Are Not Directors. . . . . . . . . . . . . . 73
Stock Ownership of Management . . . . . . . . . . . . . . . . . . . 73
Meetings and Committees of the Board of
Directors/Trustees. . . . . . . . . . . . . . . . . . . . . . 74
Director/Trustee Compensation . . . . . . . . . . . . . . . . . . . 74
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . 74
Compensation of Officers and Directors Through Benefit
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Nomination and Election of Directors - First Bank . . . . . . . . . 81
Security Ownership of Certain Beneficial Owners . . . . . . . . . . 82
Section 16(a) Beneficial Ownership Reporting
Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . 84
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . 85
Aggregated Stock Option Exercises in Last Fiscal Year
and Fiscal Year-End Stock Option Values . . . . . . . . . . . 86
Transactions with Management. . . . . . . . . . . . . . . . . . . . 86

PSB ANNUAL MEETING -
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . 87
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

APPOINTMENT OF AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . 87

ADOPTION OF THE AMENDMENT TO PSB BANCORP, INC. ARTICLES OF
INCORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

ADOPTION OF THE 1998 PSB BANCORP, INC. EMPLOYEE STOCK OPTION
PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Awards Under the Option Plan. . . . . . . . . . . . . . . . . . . . 90
Amendment and Termination of the Plan . . . . . . . . . . . . . . . 92
Tax Consequences. . . . . . . . . . . . . . . . . . . . . . . . . . 92

ADOPTION OF THE 1998 PSB BANCORP, INC. MANAGEMENT
RECOGNITION PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . 94
Reasons for Submission to Shareholders. . . . . . . . . . . . . . . 95

MISCELLANEOUS ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . 97
Conduct of the Meeting. . . . . . . . . . . . . . . . . . . . . . . 97
Dissenters Rights . . . . . . . . . . . . . . . . . . . . . . . . . 97
Certain Reporting Requirements. . . . . . . . . . . . . . . . . . . 97
Shareholder Proposals for Next Annual Meeting . . . . . . . . . . . 97

FIRST BANK ANNUAL MEETING - OTHER MATTERS . . . . . . . . . . . . . . . . 98
Shareholder Proposals . . . . . . . . . . . . . . . . . . . . . . . 98
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

WHERE YOU CAN FIND MORE INFORMATION . . . . . . . . . . . . . . . . . . . 99

ANNEX LISTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . .I-16

CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION

This joint proxy statement/prospectus may be deemed to
contain "forward looking" information. Examples of forward
looking information include, but are not limited to:

(a) projections of or statements regarding future
earnings, interest income, other income, earnings or loss per
share, asset mix and quality, growth prospects, capital structure
and other financial terms;

(b) statements of plans and objectives of management
or the Board of Directors;

(d) statements of assumptions, such as economic
conditions in the market areas served by PSB and First Bank,
underlying other statements and statements about PSB or First
Bank or their respective businesses.

Such forward looking information can be identified by
the use of forward looking terminology such as "believes,"
"expects," "may," "intends," "will," "should," "anticipates,"
"projects," or the negative of any of the foregoing or other
variations thereon or comparable terminology, or by discussion of
strategy. No assurance can be given that the future results
covered by the forward-looking information will be achieved.
Such statements are subject to risks, uncertainties, and other
factors which could cause actual results to differ materially
from future results expressed or implied by such forward looking
information. Important factors that could impact operating
results include, but are not limited to:

(i) the effects of changing economic conditions in
both the market areas served by PSB and First Bank and
nationally;

(ii) credit risks of commercial, real estate, consumer
and other lending activities;

(iii) significant changes in interest rates;

(iv) changes in federal and state banking laws and
regulations which could affect operations;

(v) funding costs, and

(vi) other external developments which could
materially affect business and operations.

No persons have been authorized to give any information
or to make any representations other than those contained in this
<PAGE 1> joint proxy statement/prospectus in connection with the
solicitation of proxies or the offering of securities made hereby
and, if given or made, such information or representation must
not be relied upon as having been authorized by PSB or First
Bank. This joint proxy statement/prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, any
securities, or the solicitation of a proxy, in any jurisdiction
to or from any person to whom it is not lawful to make any such
offer or solicitation in such jurisdiction. Neither the delivery
of this joint proxy statement/prospectus nor any distribution of
securities made hereunder shall, under any circumstances, create
an implication that there has been no change in the affairs of
PSB or First Bank since the date hereof or that the information
herein is correct as of any time subsequent to its date.

All information concerning PSB and its subsidiaries
contained herein, or supplied herewith, has been furnished by
PSB, and all information concerning First Bank contained herein
or supplied herewith, has been furnished by First Bank.
<PAGE 2>
QUESTIONS AND ANSWERS ABOUT THE MERGER

Q: Who are the parties to the merger?

A: PSB Bancorp, Inc. and its subsidiary Pennsylvania Savings
Bank, and First Bank of Philadelphia.

Q: Who are the parties being merged?

A: Pennsylvania Savings Bank and First Bank of Philadelphia
will be merged.

Q: How will the merger be effected?

A: Pennsylvania Savings Bank and First Bank will be merged.
Shareholders of First Bank will receive shares of common
stock of PSB Bancorp, Inc. in exchange for their shares in
First Bank, and the combined First Bank/Pennsylvania Savings
Bank will survive as a subsidiary of PSB Bancorp, Inc.

Q: What do I need to do now?

A: Just indicate on your proxy card how you want your shares to
be voted, then sign and mail it in the enclosed prepaid
return envelope as soon as possible, so that your shares may
be represented and voted at the annual meeting of First Bank
to be held on ________ __, 1999 or at the annual meeting of
PSB to be held on _________, 1999.

Your vote is very important. Approval of the agreement
requires the affirmative vote of a majority of the votes
cast by the shareholders present at the PSB annual meeting,
in person or by proxy. First Bank shareholder approval
requires the affirmative vote of 66-2/3% of the outstanding
shares entitled to be cast at the First Bank annual meeting.
You should return your signed proxy card as soon as
possible.

Both the PSB and First Bank Boards of Directors unanimously
recommend voting "FOR" the agreement.

Q: If my shares are held in "street name" by my broker, will my
broker vote my shares for me?

A: Your broker will vote your shares with respect to the merger
only if you provide instructions on how to vote. You should
follow the directions provided by your broker. Without
instructions, your shares will not be voted on the merger
agreement.

Q: Can I change my vote after I have mailed my signed proxy
card?
<PAGE 3>
A: Yes. There are three ways for you to revoke your proxy and
change your vote. First, you may send a written notice to
the person to whom you submitted your proxy stating that you
would like to revoke your proxy. Second, you may complete
and submit a new proxy card with a later date. Third, you
may vote in person at the special or annual meeting. If you
have instructed a broker to vote your shares, you must
follow directions received from your broker to change your
vote.

Q: Who will be sending in their stock certificates?

A: Only First Bank shareholders will be required to send in
their stock certificates after approval of the merger.

Q: Should I send in my stock certificates now?

A: No. Shortly after the merger is completed, PSB will send
you written instructions for exchanging your First Bank
stock certificates. We will request that you return your
First Bank stock certificates at that time.

Q: When do you expect to merge?

A: We are working towards completing the merger as quickly as
possible. In addition to the approval of PSB and First Bank
shareholders, we must also obtain regulatory approvals. We
expect to receive all necessary approvals and complete the
merger by November 30, 1999.

Q: Who should I call with questions or to obtain additional
copies of this joint proxy statement/prospectus?

A: You should contact either:

PSB Bancorp, Inc.
Anthony DiSandro, President
Eleven Penn Center, Suite 2601
1835 Market Street
Philadelphia, Pennsylvania 19103
(215) 979-7900
or
First Bank of Philadelphia
Carl A. Lingle, President
1424 Walnut Street
Philadelphia, Pennsylvania 19102
(215) 790-5209
<PAGE 4>
SUMMARY

This summary highlights selected information from this
joint proxy statement/prospectus. It may not contain all of the
information that is important to you. You should read carefully
this entire joint proxy statement/prospectus and the attached
annexes. See "Where You Can Find More Information" on page __
for reference to additional information available to you
regarding PSB Bancorp, Inc. and First Bank of Philadelphia.

The Merger

If the merger is completed, shareholders of First Bank
will receive shares of PSB common stock, plus cash instead of any
fractional share, in exchange for their First Bank common stock.
PSB shareholders will continue to hold their shares of PSB common
stock. The number of shares of PSB common stock received by a
First Bank shareholder will be determined by an exchange ratio.
The exchange ratio will be that number of shares of PSB common
stock having a market value equal to $6.00. In the agreement PSB
market value means the average of the market price of PSB common
stock for the twenty (20) consecutive trading days ending on the
trading day three (3) trading days preceding the closing. The
market price of PSB common stock is defined as the average
between the closing high bid and low asked prices.

However, if the market value of PSB common stock is
above $9.00 per share each First Bank share will be exchanged for
.667 shares of PSB common stock and if the market value is below
$7.00 per share each First Bank share will be exchanged for .857
shares of PSB common stock. Thus, First Bank shareholders will
receive no fewer than .667 shares of PSB common stock, even
though the imputed value of such shares would be in excess of
$6.00, and will receive no more than .857 shares of PSB common
stock, even though the imputed value of such shares is less than
$6.00.

If the market value of PSB common stock is below $6.50
on the closing date, First Bank can elect to terminate the
agreement, unless PSB resets the exchange ratio equal to $6.00
divided by the market value of PSB common stock. If PSB chooses
this option, it would preclude the termination of the agreement
by First Bank. If PSB does not elect to set the exchange ratio
at the time of notification of First Bank's intent to terminate,
the agreement would terminate and neither First Bank or PSB would
owe any penalty or fee as a result of the termination.

On ______ __, 1999, the closing price of PSB common
stock was $______. Because the market price of PSB stock
fluctuates, you will not know when you vote exactly what the
shares will be worth when issued in the merger.

No Federal Income Tax on Shares Received in Merger (Page __)
<PAGE 5>
First Bank shareholders generally will not recognize
gain or loss for federal income tax purposes upon receipt of
shares of PSB common stock received in the merger. PSB's
attorneys have issued a legal opinion to this effect, which PSB
has included as an exhibit to the registration statement filed
with the SEC. First Bank shareholders will be taxed on cash
received instead of any fractional share. TAX MATTERS ARE
COMPLICATED, AND TAX RESULTS MAY VARY AMONG SHAREHOLDERS. We
urge you to contact your own tax advisor to understand fully how
the merger will affect you.

First Bank and PSB Boards Recommend Shareholder Approval
(Page __)

The First Bank and PSB Boards believe that the merger
is in the best interests of First Bank, PSB and their respective
shareholders and each Board unanimously recommends that you vote
"FOR" approval of the merger.

Copy of Agreement and Plan of Reorganization Attached (Page __)

We have attached the Agreement and Plan of
Reorganization as Annex A at the back of this joint proxy
statement/prospectus. We encourage you to read this agreement,
because it is the legal document that governs the merger.

Exchange Ratio Fair From a Financial Point of View According to
Financial Advisor of First Bank (Page __)

Berwind Financial, L.P. has given an opinion to the
First Bank Board that, as of [the date of this joint proxy
statement/prospectus], the financial consideration to be received
in the merger is fair from a financial point of view to First
Bank shareholders. First Bank has attached the full text of this
opinion as Annex B to this joint proxy statement/prospectus.
First Bank encourages you to read the opinion carefully. Berwind
Financial has received $30,000 for serving as financial advisor.
If we complete the merger, Berwind Financial will receive an
additional $172,363 in exchange for its advice and for providing
its financial opinion.

Exchange Ratio Fair From a Financial Point of View According to
Financial Advisor of PSB Bancorp, Inc. (Page __)

Hopper Soliday, L.P. has given an opinion to the PSB
Board that, as of [the date of this joint proxy statement/
prospectus], the exchange ratio in the merger is fair from a
financial point of view to PSB shareholders. PSB has attached
the full text of this opinion as Annex C to this joint proxy
statement/prospectus. PSB encourages you to read the opinion
carefully. Hopper Soliday has received $___________ for serving
as financial advisor. If we complete the merger, Hopper Soliday
will receive an additional $____________ in exchange for its
advice and for providing its financial opinion.
<PAGE 6>
Vote Required to Approve the Merger (Page __)

Approval of the merger by First Bank shareholders
requires the affirmative vote, either in person or by proxy, of
the holders of at least 66-2/3% of the outstanding shares of
First Bank. Approval of the merger by PSB shareholders requires
the affirmative vote of a majority of the votes cast, either in
person or by proxy, at the PSB annual meeting. A First Bank
shareholder's failure to vote will have the effect of a vote
against approval of the merger. Directors and executive officers
of PSB and First Bank together own about 26% and ____%
respectively, of the shares entitled to be cast at the meetings.
Certain of the officers and directors of First Bank have agreed
to vote their shares in favor of the merger.

Brokers who hold shares of PSB and First Bank common
stock as nominees will not have authority to vote such shares
with respect to the merger unless shareholders provide voting
instructions.

PSB Annual Meeting to be Held _____ __, 1999 (Page __)

PSB will hold its annual meeting of shareholders on
________________, _____ __, 1999, at ______ p.m., local time, at
_________________________________, Pennsylvania.

At the annual meeting, PSB shareholders will vote on
the merger and on the proposal to adjourn the meeting to solicit
additional proxies, and to consider the additional matters
contained in this proxy, and if necessary, to conduct any other
business that properly arises.

First Bank Annual Meeting to be Held ____ __, 1999 (Page __)

First Bank will hold its annual meeting of shareholders
on ________________, ____ __, 1999, at ______ p.m., local time,
at _________________________________, Pennsylvania.

At the annual meeting, First Bank shareholders will
vote on the merger, on the proposal to adjourn the meeting to
solicit additional proxies, if necessary, on the election of
directors and conduct any other business that properly arises.

The Companies (Page __)

PSB Bancorp, Inc.
Eleven Penn Center, Suite 2601
1835 Market Street
Philadelphia, Pennsylvania 19103

PSB Bancorp, Inc., a Pennsylvania business corporation,
is the holding company for Pennsylvania Savings Bank, a state
chartered savings bank. At March 31, 1999, PSB and its
subsidiaries had total consolidated assets of $169.81 million,
deposits of $133.85 million and shareholders' equity of <PAGE 7>
$30.51 million. The primary operating entity of PSB Bancorp,
Inc. is Pennsylvania Savings Bank. Pennsylvania Savings Bank's
primary business consists of attracting deposits from its network
of 5 community branch banking offices, and originating consumer
loans, residential mortgage loans, home equity lines of credit,
commercial loans and commercial real estate loans in the greater
Philadelphia area.

First Bank of Philadelphia
1424 Walnut Street
Philadelphia, Pennsylvania 19102

First Bank, is a Pennsylvania state chartered banking
corporation. At March 31, 1999, First Bank had total
consolidated assets of $62.97 million, deposits of $56.86 million
and shareholders' equity of $5.88 million. First Bank of
Philadelphia has one office located in Philadelphia,
Pennsylvania. First Bank is engaged principally in the business
of taking deposits and making secured commercial loans,
construction loans, permanent mortgage loans and student loans.

Record Dates (Page __)

If you owned shares of PSB common stock at the close of
business on ________ __, 1999, or if you owned First Bank common
stock at the close of business on _________ __, 1999, you are
entitled to vote on the agreement, the adjournment proposal and
for the election of directors. In addition, PSB shareholders are
entitled to vote on the additional matters contained in the
section of this joint proxy statement/prospectus entitled PSB
ANNUAL MEETING -- OTHER MATTERS.

On their respective record dates, there were
_______________ shares of PSB common stock outstanding and
__________ shares of First Bank common stock outstanding. You
will have one vote at the PSB Bancorp, Inc. annual meeting or at
the First Bank of Philadelphia annual meeting for each share of
PSB or First Bank common stock you owned on the respective record
date of each company. First Bank shareholders are entitled to
cumulative voting with respect to the election of directors.

Conditions that Must Be Satisfied for the Merger to Occur
(Pages __ and __)

The following conditions must be met for us to complete
the merger, in addition to other customary conditions:

-- approval of the merger by PSB and First Bank
shareholders;

-- approval by the shareholders of PSB of the
amendment to the PSB Articles of Incorporation;

-- receipt of a legal opinion concerning the tax
consequences of the merger; <PAGE 8>

-- receipt of an opinion of the PSB auditors that the
merger will be accounted for as a pooling-of-
interests under Generally Accepted Accounting
Principles;

The merger also cannot be completed unless we obtain
the approval of the Board of Governors of the Federal Reserve
System and the Pennsylvania Department of Banking. PSB filed the
required applications seeking approval of the merger on
________ __, 1999. Although we believe the regulatory approvals
will be received in a timely manner, we cannot be certain when or
if we will obtain them.

Termination and Amendment of the Agreement and Plan of
Reorganization (Page __)

PSB and First Bank can agree at any time to terminate
the agreement without completing the merger. The companies can
also terminate the agreement in the following circumstances:

-- Either company can terminate the agreement if the
merger is not completed by December 31, 1999 and
the company that wants to terminate the agreement
is not at that time in breach of the agreement in
a material way;

-- Either company can terminate the agreement if the
other company violates, in a material way, any of
its representations, warranties or obligations
under the agreement;

-- First Bank can terminate the agreement if at
closing, the market value of PSB common stock is
less than $6.50 per share and PSB does not elect
to reset the exchange ratio to $6.00 divided by
the market value of PSB.

Generally, the company seeking to terminate cannot
itself be in violation of the agreement.

We can agree to amend the agreement in any way, except
that after the shareholders' meetings we cannot decrease the
consideration First Bank shareholders will receive in the merger.
Either company can waive any of the requirements of the other
company in the agreement, except that neither company can waive
any required regulatory approval. Neither company intends to
waive the tax opinion condition. If a tax opinion is not
available and we wish to proceed with the merger, we will
resolicit shareholders.

Dissenters' Rights of Appraisal (Page __)

Under Pennsylvania law, First Bank shareholders have
the right to dissent from the merger and receive cash equal to
<PAGE 9> the "fair value" of their shares. See "Dissenters
Rights" on Page __ for additional information.

PSB Bancorp, Inc. to use Pooling-of-Interest Accounting Treatment
(Page __)

PSB will account for the merger as a pooling-of-
interest for financial reporting purposes.

Organization and Operation after the Merger (Page __)

In the acquisition of First Bank by PSB, Pennsylvania
Savings Bank, the wholly owned operating subsidiary of PSB will
merge with and into First Bank. The Board of Directors of
Pennsylvania Savings Bank will become the Board of Directors of
the resulting bank and will appoint the officers of the new bank.
Certain officers of First Bank will continue as officers of the
new bank after the merger.

The Rights of First Bank Shareholders Will Change After the
Merger (Page __)

Upon completion of the merger, current shareholders of
First Bank will become shareholders of PSB. PSB's articles of
incorporation, bylaws and Pennsylvania law determine the rights
of PSB's shareholders. The rights of shareholders of PSB differ
in certain respects from the rights of shareholders of First
Bank.

Stock Option Agreement (Page __)

As a condition to PSB entering into the agreement and
to discourage other companies from acquiring First Bank, First
Bank granted PSB an option to purchase up to 210,625 shares of
First Bank common stock at an exercise price of $5.75 per share.
PSB may exercise this option only if another party seeks to gain
control of First Bank. We do not believe that any of the events
which would permit PSB to exercise the option have occurred as of
the date of this joint proxy statement/prospectus.

The stock option agreement is attached to this joint
proxy statement/prospectus as Annex D.

Monetary Benefits to Management in the Merger (Page __)

When considering the recommendation of the PSB and
First Bank Boards, you should be aware that some directors and
officers of First Bank have interests in the merger in addition
to their interests as shareholders. These interests include:

-- Officers and directors of First Bank hold stock
options to purchase First Bank stock that will
convert into options to purchase PSB common stock
that are exercisable immediately after the merger;
<PAGE 10>
-- As of ______ __, 1999, the difference between the
aggregate exercise price and the market value of
the shares underlying the options, which
represents the economic value of the options, was
$_____________;

-- PSB will enter into employment agreements with two
officers of First Bank with annual salaries of
$125,000 plus bonus;

-- Following the merger, PSB will indemnify and
provide liability insurance to the former officers
and directors of First Bank;

-- PSB will pay all amounts due under the First Bank
Deferred Compensation Plan.

Share Information and Market Prices (Page __)

PSB common stock trades on the National Market System
of the NASDAQ Stock Market. First Bank common stock trades on
the Small Cap Market of the NASDAQ Stock Market. The trading
symbol for PSB Bancorp, Inc. is "PSBI." The trading symbol for
First Bank of Philadelphia is "FBKP." The following table shows
the last sale prices of PSB common stock and First Bank common
stock and the equivalent price per share of First Bank common
stock on March 18, 1999 and _____ __, 1999, if based on an
assumed exchange ratio of _____.

PSB Bancorp, Inc First Bank Equivalent
Market Value
Historical Historical Per Share

March 18, 1999 $7.50 $5.75 $6.00
_____ __, 1999 _________ _________ _________

The market prices of both PSB and First Bank's common
stock will fluctuate prior to the merger. You should obtain
current market quotations for PSB common stock and First Bank
common stock.
<PAGE 11>
PRO FORMA COMBINED FINANCIAL INFORMATION

The following tables set forth selected unaudited pro
forma financial data reflecting the merger.

The pro forma information has been prepared assuming
that shareholders of First Bank will receive in the merger
.857 shares of PSB common stock for each share of First Bank
common stock they own. This ratio is based on a closing sale
price of $6.625 per share of PSB common stock. The ratio is
subject to adjustment based on the market value of PSB common
stock as of the effective date of the merger. The actual
mechanics of the ratio calculation may be found on pages __ and
__ of this joint proxy statement/prospectus. The pro forma
financial information included in this joint proxy statement/
prospectus is presented for illustrative purposes only. Such pro
forma financial information does not necessarily reflect what the
actual results of PSB would be following completion of the
merger.

The pro forma has been prepared using the "pooling-of-
interests" method of accounting for business combinations. The
use of this method has been identified as a pre-condition for the
completion of the merger.

The pro forma information presented does not give
effect to any cost savings which may have been realized nor any
merger-related expenses which may be incurred as a result of the
merger. It also ignores the effect of cash payments which will
be required for fractional shares and to dissenting shareholders
of First Bank. The amount of these cash payments is impossible
to estimate but is believed to be immaterial.

Pro Forma Unaudited Combined Condensed Balance Sheet as of
March 31, 1999

The following unaudited pro forma combined condensed
balance sheet information reflects the pro forma combined
condensed balance sheet of PSB and First Bank as of March 31,
1999, after giving effect to the merger. The merger has been
reflected as a pooling-of-interests effective as of March 31,
1999. In accounting for a merger using the "pooling-of-
interests" method, assets and liabilities are combined at book
value in conformity with generally accepted accounting
principles. No new bases of accountability are recognized unless
the companies employ different methods of accounting for the same
line item. It is assumed that no such situation exists and that
both PSB and First Bank employ identical accounting methods. The
unaudited information should be read in conjunction with the
historical consolidated financial statements of PSB and First
Bank, including the notes thereto, appearing elsewhere in this
joint proxy statement/prospectus. See "WHERE YOU CAN FIND MORE
INFORMATION," "ANNEX H: ADDITIONAL INFORMATION WITH RESPECT TO
PSB BANCORP, INC. -- INDEX TO PSB FINANCIAL STATEMENTS" and
<PAGE 12> "ANNEX I: ADDITIONAL INFORMATION WITH RESPECT TO FIRST
BANK -- INDEX TO FIRST BANK FINANCIAL STATEMENTS."

The pro forma information has been prepared assuming
that the shareholders of First Bank of Philadelphia will receive
0.857 shares of PSB Bancorp common stock for each share of First
Bank of Philadelphia common stock.
<PAGE 13>
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1999
(In thousands)

<TABLE>
<CAPTION>
PSB Bancorp
and
Pro Forma First Bank
PSB Bancorp First Bank Adjustments Combined
<S> <C> <C> <C> <C>
Cash and amounts due from
depository institutions $ 35,536 $ 5,321 $ $ 40,857
Investments and Mortgage-Backed
securities 48,542 544 49,086
Loans net of Allowance for Loan
Losses 75,133 54,641 129,774
Goodwill and other intangible
assets - - -
Other assets 10,599 2,462 13,061

Total Assets 169,810 62,968 232,778

Deposits 133,847 56,862 190,709
Borrowings - - -
Other Liabilities 5,450 227 5,677

Total Liabilities 139,297 57,089 196,386

Common Stock - 419 (419) -
Additional Paid In Capital 30,105 10,243 419 40,767
Employee Stock Ownership Plan (1,380) - (1,380)
Unrealized loss on Available
for Sale investments (244) - (244)
Retained Earnings 2,032 (4,783) (2,751)

Total Shareholders' Equity 30,513 5,879 - 36,392

Total Liabilities and Shareholders'
Equity 169,810 62,968 - 232,778

</TABLE>
<PAGE 14>
Pro Forma Statements of Income for the Quarter ended March 31,
1999 and the Years Ended December 31, 1998, 1997 and 1996

The following four tables show pro forma statements of
income for the quarter ended March 31, 1999 and the years ended
December 31, 1998, 1997, and 1996. We prepared this pro forma
information under the pooling-of-interests method of accounting
assuming that the merger occurred on the first day of each period
for which information is presented. Under the pooling-of-
interests method of accounting, the income statements of the
separate companies are added together for each period shown. You
should read this pro forma information together with the
historical financial statements of PSB and First Bank appearing
elsewhere in this joint proxy statement/prospectus. See "WHERE
YOU CAN FIND MORE INFORMATION," "ANNEX H: ADDITIONAL INFORMATION
WITH RESPECT TO PSB BANCORP, INC. -- INDEX TO PSB FINANCIAL
STATEMENTS" and "ANNEX I: ADDITIONAL INFORMATION WITH RESPECT TO
FIRST BANK -- INDEX TO FIRST BANK FINANCIAL STATEMENTS."
<PAGE 15>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 1999
(In thousands, except per share data)

<TABLE>
<CAPTION>
PSB Bancorp
and
First Bank
PSB Bancorp First Bank Combined

<S> <C> <C> <C>
Interest Income $ 2,814 $ 1,260 $ 4,074
Interest Expense 1,390 687 2,077

Net Interest Income 1,424 573 1,997

Provision for Loan
Losses - - -

Net Interest Income after
Provision for
Loan Losses 1,424 573 1,997

Other Non-Interest Income 257 13 270
Non-Interest Expense 1,220 504 1,724

Income Before Taxes 461 82 543

Income Taxes 133 (60) 73

Net Income 328 142 470

Other Comprehensive Income (248) - (248)

Basic earnings per share 0.11 0.08 0.10

Diluted earnings per share 0.10 0.06 0.09

Weighted average number of
shares outstanding Basic 3,101,094 1,676,875 4,538,176***
Diluted 3,125,240 2,482,188 5,252,475***
</TABLE>

*** Assumes conversion ration of 0.857 Shares of PSB Bancorp
common stock issued for each share of First Bank common
stock.

<PAGE 16>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands, except per share data)

<TABLE>
<CAPTION>
PSB Bancorp
and
First Bank
PSB Bancorp First Bank Combined

<S> <C> <C> <C>
Interest Income $ 10,097 $ 5,129 $ 15,226
Interest Expense 5,090 2,710 7,800

Net Interest Income 5,007 2,419 7,426

Provision for Loan
Losses 283 - 283

Net Interest Income after
Provision for
Loan Losses 4,724 2,419 7,143

Other Non-Interest Income 1,315 58 1,373
Non-Interest Expense 4,625 1,885 6,510

Income Before Taxes 1,414 592 2,006

Income Taxes 502 (160) 342

Net Income 912 752 1,664

Other Comprehensive Income 14 - 14

Basic earnings per share 0.31 0.45 0.38

Diluted earnings per share 0.31 0.30 0.32

Weighted average number of
shares outstanding Basic 2,956,851 1,676,875 4,393,933***
Diluted 2,988,037 2,490,179 5,122,120***
</TABLE>

*** Assumes conversion ratio of 0.857 Shares of PSB Bancorp
common stock issued for each share of First Bank common
stock.

<PAGE 17>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share data)

<TABLE>
<CAPTION>
PSB Bancorp
and
First Bank
PSB Bancorp First Bank Combined

<S> <C> <C> <C>
Interest Income $ 8,740 $ 5,097 $ 13,837
Interest Expense 4,564 2,812 7,376

Net Interest Income 4,176 2,285 6,461

Provision for Loan
Losses 60 - 60

Net Interest Income after
Provision for
Loan Losses 4,116 2,285 6,461

Other Non-Interest Income 1,071 97 1,168
Non-Interest Expense 4,134 1,979 6,113

Income Before Taxes 1,053 403 1,456

Income Taxes 345 - 345

Net Income 708 403 1,111

Other Comprehensive Income 60 - 60

Basic earnings per share**** 0.61 0.24 0.49

Diluted earnings per share**** 0.81 0.16 0.38

Weighted average number of
shares outstanding Basic 1,165,105 1,676,875 2,288,444***
Diluted 1,179,678 2,587,473 2,913,026***
</TABLE>

*** During 1998, Pennsylvania Savings Bank reorganized into PSB
Bancorp, Inc. The 579,390 of the shares outstanding at that
time would have been exchanged for 2,572,374 shares of the
new PSB Bancorp. The estimated exchange ratio has been
changed accordingly to 0.6699 shares of PSB Bancorp for each
share of First Bank (.857/2.572374) x (1,165,105/579,390) =
.6699

**** Due to the reorganization of Pennsylvania Savings Bank into
PSB Bancorp in 1998, these Earnings Per Share figures are
not comparable to those following the reorganization.

<PAGE 18>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands, except per share data)

<TABLE>
<CAPTION>
PSB Bancorp
and
First Bank
PSB Bancorp First Bank Combined

<S> <C> <C> <C>
Interest Income $ 8,039 $ 4,979 $ 13,018
Interest Expense 4,119 2,823 6,942

Net Interest Income 3,920 2,156 6,076

Provision for Possible Loan
Losses 132 - 132

Net Interest Income after
Provision for Possible
Loan Losses 3,788 2,156 5,944

Other Non-Interest Income 915 85 1,000
Non-Interest Expense 4,363 2,039 6,402

Income Before Taxes 340 202 542

Income Taxes 201 - 201

Net Income 139 202 341

Other Comprehensive Income (56) - (56)

Basic earnings per share**** 0.12 0.12 0.15

Diluted earnings per share**** 0.12 0.12 0.15

Weighted average number of
shares outstanding Basic 1,152,328 1,678,875 2,275,667***
Diluted 1,152,328 1,678,875 2,275,667***
</TABLE>

*** During 1998, Pennsylvania Savings Bank reorganized into PSB
Bancorp. The number of shares outstanding at that time
would have been exchanged for 2,572,374 shares of the new
PSB Bancorp. The estimated exchange ratio has been changed
accordingly to 0.6699 shares of PSB Bancorp for each share
of First Bank. (.857/2.572374) x (1,165,105/579,390) =
.6699.

**** Due to the reorganization of Pennsylvania Savings Bank into
PSB Bancorp in 1998, these Earnings Per Share figures are
not comparable to those following the reorganization.

<PAGE 19>
THE MEETINGS

Date, Time and Place

PSB. The PSB annual meeting will be held at
____________________. Philadelphia, Pennsylvania, at _____ p.m.
local time, on _____ __, 1999.

First Bank. The First Bank annual meeting will be held
at _________________________, Philadelphia, Pennsylvania, at
______ p.m., local time, on ______ __, 1999.

Matters To Be Considered at the PSB Annual Meeting

At the PSB annual meeting, holders of PSB common stock
will be asked to consider and vote upon the approval and adoption
of the agreement and the approval of the PSB adjournment
proposal. In addition, holders of PSB common stock will be asked
to:

- elect two Class I directors for a term of three
years each;

- ratify the selection of Stockton Bates, LLP as
auditors for the year ending December 31, 1999;

- approve the amendment to the Articles of
Incorporation;

- approve the 1998 PSB Bancorp, Inc. Employee Stock
Option Plan;

- approve the 1998 PSB Bancorp, Inc. Management
Recognition Plan.

Shareholders may also consider such other matters as
may properly be brought before the PSB annual meeting.

The Board of Directors of PSB has unanimously approved
the agreement and recommends a vote FOR approval and adoption of
the agreement and FOR each other proposal.

Matters To Be Considered at the First Bank Annual Meeting

At the First Bank annual meeting, holders of First Bank
common stock will be asked to consider and vote upon the approval
and adoption of the agreement and the approval of the First Bank
adjournment proposal.

In addition, holders of First Bank common stock will be
asked to elect five directors for a term of one year each.
<PAGE 20>
Shareholders may also consider and vote upon such other
matters as may properly be brought before the First Bank annual
meeting.

The Board of Directors of First Bank has unanimously
approved the agreement and recommends a vote FOR approval and
adoption of the agreement. The Board of Directors has also, by
unanimous vote, approved, and recommends a vote FOR approval of,
the First Bank adjournment proposal and recommends a vote FOR the
election, as directors, of the nominees of the Board of
Directors.

Votes Required

PSB. All matters to be voted on by PSB shareholders,
other than the election of directors, will require the
affirmative vote of holders of the majority of the PSB common
stock present, in person or by proxy, at the PSB annual meeting.
Directors are elected by a plurality of the votes cast in person
or by proxy at the PSB annual meeting. Accordingly, with respect
to the election of directors, the nominees who receive the
greatest number of votes at the PSB annual meeting will be
elected as directors.

Each holder of shares of PSB common stock outstanding
on the PSB record date will be entitled to one vote for each
share held of record on each matter to be considered at the PSB
annual meeting. Shareholders of PSB are not entitled to cumulate
votes for the election of directors.

As of the PSB record date, directors and executive
officers of PSB and their affiliates beneficially owned and were
entitled to vote 800,195 shares of PSB common stock, which
represented approximately 26% of the shares of PSB common stock
outstanding on the PSB record date. Each PSB director and
executive officer has indicated his present intention to vote the
PSB common stock so owned by him or her for approval and adoption
of the agreement and all other matters to be presented at the
meeting to PSB shareholders.

First Bank. The approval and adoption of the agreement
will require the affirmative vote of 66-2/3% of the votes
entitled to be cast at the First Bank annual meeting. The
approval and adoption of the adjournment proposal will require
the affirmative vote of a majority of the shareholders present in
person or by proxy at the First Bank annual meeting. Directors
are elected by a plurality of the votes cast in person or by
proxy at the First Bank annual meeting.

Holders of record of First Bank common stock on the
First Bank record date are each entitled to one vote per share on
each matter to be voted on at the First Bank annual meeting.
First Bank shareholders are entitled to cumulative voting in the
election of directors.
<PAGE 21>
As of the record date, directors and executive officers
of First Bank and their affiliates beneficially owned and were
entitled to vote _______ shares of First Bank common stock, which
represented approximately ____% of the shares of First Bank
common stock outstanding on the First Bank record date. The
First Bank directors and certain executive officers have agreed
to vote their First Bank common stock for approval of the
agreement, and the directors and executive officers have
indicated their present intent to vote their First Bank common
stock for approval of the agreement, and the First Bank
adjournment proposal, and for the election as directors of the
nominees presented by the Board of Directors.

As of both the First Bank record date and the PSB
record date neither PSB nor First Bank had voting power with
respect to any shares of First Bank or PSB common stock in a
fiduciary, custodian or agent capacity.

Voting of Proxies

Shares represented by all properly executed proxies
received in time for the meetings will be voted at such meetings
in the manner specified. In the case of shares of PSB, properly
executed proxies that do not contain voting instructions will be
voted in favor of the agreement, in favor of the PSB adjournment
proposal, in favor of the election, as directors, of the nominees
of the Board of Directors, for approval of Stockton Bates, LLP
as auditors, in favor of the amendment to the Articles of
Incorporation, and in favor of both the 1998 PSB Bancorp, Inc.
Employee Stock Option Plan and the 1998 PSB Bancorp, Inc.
Management Recognition Plan.

In the case of shares of First Bank, properly executed
proxies that do not contain voting instructions will be voted in
favor of the agreement, in favor of the First Bank adjournment
proposal and in favor of the election as directors of the
nominees of the Board of Directors.

PSB and First Bank each intend to count shares of PSB
common stock or First Bank common stock, as the case may be,
present in person at the meetings but not voting, and shares of
PSB common stock or First Bank common stock, as the case may be,
for which they have received proxies but with respect to which
holders of shares have abstained or not voted on any matter, as
present at the meetings for purposes of determining the presence
of a quorum for the transaction of business.

A broker cannot vote your shares with respect to the
merger without specific instructions from you the shareholder.
Abstentions and broker non-votes relating to shares of PSB or
First Bank common stock will not constitute or be counted as
votes "cast", but will be counted for the determination of a
quorum, for purposes of the PSB annual meeting or the First Bank
annual meeting.
<PAGE 22>
It is not expected that any matter other than those
referred to in this joint proxy statement/prospectus will be
brought before either of the meetings. If, however, other
matters are properly presented for a vote, the persons named as
proxies will vote in accordance with their judgment with respect
to such matters.

Revocability of Proxies

The grant of a proxy on the enclosed PSB or First Bank
form of proxy does not preclude a shareholder of PSB or First
Bank from voting in person at the applicable meeting. A PSB
shareholder or a First Bank shareholder may revoke a proxy at any
time prior to its exercise by:

- filing with the Secretary of PSB (if you are a PSB
shareholder) or the Secretary of First Bank (if
you are a First Bank shareholder) a duly executed
revocation of proxy;

- by submitting a duly executed proxy bearing a
later date;

- by appearing at the applicable meeting and voting
in person at the meeting.

Attendance at the applicable meeting will not, in and
of itself, constitute revocation of a proxy.

Record Date; Stock Entitled to Vote; Quorum

PSB. On the PSB record date, ___________ shares of PSB
common stock were issued and outstanding and held by
approximately __________ holders of record.

Shareholders entitled to cast at least a majority of
the votes which all shareholders are entitled to cast on the PSB
record date must be represented in person or by proxy at the PSB
annual meeting in order for a quorum to be present for purposes
of voting on approval of the agreement and the other matters to
be considered at the PSB annual meeting.

First Bank. On the First Bank record date, _________
shares of First Bank common stock were issued and outstanding and
held by approximately ____ holders of record.

Shareholders entitled to cast at least a majority of
the votes which all shareholders are entitled to cast on the
First Bank record date must be represented in person or by proxy
at the First Bank annual meeting in order for a quorum to be
present for purposes of voting on approval of the agreement and
the other matters to be considered at the First Bank annual
meeting.

Solicitation of Proxies <PAGE 23>

PSB and First Bank each will bear the cost of the
solicitation of proxies from its own shareholders, except that
PSB and First Bank will share equally the cost of printing and
mailing this joint proxy statement/prospectus. In addition to
solicitation by mail, the directors, officers, and employees of
each of PSB and First Bank and their subsidiaries may solicit
proxies from shareholders of each entity by telephone or telegram
or in person. First Bank, at its own expense, will engage an
external proxy solicitation firm. The proxy solicitation firm
will be paid $______ for their services. Arrangements will also
be made with brokerage houses and other custodians, nominees, and
fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and
PSB and First Bank will reimburse such custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses.

First Bank shareholders should not send stock
certificates with their proxy card. PSB shareholders are not
required to take any action with respect to their stock
certificates in connection with the merger. As described below
under the caption "Approval of the Agreement and Plan of
Reorganization -- Exchange of First Bank Stock Certificates," if
you are a First Bank shareholder you will be provided with
materials for exchanging shares of First Bank common stock as
promptly as practicable after the effective date of the merger.
<PAGE 24>
MATTER NO. 1
APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION

In this section of the joint proxy statement/prospectus
we describe the material terms and provisions of the proposed
merger. A copy of the agreement that provides for the merger is
attached to this joint proxy statement/prospectus as Annex A. We
urge all shareholders to read the agreement carefully.

The agreement provides that:

- PSB will acquire First Bank through a merger of
Pennsylvania Savings Bank and First Bank:

- First Bank shareholders will receive shares of PSB
common stock (the exact number to be determined by
an exchange ratio at closing) for each share of
First Bank stock that they own if the merger is
completed;

- All PSB shares issued and outstanding at the time
of merger will remain issued and outstanding if
the merger is completed.

Background of the Merger

First Bank was chartered as a Pennsylvania commercial
bank on February 2, 1987 and commenced operations on July 13,
1987.

First Bank suffered significant losses in the early
1990s (prior to the involvement of the current management and
Board with the Bank) and on September 14, 1993, First Bank
entered into formal written agreements with the Pennsylvania
Department of Banking and the Federal Reserve Bank of
Philadelphia. In early 1995, First Bank raised $4.0 million of
additional capital and brought in its current management and
board of directors. On December 15, 1997, First Bank was
notified by the Pennsylvania Department of Banking that the
Memorandum of Understanding that First Bank had been operating
under had been lifted. On January 23, 1998, First Bank was
notified by the Federal Reserve Bank that because of its improved
condition and compliance with all provisions, the formal
agreement with the Federal Reserve Bank had also been lifted.

Expressions of interest in acquiring the Bank were
received from certain banks in September, 1998.

At a meeting of the First Bank Board of Directors on
October 1, 1998, the First Bank Board engaged Berwind Financial
LP, a financial advisory firm experienced in representing
community banks, to assist First Bank in exploring strategic
alternatives, including a possible sale of First Bank. The First
Bank Board also engaged the services of Pepper Hamilton LLP, a
<PAGE 25> law firm experienced in representing banks in corporate
matters, including mergers. The First Bank Board appointed Hal
Shaffer, Chairman of the Board and Carl Lingle, President, as a
Committee of the First Bank Board to work with Berwind and First
Bank's counsel in exploring a possible sale of First Bank and
developing appropriate procedures for pursuing a sale.

Berwind, together with the Committee, prepared a
Confidential Memorandum describing First Bank and its business
and financial condition.

At a First Bank Board meeting on November 30, 1998, the
First Bank Board approved sending the Confidential Memorandum to
certain banks which Berwind had contacted, which had expressed
interest in First Bank and which agreed to sign confidentiality
agreements.

Prior to year-end 1998, based on their review of the
Confidential Memorandum, four banks submitted indications of
interest in acquiring First Bank.

In January, 1999, the Committee, with the approval of
the First Bank Board, decided to pursue further discussions with
two of the banks that had submitted indications, one of which was
PSB, and to invite the two banks to conduct due diligence at
First Bank and to submit a definitive indication of interest.

PSB and First Bank conducted due diligence, and on
February 26, 1999, PSB submitted a definitive indication of
interest to acquire First Bank.

The First Bank Board met on March 8, 1999 to review the
terms of PSB's definitive indication of interest to acquire First
Bank. The First Bank Board authorized the Committee to work with
counsel to negotiate a definitive merger agreement based on PSB's
indication letter. The First Bank Board also instructed Mr.
Lingle and Berwind to conduct due diligence with respect to PSB.

The definitive merger agreement was negotiated and
prepared. PSB's Board of Directors approved the agreement at a
meeting held on March 18, 1999.

On March 19, 1999, the First Bank Board met for the
purposes of reviewing and considering the agreement.
Representatives of Berwind and First Bank's counsel were present
at the meeting. The Berwind representatives reviewed the
financial terms of the merger, the financial characteristics of
First Bank and PSB, both separate and combined on a pro forma
basis, and comparable merger transactions. Berwind advised the
directors that, in their opinion, the financial consideration to
be received in the merger was fair to First Bank's shareholders
from a financial point of view. First Bank's counsel reviewed
the provisions of the merger agreement with the First Bank Board.
It was noted that as part of the transaction, Mr. Carl Lingle,
<PAGE 26> president, and Mr. James Schaeffer, chief financial
officer of First Bank, would remain with PSB after the merger.

The First Bank Board, by a unanimous vote, approved the
merger agreement and authorized its execution by the officers of
First Bank. After the meeting, the merger agreement was signed
by both banks.

PSB Reasons for the Merger

The PSB Board believes that the merger is fair to, and
in the best interests of PSB, and its shareholders. In reaching
these conclusions, the PSB Board considered a number of factors,
including the following:

- PSB's current condition and historical operating
results and its prospective results of operations
if PSB were to acquire First Bank.

- the economic, business and competitive climate for
banking and financial institutions in Philadelphia
and PSB's business plan for strengthening PSB's
position in the area.

- the business, operations, earnings and prospects
of First Bank, particularly the enhanced
opportunities presented by the formation of a
specialized lending group utilizing First Bank's
existing expertise and the increased economic
value that the group's operations could add to
PSB's current business structure.

- the proposed amendment to the articles of
incorporation which will make it more difficult
for a shareholder to effect a "change of control"
of PSB.

- the management talent of First Bank, particularly
the availability of the two officers to form a
specialized lending group after the merger.

- the availability of pooling-of-interest accounting
treatment for the merger.

- the business enhancement offered by the ability to
conduct business under a commercial bank charter
after the merger.

- the opinion of Hopper Soliday that the exchange
ratio was fair to the PSB shareholders from a
financial point of view.

This list of factors considered by the PSB Board is not
exhaustive, but is intended to highlight the material factors
considered by the PSB Board. Individual directors may have given
<PAGE 27> different weights to these factors in reaching their
decision; however, the PSB Board did not assign specific weights
or priority to any one factor.

First Bank Reasons for the Merger

The First Bank Board believes that the merger is fair
to, and in the best interests of, First Bank and its
shareholders. In reaching these conclusions, the First Bank
Board considered a number of factors, including the following:

- First Bank's current condition and historical
operating results, and its prospective results of
operations if First Bank were to remain
independent;

- the economic, business and competitive climate for
banking and financial institutions in
Philadelphia, and the challenges that First Bank
faced as an independent bank with a single office
in a highly competitive market;

- the search process conducted by First Bank with
the assistance of Berwind;

- the business, operations, earnings and prospects
of PSB, and the enhanced opportunities for
operating efficiencies (particularly from the
integration of operations and support functions)
and growth that the merger would make possible;

- the opinion of Berwind that the financial
consideration to be received in the merger was
fair to First Bank shareholders from a financial
point of view;

- the fact that the merger will be a tax-free
exchange to First Bank shareholders for federal
income tax purposes to the extent they receive PSB
common stock as consideration in exchange for
their shares of First Bank common stock.

This list of factors considered by the First Bank Board
is not intended to be an exhaustive list, but is intended to
include the material factors considered by the First Bank Board.
In reaching its determination to approve and recommend the
merger, the First Bank Board did not assign any relative or
specific weights to these factors, and the individual directors
may have given differing weights to different factors.

Accordingly, The PSB and First Bank Boards recommend that
shareholders vote FOR Approval of the Agreement.

Effect of the Merger
<PAGE 28>
If the agreement is approved by the shareholders of
both PSB and First Bank, PSB will acquire First Bank through a
merger of First Bank and Pennsylvania Savings Bank. PSB will
exchange shares of PSB common stock for the issued and
outstanding shares of First Bank common stock. The combined
First Bank and Pennsylvania Savings Bank will be a wholly owned
subsidiary of PSB.

The merger is structured so that the commercial bank
charter of First Bank will be the surviving entity in the merger.
All property, rights, debts and obligations of Pennsylvania
Savings Bank will automatically transfer to and vest in First
Bank, in accordance with Pennsylvania law. The commercial bank
charter will give PSB and its bank subsidiary broader authority
to engage in commercial lending than Pennsylvania Savings Bank,
as a savings bank, currently has. After the acquisition of First
Bank, PSB intends to take the appropriate steps to rename First
Bank. Directors of First Bank will resign upon completion of the
acquisition and PSB will elect the present directors of
Pennsylvania Savings Bank as directors of the surviving bank.
Those directors will appoint the officers of the new bank, which
will be the current officers of Pennsylvania Savings Bank. In
addition, Carl A. Lingle, current President of First Bank, and
James T. Schaeffer, current Principal Financial Officer and Chief
Accounting Officer of First Bank, will be appointed officers of
the new bank.

Exchange Ratio

On the effective date of the merger, each outstanding
share of First Bank common stock will automatically convert into
shares of PSB common stock based upon the exchange ratio
contained in the agreement. The exchange ratio will be that
number of shares of PSB common stock having a market value equal
to $6.00. In the agreement PSB market value means the average of
the market price of PSB common stock for the twenty (20)
consecutive trading days ending on the trading day three (3)
trading days preceding the closing. The market price of PSB
common stock is defined as the average between the closing high
bid and low asked prices.

If the market value of PSB common stock is below $6.50
on the closing date, First Bank can elect to terminate the
agreement, unless PSB resets the exchange ratio equal to $6.00
<PAGE 29> divided by the market value of PSB common stock. If
PSB chooses this option, it would preclude the termination of the
agreement by First Bank. If PSB does not elect to set the
exchange ratio at the time of notification of First Bank's intent
to terminate, the agreement would terminate and neither First
Bank or PSB would owe any penalty or fee as a result of the
termination.

PSB will adjust the number of shares of PSB common
stock issuable in exchange for shares of First Bank common stock
to take into account any stock splits, reclassifications or other
similar events involving PSB common stock.

On the effective date of the merger, each outstanding
option to purchase shares of First Bank common stock will
automatically convert into an option to purchase PSB common
stock. The number of shares of PSB common stock issuable upon
exercise will be equal to the number of shares of First Bank
common stock subject to the option multiplied by the exchange
ratio. The exercise price for a whole share of PSB common stock
will equal the stated exercise price of the option divided by the
exchange ratio. Shares issuable upon the exercise of such
options to acquire PSB common stock will remain subject to the
terms of the plans and grant agreements of First Bank under which
First Bank issued the options.

Consolidation of Operations

PSB expects to achieve certain cost savings and
operating synergies as a result of the merger. PSB believes that
these costs savings and operating synergies will aggregate
approximately $350,000 per year.

Opinion of First Bank Independent Financial Advisor

Pursuant to an engagement letter date October 1, 1998,
First Bank retained Berwind to act as its financial advisor in
connection with First Bank's consideration of a possible business
combination. In connection with the merger, the First Bank board
requested Berwind to render its opinion to the fairness, from a
financial point of view, of the financial consideration to be
received by the holders of First Bank common stock. Berwind
rendered its opinion to the board that, based upon and subject to
the various considerations set forth therein, as of March 19,
1999, the consideration to be received in the merger was fair,
from a financial point of view, to the holders of First Bank
common stock. Berwind has reconfirmed its opinion dated as of
______________, 1999 to the effect that, as of that date, the
financial consideration was fair to the holders of shares of
First Bank common stock from a financial point of view.

The full text of Berwind's __________________, 1999
opinion, sets forth the assumptions made, matters considered and
limitations of the review undertaken. It is attached as Annex B
to this joint proxy statement/prospectus, is incorporated herein
<PAGE 30> by reference, and should be read in its entirety in
connection with this joint proxy statement/prospectus. The
summary of Berwind's opinion is qualified by reference to the
full text of the opinion.

Berwind was selected to act as First Bank's financial
advisor based upon its qualifications, expertise, experience and
reputation in the financial services industry. Berwind has
knowledge of, and experience with Pennsylvania and surrounding
banking markets as well as banking organizations operating in
those markets. Berwind, as part of its investment banking
business, is engaged regularly in the valuation of assets,
securities and companies in connection with various types of
asset and securities transactions, including mergers,
acquisitions, private placements, and valuations for various
other purposes and in the determination of adequate consideration
in such transactions. No limitations were imposed by First
Bank's Board of Directors upon Berwind with respect to the
investigations made or procedures followed by Berwind in
rendering the March 19, 1999 opinion or the _____________, 1999
opinion.

In rendering its opinion, Berwind among other things:

- reviewed the historical financial performances,
current financial positions and general prospects
of First Bank and PSB and reviewed certain
internal financial analyses and forecasts prepared
by the management of First Bank and PSB;

- reviewed and analyzed the stock market performance
of First Bank and PSB;

- studied and analyzed the consolidated financial
and operating data of First Bank and PSB;

- considered the terms and conditions of the
proposed merger as compared with the terms and
conditions of comparable bank and bank holding
company mergers and acquisitions;

- met and/or communicated with certain members of
First Bank's and PSB's senior management to
discuss their respective operations, historical
financial statements, and future prospects;

- reviewed the merger agreement and certain related
documents;

- reviewed this joint proxy statement/prospectus;

- discussed the strategic objectives of the merger
and the plans for the combined company with senior
executives of First Bank and PSB, including
<PAGE 31> estimates of the cost savings and other
synergies projected for the combined company;

- participated in discussions and negotiations among
representatives of First Bank and PSB and their
financial and legal advisors; and,

- conducted such other financial analyses, studies
and investigations as Berwind deemed appropriate.

In delivering its March 19, 1999 opinion and
__________________, 1999 opinion, Berwind assumed that in the
course of obtaining the necessary regulatory and governmental
approvals for the merger, no restriction will be imposed on PSB
or First Bank that would have a material adverse effect on the
contemplated benefits of the merger. Berwind also assumed that
there will not occur any change in applicable law or regulation
that would cause a material adverse change in the prospects or
operations of PSB after the merger.

Berwind relied without independent verification upon
the accuracy and completeness of all of the financial and other
information reviewed by and discussed with it for purposes of its
opinions. With respect to First Bank's and PSB's financial
forecasts and other information reviewed by Berwind in rendering
its opinions, Berwind assumed that such information was
reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of First Bank
and PSB as to their most likely future performance and the cost
savings and other potential synergies (including the amount,
timing and achievability thereof) anticipated to result from the
merger. Berwind did not make an independent evaluation or
appraisal of the assets (including loans) or liabilities of First
Bank or PSB nor was it furnished with any such appraisal.
Berwind also did not independently verify and has relied on and
assumed that all allowances for loan and lease losses set forth
in the balance sheets of First Bank and PSB were adequate and
complied fully with applicable law, regulatory policy and sound
banking practice as of the date of such financial statements. In
addition, Berwind did not review credit files of either First
Bank or PSB.

In connection with the March opinion, Berwind performed
a variety of financial analyses. Berwind evaluated the financial
terms of the transaction using standard valuation methods,
including comparable company analysis, comparable acquisition
analysis, discounted dividend analysis, pro forma merger analysis
and contribution analysis. The following is a summary of
selected analyses prepared by Berwind and presented to First
Bank's Board in connection with the March opinion and analyzed by
Berwind in connection with the March and __________________, 1999
opinions. In connection with delivering its __________________,
1999 opinion, Berwind updated the analyses described above to
reflect current market conditions and events occurring since the
date of the March opinion. Based on this update Berwind
<PAGE 32> determined that it was not necessary to change the
conclusions it had reached in connection with rendering the March
opinion.

Comparable Company Analyses. Berwind compared selected
publicly available financial and operating data for First Bank
with those of a peer group of selected publicly traded banks and
bank holding companies with assets less than $150 million, as of
the most recent financial period publicly available,
headquartered in the Mid-Atlantic region. Financial and
operating ratios compared in the analysis of the First Bank peer
group included but were not limited to:

- return on average assets;

- return on average shareholders' equity;

- shareholders' equity to assets ratio;

- certain asset quality ratios.

Berwind also compared selected publicly available
financial, operating and stock market data for PSB with those of
a peer group of selected publicly traded thrifts and thrift
holding companies with assets greater than $50 million and less
than $400 million, as of the most recent period publicly
available, headquartered in Pennsylvania, Maryland, New Jersey
and New York that fully converted to stock ownership subsequent
to December 31, 1995. Financial, operating and stock market
data, ratios and multiples compared in the analysis of the PSB
peer group included but were not limited to:

- return on average assets;

- return on average shareholders' equity;

- shareholders' equity to asset ratios;

- certain asset quality ratios;

- price to book value;

- price to tangible book value;

- price to earnings (latest twelve months and
estimated 1999);

- and dividend yield.

Comparable Acquisition Transaction Analysis. Berwind
compared the multiples of book value, tangible book value, latest
twelve months' earnings, assets and deposits to be paid in the
merger with the multiples paid in recent acquisitions of banks
and bank holding companies that Berwind deemed comparable. The
transactions deemed comparable by Berwind included both
<PAGE 33> interstate and intrastate bank and bank holding company
acquisitions announced during the twelve months preceding the
date of the __________________, 1999 opinion, in which the
selling institution's assets were between $10 million and
$100 million as of the most recent period publicly available
prior to announcement. Berwind compared transactions located
throughout the country and analyzed those transactions in three
groups:

- a national group

- a regional group

- a performance group

The national group included transactions throughout the
United States; the regional group included transactions in which
the seller was located in New Jersey, Pennsylvania or Maryland;
and the performance group included transactions in which the
selling company had non-performing assets as a percentage of
total assets greater than 1.00% and return on average
shareholders' equity greater than 9.00%.

No company or transaction, however, used in the
Comparable Company Analysis or the Comparable Acquisition
Transaction Analysis is identical to First Bank, PSB or the
merger. Accordingly, an analysis of the result of the foregoing
is not mathematical; rather, it involves complex considerations
and judgments concerning differences in financial and operating
characteristics of the companies and other factors that would
affect the public trading values of the companies or company to
which they are being compared.

Discounted Dividend Analysis. Berwind performed a
discounted dividend analysis to determine a range of present
values per share of First Bank common stock assuming First Bank
continued to operate as a stand-alone entity. This range was
determined by adding the present value of the estimated future
dividend stream that First Bank could generate, and the present
value of the "terminal value" of First Bank common stock at the
end of five years. To determine a projected dividend stream,
Berwind utilized management's anticipated dividend payout ratio
of First Bank's projected income for the five year period. The
net income projections were grown using various earnings growth
rates scenarios. The "terminal value" of First Bank common stock
at the end of the period was determined by applying to fifth
year's projected earnings to a range of price to earnings
multiples. The range of terminal multiples utilized reflected
price to earnings multiples generally received by banking
institutions which have similar financial and operating
characteristics as First Bank. The dividend stream and terminal
values were discounted to present value using various discount
rates, reflecting different assumptions regarding the rates of
return required by holders or prospective buyers of First Bank
common stock. <PAGE 34>

In connection with its analysis, Berwind considered and
discussed with the First Bank Board, how the discounted dividend
analysis would be affected by changes in the underlying
assumptions, including variations with respect to the growth rate
of assets, net interest spread, non-interest income, non-interest
expenses and dividend payout ratio. Berwind noted that the
discounted dividend analysis is a widely used valuation
methodology, but the assumptions that must be made, and the
results thereof are not necessarily indicative of actual values
or future results.

Pro Forma Contribution Analysis. Berwind analyzed the
changes in the amount of earnings, book value and dividends
represented by one share of First Bank stock prior to the merger
and the number of shares of PSB stock after the merger resulting
from the exchange ratio. The analysis considered, among other
things, the changes that the merger would cause to First Bank's
earnings per share, book value per share and indicated dividends.
In reviewing the pro forma combined earnings, equity and assets
of PSB based on the merger with First Bank, Berwind analyzed the
contribution that First Bank would have made to the combined
company's earnings, equity and assets as of and for the most
recent quarterly period ended as of the date of the _________,
1999 opinion. Berwind also reviewed the percentage ownership
that First Bank shareholders would hold in the combined company.

In connection with rendering its March opinion and
__________________, 1999 opinion, Berwind performed a variety of
financial analyses. Although the evaluation of the fairness,
from a financial point of view, of the consideration to be paid
in the merger was to some extent a subjective one based on the
experience and judgment of Berwind and not merely the result of
mathematical analysis of financial data, Berwind principally
relied on the previously discussed financial valuation
methodologies in its determinations. Berwind believes its
analyses must be considered as a whole and that selecting
portions of such analyses and factors considered by Berwind
without considering all such analyses and factors could create an
incomplete view of the process underlying Berwind's opinions. In
its analysis, Berwind made numerous assumptions with respect to
business, market, monetary and economic conditions, industry
performance and other matters, many of which are beyond First
Bank's and PSB's control. Any estimates contained in Berwind's
analyses are not necessarily indicative of future results or
values, which may be significantly more or less favorable than
such estimates.

In reaching its opinion as to fairness, none of the
analyses or factors considered by Berwind was assigned any
particular weighting by Berwind than any other analysis. As a
result of its consideration of the aggregate of all factors
present and analyses performed, Berwind reached the conclusion,
and opined, that the consideration to be received pursuant to the
agreement was fair to the shareholders of First Bank from a
financial point of view. <PAGE 35>

Berwind's __________________, 1999 opinion was based
solely upon the information available to it and the economic,
market and other circumstances as they existed as of the date of
its __________________, 1999 opinion was delivered; events
occurring after the date of its __________________, 1999 opinion
could materially affect the assumptions used in preparing its
__________________, 1999 opinion. Berwind has not undertaken to
reaffirm and revise its __________________, 1999 opinion or
otherwise comment upon any events occurring after the date
thereof.

Pursuant to the terms of the engagement letter dated
October 1, 1998, First Bank has paid Berwind $30,000 for serving
as financial advisor. First Bank has also agreed to pay Berwind
approximately $172,363 upon the completion of the merger for
acting as financial advisor in connection with the merger
including delivering its March and __________________, 1999
opinions. Whether or not the merger is consummated, First Bank
has also agreed to reimburse Berwind for all reasonable out-of-
pocket expenses incurred in connection with the services provided
by Berwind and to indemnify Berwind and certain related persons
against certain liabilities relating to or arising out of its
engagement.

Berwind's __________________, 1999 opinion is directed
only to the financial consideration to be received by First Bank
shareholders pursuant to the agreement, is for the information of
the board of directors of First Bank, and does not address any
other aspect of the merger nor does not constitute a
recommendation to any holder of First Bank common stock as to how
such holder should vote at the First Bank annual meeting.

The foregoing provides only a summary of the
__________________, 1999 opinion of Berwind and is qualified in
its entirety by reference to the full text of that opinion, which
is set forth in Annex B to this joint proxy statement/prospectus.

Opinion of PSB Independent Financial Advisor

The PSB Board retained Hopper Soliday, a division of
Tucker Anthony Incorporated, under an engagement letter dated
March 15, 1998, to render financial advisory and investment
banking services to PSB in connection with the possible
acquisition of First Bank by PSB. Hopper Soliday has no other
material relationship with PSB or First Bank. Tucker Anthony
Incorporated is a market maker in PSB's common stock.

Hopper Soliday is a regional investment banking firm
and as a customary part of its investment banking business is
engaged in the valuation of bank and bank holding company
securities in connection with mergers, acquisitions,
underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for various other
purposes. As a specialist in the securities of financial
institutions, Hopper Soliday has experience in, and knowledge of,
<PAGE 36> the valuation of banking enterprises. The PSB Board
selected Hopper Soliday on the basis of Hopper Soliday's ability
to evaluate the fairness of the merger from a financial point of
view, its qualifications, its previous experience and its
reputation in the banking and investment communities. Hopper
Soliday has acted exclusively for the PSB Board in rendering its
fairness opinion and will receive a fee from PSB for its
services.

Hopper Soliday has rendered a written opinion to the
PSB Board, dated as of the date of this joint proxy statement/
prospectus, to the effect that, as of that date, the merger
consideration is fair, from a financial point of view, to the
shareholders of PSB. The full text of the Hopper Soliday opinion
is attached as Annex C to this joint proxy statement/prospectus
and is incorporated herein by reference. We urge PSB
shareholders to read the Hopper Soliday opinion in its entirety
for a description of the procedures followed, assumptions made,
matters considered, and qualifications and limitations on the
review undertaken by Hopper Soliday rendering its opinion. We
qualify the following summary of the Hopper Soliday opinion in
its entirety by reference to the full text of the Hopper Soliday
opinion. PSB and First Bank determined the merger consideration
by negotiation. Hopper Soliday did not determine the merger
consideration. See "The Agreement and Plan of Reorganization --
Background of the Merger."

The Hopper Soliday Opinion is directed only to the
merger consideration and is not a recommendation to any PSB
shareholder as to how the shareholder should vote at the annual
meeting.

In rendering its opinion, Hopper Soliday reviewed,
among other things:

- First Bank's Annual Reports on Form 10-K and
related financial information for fiscal years
ended December 31, 1993 through December 31, 1997,
and First Bank's Quarterly Reports on Form 10-Q
and related unaudited financial information for
the quarters ended March 31, 1998, June 30, 1998
and September 30, 1998;

- PSB's Annual Report on Form 10-KSB and related
financial information for the fiscal year ended
December 31, 1997, and Pennsylvania Savings Bank
Quarterly Call Reports as filed with the Federal
Deposit Insurance Corporation (FDIC) for the
periods ending December 31, 1995 and December 31,
1996, and PSB's Quarterly Reports on Form 10-QSB
and related unaudited financial information for
the quarters ended March 31, 1998, June 30, 1998
and September 30, 1998;
<PAGE 37>
- the offering circulars issued by PSB in its mutual
holding company formation and its second step
mutual-to-stock conversion;

- certain information concerning the respective
businesses, operations, regulatory condition and
prospects of PSB and First Bank, including
financial forecasts relating to the business,
earnings, assets and prospects of PSB and First
Bank, furnished to Hopper Soliday by PSB and First
Bank, which Hopper Soliday discussed with members
of senior management of PSB and First Bank;

- historical market prices and trading activity for
the PSB common stock and First Bank common stock
and similar data for certain publicly traded
companies which Hopper Soliday deemed to be
relevant;

- the financial terms of the merger contemplated by
the merger agreement and the financial terms of
certain other mergers and acquisitions which
Hopper Soliday deemed to be relevant;

- the pro forma impact of the merger on the earnings
and book value per share, consolidated
capitalization and certain balance sheet and
profitability ratios of PSB;

- the implications for PSB's shareholders of the
accounting treatment (pooling-of-interests
compared with purchase accounting) for the merger;

- the Merger Agreement; and

- other matters that Hopper Soliday deemed
necessary.

Hopper Soliday also met with certain members of senior
management and other representatives of PSB and First Bank to
discuss the foregoing as well as other matters Hopper Soliday
deemed relevant. Hopper Soliday also considered such financial
and other factors as it deemed appropriate under the
circumstances and took into account its assessment of general
economic, market and financial conditions, and its experience in
similar transactions, as well as its experience in securities
valuation and its knowledge of the banking industry generally.
The Hopper Soliday opinion is necessarily based upon conditions
as they existed and could be evaluated on the respective dates
thereof and the information made available to Hopper Soliday
through the respective dates thereof.

Hopper Soliday relied without independent verification
upon the accuracy and completeness of all of the financial and
other information reviewed by and discussed with it for purposes
<PAGE 38> of its opinion. With respect to the financial
forecasts reviewed by Hopper Soliday in rendering its opinion,
Hopper Soliday assumed that such financial forecasts were
reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of PSB and
First Bank as to the future financial performance of PSB and
First Bank. Hopper Soliday also assumed that the allowance for
loan losses at PSB and First Bank were adequate. Hopper Soliday
did not make any independent evaluation or appraisals of the
assets or liabilities of First Bank nor was it furnished with any
such appraisals.

The summary set forth below is not a complete
description of the analyses performed by Hopper Soliday in this
regard. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not
readily susceptible to the summary description. Accordingly,
notwithstanding the separate factors discussed below, Hopper
Soliday believes that its analyses must be considered as a whole
and that selecting portions of its analyses and of the factors
considered by it, without considering all analyses and factors,
could create an incomplete view of the evaluation process
underlying its opinion. No one of the analyses performed by
Hopper Soliday was assigned a greater significance with respect
to industry performance, business and economic conditions and
other matters, many of which are beyond PSB's or First Bank's
control. The analyses performed by Hopper Soliday are not
necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by
such analyses. Additionally, analyses relating to the values of
businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold.

Transaction Summary. Hopper Soliday reviewed with the
PSB Board the key financial terms of the proposed merger,
including the expected method of accounting, the exchange ratio,
the share price of PSB as of March 17, 1999, the resulting
indicated value per share of First Bank common stock of the
merger and the resulting indicated aggregate consideration to be
paid in the merger.

The proposed method of accounting for the merger was a
pooling-of-interests in a tax-free exchange;

- the indicated value was $6.00 per share of First
Bank common stock. The exchange ratio is
calculated by dividing $6.00 by the market value
of PSB common stock provided that the market value
of PSB common stock is between $7.00 and $9.00 per
share;
<PAGE 39>
- the indicated aggregate consideration to be paid
in the merger was $10.1 million based on 1,686,875
shares of First Bank common stock outstanding;

- the value of the merger consideration represented
121% of First Bank's market price of $4.94 per
share on March 17, 1999;

- the $6.00 per share value represented 176% of
First Bank's book value per share as of
December 31, 1998; and

- the $6.00 per share value represented a multiple
of 13.5 times First Bank's net income for the
twelve months ended December 31, 1998.

Contribution Analysis. Hopper Soliday reviewed the
contribution made by each of PSB and First Bank to various
balance sheet items and net income of the combined company at the
proposed exchange ratio based on the market price of PSB common
stock on March 17, 1999, balance sheet data at December 31, 1998
and trailing twelve months earnings as of December 31, 1998.
This analysis showed that:

- First Bank's shareholders would own approximately
29.8% of the aggregate shares outstanding of the
combined company;

- First Bank was contributing 27.9% of total assets
of the pro forma combined company;

- First Bank was contributing 37.8% of total loans
of the pro forma combined company;

- First Bank was contributing 31.0% of total
deposits of the pro forma combined;

- First Bank was contributing 15.9% of shareholders'
equity of the pro forma combined company; and

- First Bank was contributing 45.2% of net income of
the pro forma combined company.

Summary of Comparison of Selected Institutions - PSB.
Hopper Soliday compared selected balance sheet data, asset
quality, capitalization and profitability ratios and market
statistics using financial data at or for the twelve months ended
September 30, 1998 and market data as of March 13, 1999 for PSB
to a peer group of mid-Atlantic thrifts and thrift holding
companies consisting of nine institutions located in metropolitan
markets with total assets between $86 million and $300 million.
The analysis included, but was not limited to, the following
ratios: loans/deposits, equity/assets, non-performing assets/
total assets, allowance for loan losses/non-performing assets,
net interest margin, efficiency ratio, return on average assets,
<PAGE 40> return on average equity, price/earnings, and price/
book. The analysis showed that:

- PSB's loan/deposit ratio was 60.25% versus a peer
group median of 89.89%;

- PSB's equity/assets ratio was 19.75% versus a peer
group median of 10.57%;

- PSB's ratio of non-performing assets to total
assets was 1.15% versus a peer group median of
0.66%;

- PSB's allowance for loan losses/non-performing
assets ratio was 25.54% versus a peer group median
of 38.11%;

- PSB's net interest margin was 3.53% versus a peer
group median 3.25%;

- PSB's efficiency ratio was 76.56% versus a peer
group median of 59.15%;

- PSB's return on average assets and return on
average equity were 0.55% and 4.82%, respectively,
versus peer group medians of 0.86% and 8.62%,
respectively;

- PSB's price/earnings and price/book ratios were
32.4x and 79.0%, respectively, versus peer group
medians of 14.5x and 112.0%, respectively.

Summary of Comparison of Selected Institutions - First
Bank. Hopper Soliday compared selected balance sheet data, asset
quality, capitalization and profitability ratios and market
statistics using financial data at or for the twelve months ended
September 30, 1998 and market data as of March 13, 1999 for First
Bank to a peer group of mid-Atlantic banks and bank holding
companies consisting of seven institutions located in
metropolitan markets with total assets between $109 million and
$173 million. The analysis included, but was not limited to, the
following ratios: loans/deposits, equity/assets, non-performing
assets/total assets, allowance for loan losses/non-performing
assets, net interest margin, efficiency ratio, return on average
assets, return on average equity, price/earnings, and price/book.
The analysis showed that:

- First Bank's loan/deposit ratio was 86.61% versus
a peer group median of 66.39%;

- First Bank's equity/assets ratio was 9.03% versus
a peer group median of 8.24%;
<PAGE 41>
- First Bank's ratio of non-performing assets to
total assets was 2.44% versus a peer group median
of 1.47%;

- First Bank's allowance for loan losses/non-
performing assets ratio was 49.19% versus a peer
group median of 31.86%;

- First Bank's net interest margin was 4.27% versus
a peer group median 4.96%;

- First Bank's efficiency ratio was 77.56% versus a
peer group median of 78.58%;

- First Bank's return on average assets and return
on average equity were 1.08% and 12.33%,
respectively, versus peer group medians of 0.51%
and 5.48%, respectively;

- First Bank's price/earnings and price/book ratios
were 11.1x and 145.0%, respectively, versus peer
group medians of 17.9x and 106.0%, respectively.

Summary of Selected Bank Merger and Acquisition
Transactions. Hopper Soliday compared the ratios of price/book,
price/trailing 12 months earnings, book/book and price/deposits
for the proposed merger to the maximum, mean, median and minimum
ratios for a group of 11 transactions announced since January 1,
1997 with transaction values less than $25 million. The selected
transactions involved the acquisition of profitable commercial
banks and bank holding companies headquartered in Delaware,
Maryland, New Jersey and Pennsylvania. This analysis showed
that:

- the merger consideration represented 176.0% of
First Bank's book value versus a median of 255.7%
for the selected transactions;

- the merger consideration represented a price/
trailing 12 months earnings ratio of 13.5x
compared to a median of 22.6x for the selected
transactions;

- the merger consideration represented a book/book
ratio of 188.0% compared to a median of 98.6% for
the selected transactions; and

- the merger consideration represented a price/
deposits ratio of 17.6% compared to a median of
26.2% for the selected transactions.

No company or transaction used in the above analysis as
a comparison is identical to PSB, First Bank or the contemplated
transaction. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather, it involves complex
<PAGE 42> consideration and judgments concerning differences in
financial and operating characteristics of the companies and
other factors that could affect the public trading value of the
companies to which they are being compared. The ranges of
valuations resulting from any particular analysis described above
should not be taken to be Hopper Soliday's view of the actual
value of PSB or First Bank. The fact that any specific analysis
has been referred to in the summary above is not meant to
indicate that such analysis was given more weight than any other
analyses.

In performing its analyses, Hopper Soliday made
numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many
of which are beyond the control of PSB or First Bank. The
analyses performed by Hopper Soliday are not necessarily
indicative of actual values or actual future results, which may
be significantly more or less favorable than suggested by such
analyses. The analyses do not purport to be appraisals or to
reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at the present time
or at any time in the future. In addition, as described above,
Hopper Soliday's opinion and presentation to the PSB Board is
just one of many factors taken into consideration by the PSB
Board.

Pursuant to the Hopper Soliday engagement letter, PSB
agreed to pay Hopper Soliday a contingent fee of 0.60% of the
aggregate consideration to be paid in the merger. A retainer fee
of $5,000 was paid to Hopper Soliday upon execution of the Hopper
Soliday engagement letter. A payment of $20,000 was made to
Hopper Soliday upon delivery of Hopper Soliday's written fairness
opinion. The balance of the fee is due upon consummation of the
merger. Both the retainer fee and the $20,000 payment will be
credited towards the contingent fee. Hopper Soliday will be
reimbursed for reasonable out-of-pocket expenses incurred on
behalf of PSB. PSB has agreed to indemnify Hopper Soliday
against certain liabilities.

Effective Date of the Merger

The effective date of the merger will occur within
30 days following the satisfaction or waiver of all conditions to
completion of the merger specified in the agreement. PSB and
First Bank may also mutually agree on a different date. We
presently expect that the effective date of the merger will occur
prior to November 30, 1999.

On or prior to the effective date of the merger, PSB
will file articles of merger with the Pennsylvania Department of
State and this document will set forth the effective date of the
merger.

Exchange of First Bank Stock Certificates
<PAGE 43>
As promptly as practicable after the effective date of
the merger, PSB will send a transmittal form to each record owner
of First Bank common stock. The transmittal form will contain
instructions on how to surrender certificates representing First
Bank common stock for certificates representing PSB common stock.

PSB must mail certificates representing shares of PSB
common stock and checks for cash in lieu of fractional share
interests to former shareholders of First Bank in no event later
than thirty business days following the receipt of the
transmittal form and First Bank stock certificates properly
endorsed or accompanied by the required materials.

You should not forward First Bank stock certificates
until you have received transmittal forms from PSB. You should
not return stock certificates with the enclosed proxy card.

Until you exchange your certificates representing First
Bank common stock, you will not receive the certificates for the
PSB common stock into which your First Bank shares have
converted. For all other purposes, however, each certificate
which represents shares of First Bank common stock outstanding at
the effective date of the merger will evidence ownership of the
shares of PSB common stock into which those shares converted as a
result of the merger. Neither PSB nor First Bank will have
liability for any amount paid in good faith to a public official
pursuant to any applicable abandoned property, escheat or similar
law.

Conditions to the Merger

The obligations of PSB and First Bank to complete the
merger are subject to various conditions, which include, among
other customary provisions for transactions of this type, the
following:

- approval of the agreement by PSB and First Bank
shareholders;

- approval of the amendment to the PSB Articles of
Incorporation by PSB shareholders;

- receipt of all required regulatory approvals,
including the expiration or termination of any
notice and waiting periods;

- receipt of an opinion of Stockton Bates, LLP, the
PSB auditors, that the merger can be accounted for
as a pooling-of-interests under generally accepted
accounting principals;

- the absence of any legal order prohibiting the
merger;
<PAGE 44>
- delivery of a tax opinion to each of PSB and First
Bank; and

- the absence of any material adverse effect on the
assets, financial condition or results of
operations on a consolidated basis of the other
party since December 31, 1998, not including:

* any change in the value of the investment or
loan portfolios of PSB or First Bank
resulting from a change in interest rates
generally;

* any change occurring after the date of the
agreement in any law or regulation or in
generally accepted accounting principles that
affects banking institutions generally;

* reasonable expenses incurred in connection
with the merger;

* actions taken with the written consent of the
other party; and

* any material adverse effect caused, in whole
or in substantial part, by the party claiming
that a material adverse effect has occurred.

Except for the requirements of shareholder approvals,
regulatory approvals and the absence of any legal order
preventing the merger, each of the conditions described above may
be waived in the manner and to the extent described in
" -- Amendment; Waivers" on page __.

Bank Merger

As part of the agreement, Pennsylvania Savings Bank and
First Bank entered into a bank plan of merger. The bank plan of
merger provides that Pennsylvania Savings Bank will merge into
First Bank, with First Bank surviving. PSB and First Bank expect
to complete the bank merger concurrently with completion of the
acquisition of First Bank by PSB.

Regulatory Approvals

The Federal Reserve Board and the Pennsylvania
Department of Banking must approve the acquisition and the bank
merger. PSB filed an application for approval with both
regulatory authorities on _____________ __, 1999.

Under applicable regulations, the Federal Reserve Board
and the Pennsylvania Department of Banking will review the
financial, managerial, competitive, legal, disclosure, accounting
and tax aspects of the transaction, as well as the insurance risk
<PAGE 45> to the Bank Insurance Fund and the Savings Association
Insurance Fund and the convenience and needs of the community to
be served.

In addition, the Federal Reserve Board may not approve
any proposed acquisition:

- if it would result in a monopoly or further any
combination or conspiracy to monopolize or to
attempt to monopolize the banking business in any
part of the United States; or

- which in any section of the country may have the
effect of substantially lessening competition or
tending to create a monopoly or which in any other
manner would restrain trade, unless the Federal
Reserve Board finds that the anticompetitive
effects of the proposed acquisition are clearly
outweighed in the public interest by the probable
effect of the proposed acquisition in meeting the
convenience and needs of the community to be
served.

In addition, the Federal Reserve Board has the
responsibility to review the performance of all involved
institutions in meeting their responsibilities under the
Community Reinvestment Act, which includes the record of
performance of the existing institutions in meeting the credit
needs of the entire community including low- and moderate-income
neighborhoods. Both First Bank and PSB received ratings of
"satisfactory" in their last Community Reinvestment Act
examinations. The Federal Reserve Board has not received any
protest under the Community Reinvestment Act as of the date of
this joint proxy statement/prospectus.

There can be no assurance that the Federal Reserve
Board will approve the bank merger, and, if approved, there can
be no assurance as to the date of such approval. The bank merger
may not be completed until 30 days (15 days if the U.S.
Department of Justice does not object) after the date of the
Federal Reserve Board approval, during which time the U.S.
Department of Justice may challenge the bank merger on antitrust
grounds. The commencement of an antitrust action by the U.S.
Department of Justice would stay the effectiveness of the Federal
Reserve Board approval unless a court specifically orders
otherwise. In reviewing the bank merger, the U.S. Department of
Justice could analyze the bank merger's effect on competition
differently than the Federal Reserve Board, and thus it is
possible that the U.S. Department of Justice could reach a
different conclusion than the Federal Reserve Board regarding the
bank merger's competitive effects. Failure of the U.S.
Department of Justice to object to the bank merger does not
prevent the filing of antitrust actions by private persons.

Business Pending the Merger <PAGE 46>

Under the agreement, PSB and First Bank each agreed to
use their best efforts to preserve their business organizations
intact, to maintain good relationships with employees and to
preserve the goodwill of customers and others with whom business
relationships exist. In addition, First Bank agreed to conduct
its business and to engage in transactions only in the ordinary
course of business, consistent with past practice, except as
otherwise required by the agreement or with the written consent
of PSB.

First Bank also agreed that it may not without the
written consent of PSB:

- amend or change any provision of its articles of
incorporation or bylaws;

- grant any option, warrant, or agreement of any
character relating to its authorized or issued
capital stock or any securities convertible into
its capital stock;

- declare, set aside or pay any dividend or other
distribution in respect of its capital stock;

- grant any pay increase except for routine periodic
increases in accordance with past practice; or

- engage in any merger, acquisition or similar
transaction.

- grant any severance or termination pay (other than
pursuant to written policies or written agreements
of First Bank in effect on the date of the
agreement and provided to PSB prior to the date of
the agreement) to, or enter into any new or amend
any existing employment agreement with, or
increase the compensation of, any employee,
officer or director of First Bank, except for
routine periodic increases, individually and in
the aggregate, in accordance with past practice;

- purchase any security for its investment portfolio
not rated "A" or higher by either Standard &
Poor's Corporation or Moody's Investor Services,
Inc.;

- make any capital expenditure of $10,000 or more
not previously disclosed to PSB, without the prior
written consent of PSB;

- make any sale, assignment, transfer, pledge,
hypothecation or other disposition of any assets
having a book or market value, whichever is
greater, in the aggregate in excess of $100,000,
other than pledges of assets to secure government
<PAGE 47> deposits, to exercise trust powers,
sales of assets received in satisfaction of debts
previously contracted in the normal course of
business, issuance and sales of loans, or
transactions in the investment securities
portfolio by First Bank or repurchase agreements,
in each case, in the ordinary course of business;

- undertake or enter any lease, contract or other
commitment for its account, other than in the
normal course of providing credit to customers as
part of its banking business, involving a payment
by First Bank of more than $10,000 annually, or
containing a material financial commitment and
extending beyond 12 months from the date of the
agreement.

PSB and First Bank have jointly agreed:

- to use their best efforts to obtain all required
regulatory approvals; and

- to take all actions necessary to complete the
transactions contemplated by the agreement.

No Solicitation of Transactions

Unless the Board of Directors of First Bank first
receives a written legal opinion of outside counsel that the
failure to take certain actions would constitute a breach of
their fiduciary duty, the agreement prohibits First Bank or any
of its affiliates or representatives from:

- responding to, soliciting, initiating or
encouraging any inquiries relating to an
acquisition of First Bank by a party other than
PSB;

- recommending or endorsing an acquisition of First
Bank by a party other than PSB;

- participating in any discussions or negotiations
regarding an acquisition of First Bank by a party
other than PSB;

- providing anyone other than PSB with any nonpublic
information relating to an acquisition of First
Bank by a party other than PSB; or

- entering into an agreement with any other party
regarding the acquisition of First Bank.

First Bank has agreed to notify PSB if it receives any
inquiries or proposals relating to an acquisition by a party
other than PSB. <PAGE 48>

Amendment; Waivers

Subject to any applicable legal restrictions, at any
time prior to completion of the merger, PSB and First Bank may:

- amend the agreement;

- extend the time for the performance of any of the
obligations or other acts of PSB or First Bank
required in the agreement;

- waive any inaccuracies in the representations and
warranties contained in the agreement; or

- waive compliance with any of the agreements or
conditions contained in the agreement, except for
the requirements of shareholder approvals,
regulatory approvals and the absence of any order,
decree, or injunction preventing the merger.

After the shareholders of PSB and First Bank have
approved the agreement, however, neither company can modify the
amount nor the form of consideration First Bank shareholders will
receive upon completion of the merger or otherwise materially
adversely affect any shareholder without shareholder approval.

Termination; Effect of Termination

PSB and First Bank may terminate the agreement at any
time prior to completion of the merger by mutual written consent.

In addition, either PSB or First Bank may terminate the
agreement at any time prior to completion of the transaction:

- if the closing date of the merger does not occur
before December 31, 1999, unless the failure to
close by that date results from the failure of the
party seeking to terminate the agreement to
materially perform any of its obligations; or

- if either party has received a final nonappealable
order from a regulatory authority denying a
required approval or consent, unless the denial
results from the failure of the party seeking to
terminate the agreement to materially perform any
of its obligations; or

- if either party has materially breached any
material covenant or representation contained in
the agreement which would have a material adverse
effect on the assets, financial condition or
results of operation of the other party on a
consolidated basis, but only if the breach remains
uncured.
<PAGE 49>
First Bank alone may terminate the agreement:

- if the Board of Directors of PSB fails to
recommend and endorse the agreement or withdraws
or modifies a prior recommendation in a manner
adverse to First Bank; or

- if the market value of PSB common stock is less
than $6.50 at closing and PSB does not make the
election to set the exchange ratio equal to the
number of shares of fully paid and non-assessable
shares of PSB common stock equal to $6.00 divided
by the market value of PSB common stock. Under
the agreement, market value of PSB common stock
means the average market price of PSB common stock
over a period of 20 consecutive trading days
ending on the trading day three days immediately
before the closing date.

PSB alone may terminate the agreement at any time prior
to completion of the merger:

- if the Board of Directors of First Bank fails to
recommend and endorse the agreement or withdraws
or modifies a prior recommendation in a manner
adverse to PSB.

In the event that either PSB or First Bank terminates
the agreement, neither PSB nor First Bank will have any
continuing liability or obligation other than the obligations
dealing with confidentiality and any liabilities resulting from
willful breach or fraud. The PSB option agreement would survive
the termination for a period of up to 18 months.

Employee Benefits and Severance Benefits

After the merger, the employee pension and welfare
benefit plans of PSB and First Bank may, at PSB's election and
subject to the requirements of the Internal Revenue Code continue
to be maintained separately or consolidated or terminated, except
as set forth below.

- PSB Employee Stock Ownership Plan. Employees who
become employees of PSB or a PSB subsidiary will
be entitled to participate in the PSB Employee
Stock Ownership Plan in accordance with its terms
by treating them as newly employed individuals
without any prior service credit under PSB's plan.

- PSB 401(k) Retirement Savings Plan and Profit
Sharing Plan. Employees who become employees of
PSB or a PSB subsidiary will be entitled to
participate in PSB's 401(k) Retirement Savings
Plan and Profit Sharing Plan in accordance with
its terms. In this regard, each employee will
<PAGE 50> receive, for purposes of participation
and vesting only, credit for all service with
First Bank or a First Bank subsidiary, and enter
the plan either on the entry date concurrent with
or next following the employee's satisfaction of
such plan's minimum participation requirements.

- Welfare Benefit Plans. After the effective date
of the merger, the welfare benefit plans of PSB
and First Bank (and their respective subsidiaries)
will initially remain unchanged. PSB will
undertake a study, in consultation with
appropriate professional advisors, with a view
toward the possible combination of some or all of
such plans or the benefits provided thereunder.
Following such study, PSB will take such action
(which may include the implementation of new
benefits, reduction or elimination of some
benefits, and the alteration of the respective
cost allocation between employer and employee) as
it deems appropriate under the circumstances.

- Severance Policy - PSB will cause the new bank to
adopt the First Bank severance policy for certain
named First Bank executive officers.

- Deferred Compensation Plan - PSB will pay all
amounts due under the First Bank Deferred
Compensation Plan in accordance with its terms.

Accounting Treatment

PSB will use the pooling-of-interests method of
accounting to account for the merger. This accounting treatment
is different from purchase accounting. Under pooling-of-
interests accounting, the assets and liabilities of First Bank
will be carried forward to PSB at their historical recorded
amounts. Results of operations of PSB will include the results
of both companies for the entire fiscal year in which the merger
occurs. The reported balance sheet amounts and results of
operations of the separate corporations for prior periods will be
combined, reclassified and conformed, as appropriate, to reflect
the combined financial position and results of operations for
PSB.

If PSB must purchase more than 10% of the outstanding
shares of First Bank common stock for cash, due to the purchase
of fractional shares and the exercise of dissenters rights by
First Bank shareholders, or if other conditions arise that would
prevent the merger from being treated as a pooling-of-interests
for financial accounting purposes, PSB has the right to terminate
the agreement.

Material Federal Income Tax Consequences
<PAGE 51>
To complete the merger, PSB and First Bank must receive
an opinion of Stevens & Lee, P.C., counsel to PSB, that the
merger will qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, and that PSB and
First Bank will each be a party to the reorganization within the
meaning of Section 368(b) of the Code.

In the opinion of Stevens & Lee, P.C., the material
federal income tax consequences of the merger will be as follows:

- PSB and First Bank will not recognize gain or loss
in the merger;

- First Bank shareholders will not recognize any
gain or loss upon receipt of PSB common stock in
exchange for First Bank common stock, except
shareholders who receive cash proceeds for
fractional interests will recognize gain or loss
equal to the difference between such proceeds and
the tax basis allocated to their fractional share
interests, and such gain or loss will constitute
capital gain or loss if their First Bank common
stock is held as a capital asset at the effective
date of the merger;

- the tax basis of shares of PSB common stock
(including fractional share interests) that First
Bank shareholders receive in the merger will be
the same as the tax basis of their original shares
of First Bank common stock less any basis
allocable to fractional share interests; and

- the holding period of the PSB common stock that
First Bank shareholders receive in the merger will
include the holding period of their original
shares of First Bank common stock, provided their
First Bank common stock is held as a capital asset
at the time of the merger.

Under the agreement, the condition that Stevens & Lee,
P.C. deliver, at closing, the opinion described above can be
waived by PSB and First Bank. However, in the event that the
delivery of this opinion of counsel is waived, or such opinion
would otherwise set forth tax consequences materially different
to a First Bank shareholder than those described above, First
Bank and PSB intend to resolicit proxies as required in
accordance with the rules and regulations of the SEC.

This is not a complete description of all the federal
income tax consequences of the merger and, in particular, does
not address tax considerations that may affect the treatment of
shareholders who acquired their First Bank common stock pursuant
to the exercise of employee stock options or otherwise as
compensation, or shareholders which are exempt organizations or
who are not citizens or residents of the United States. Your
<PAGE 52> individual circumstances may affect the tax
consequences of the merger to you. In addition, no information
is provided herein with respect to the tax consequences of the
merger under applicable state, local, or foreign laws.
Accordingly, you are advised to consult a tax advisor as to the
specific tax consequences of the merger to you.

Expenses

PSB and First Bank will each pay all their respective
costs and expenses, including fees and expenses of financial
consultants, accountants and legal counsel, except that PSB and
First Bank will share equally the cost of printing and mailing
this joint proxy statement/prospectus.

Resale of PSB Common Stock

The PSB common stock issued in the merger will be
freely transferable under the Securities Act of 1933 except for
shares issued to any First Bank shareholder who is an "affiliate"
for purposes of SEC Rule 145. This joint proxy statement/
prospectus does not cover resales of PSB common stock received by
any affiliate of First Bank or PSB.

Dissenters' Rights of Appraisal

Pursuant to the Pennsylvania Business Corporation Law,
shareholders of First Bank have the right to dissent from the
merger, and to obtain payment of the "fair value" (as defined
therein) of their First Bank common stock, as the case may be, if
the merger is consummated. The term "fair value" means the value
of First Bank common stock immediately before completion of the
merger, taking into account all relevant factors, but excluding
any appreciation or depreciation in anticipation of the merger.

The following summary of the steps to be taken if the
right to dissent is to be exercised is qualified in its entirety
by the full text of Section 1930 and Subchapter D of Chapter 15
of the Pennsylvania law, which are attached as Annex F to this
joint proxy statement/prospectus. Each step must be taken in the
indicated order and in strict compliance with the applicable
provisions of the statute in order to perfect dissenters' rights.
The failure of any First Bank shareholder to comply with the
aforesaid steps will result in the shareholder receiving the
consideration contemplated by the agreement. See "The Merger --
Terms of the Merger." Any shareholder of First Bank who
contemplates exercising the right to dissent is urged to read
carefully the provisions of Section 1930 and Subchapter D of
Chapter 15 of the BCL.

Any written notice or demand which is required in
connection with the exercise of dissenters' rights, whether
before or after the closing date, must be sent to First Bank of
Philadelphia, 1624 Walnut Street, Philadelphia, Pennsylvania
19102 (Attention: Corporate Secretary). <PAGE 53>

A shareholder who wishes to dissent must file with
First Bank prior to the vote of shareholders on the merger at the
First Bank annual meeting a written notice of intention to demand
that he be paid the fair value for his shares of First Bank
common stock, if the merger is effected, must effect no change in
the beneficial ownership of his First Bank common stock from the
date of such filing through the closing date, and must refrain
from voting his First Bank common stock to approve the merger.
Neither a proxy nor a vote against approval of the merger will
constitute the necessary written notice of intention to dissent.
A beneficial owner of First Bank common stock whose shares are
held of record in "street name" by a brokerage firm or other
nominee must obtain the written consent of such record holder to
such beneficial owner's exercise of dissenters' rights and must
submit such consent to First Bank no later than the time of the
filing of his notice of intention to dissent.

If the merger is approved by the required vote of First
Bank's shareholders at the annual meeting, First Bank will mail a
notice to all dissenters who gave due notice of intention to
demand payment and who refrained from voting in favor of the
merger. The notice will state where and when a demand for
payment must be sent and certificates for First Bank common stock
must be deposited in order to obtain payment, and will include a
form for demanding payment and a copy of Subchapter D of
Chapter 15 of the Pennsylvania Business Corporation Law. The
time set for receipt of the demand for payment and deposit of
stock certificates will not be less than 30 days from the date of
mailing of the notice.

A shareholder who fails to timely demand payment or
fails to timely deposit stock certificates, as required by First
Bank's notice, will not have any right to receive payment of the
fair value of his First Bank common stock.

Promptly after completion of the merger, or upon timely
receipt of demand for payment if the merger already has been
completed, First Bank will either remit to dissenters who have
made demand and have deposited their stock certificates the
amount that First Bank estimates to be the fair value of the
First Bank common stock or give written notice that no such
remittance is being made. The remittance or notice will be
accompanied by (i) a closing balance sheet and an income
statement of First Bank for a fiscal year ending not more than
16 months before the date of remittance or notice, together with
the latest available interim financial statements, (ii) a
statement of First Bank's estimate of the fair value of the First
Bank common stock, and (iii) notice of the right of the dissenter
to demand payment or supplemental payment under the Pennsylvania
Business Corporation Law, as the case may be, accompanied by a
copy of Subchapter D of Chapter 15 of the Pennsylvania Business
Corporation Law. If First Bank does not remit the estimated fair
value for shares with respect to which demand for payment has
been made and stock certificates have been deposited, then First
Bank will return any certificates that have been deposited.
<PAGE 54> Returned certificates, and any certificates
subsequently issued in exchange therefor, will be marked to
record the fact that demand for payment has been made.
Transferees of shares so marked shall not acquire any rights in
First Bank other than those rights held by the original dissenter
after such dissenter demanded payment of fair value.

If a dissenter believes that the amount stated or
remitted by First Bank is less than the fair value of the First
Bank common stock he may send First Bank his own estimate of the
fair value of the First Bank common stock which shall be deemed
to be a demand for payment of the amount of the deficiency. If
First Bank remits payment of its estimated value of a dissenter's
First Bank common stock and the dissenter does not file his own
estimate within 30 days after the mailing by First Bank of its
remittance, the dissenter will be entitled to no more than the
amount remitted to him by First Bank.

Within 60 days after the latest to occur of completion
of the merger, timely receipt by First Bank of any demands for
payment, or timely receipt by First Bank of any estimates by
dissenters of fair value, if any demands for payment remain
unsettled, First Bank may file in the Court of Common Pleas of
Philadelphia County, an application requesting that the fair
value of the First Bank common stock be determined by the Court.
In that case, all dissenters, wherever residing, whose demands
have not been settled shall be made parties to the proceeding as
in an action against their shares, and a copy of the application
shall be served on each dissenter.

If First Bank were to fail to file an application, then
any dissenter, on behalf of all dissenters who have made a demand
and who have not settled their claim against First Bank may file
an application in the name of First Bank at any time within the
30-day period after the expiration of the 60-day period and
request that the fair value be determined by the Court. The fair
value determined by the Court may, but need not, equal the
dissenters' estimates of fair value. If no dissenter files an
application, then each dissenter entitled to do so shall be paid
First Bank's estimate of the fair value of the First Bank common
stock and no more, and may bring an action to recover any amount
not previously remitted, plus interest at a rate the Court finds
fair and equitable.

First Bank intends to negotiate in good faith with any
dissenting shareholder. If after negotiation, a claim cannot be
settled, then First Bank intends to file an application
requesting that the fair value of the First Bank common stock be
determined by the Court.

FINANCIAL INTERESTS OF DIRECTORS AND OFFICERS

Certain members of management of First Bank and its
Board of Directors, may have interests in the merger in addition
to their interests as shareholders. <PAGE 55>

Deferred Compensation Plan Payments

The officers of First Bank will be entitled to
aggregate payments under the First Bank Deferred Compensation
Plan of $_________ upon consummation of the merger.

The First Bank and PSB Boards of Directors were aware
of these payments and considered them, among other matters, in
approving the agreement.

Stock Options

As of the record date, the directors and executive
officers of First Bank beneficially own approximately [166,581]
shares of First Bank common stock, and hold options to purchase
[812,500] shares of First Bank common stock. On the effective
date of the merger, each option will convert into an option to
acquire PSB common stock. The number of shares of PSB common
stock issuable upon the exercise of the converted option will
equal the number of shares of First Bank common stock covered by
the option multiplied by the exchange ratio and the exercise
price for a whole share of PSB common stock will be the stated
exercise price of the option divided by the exchange ratio.
Shares issuable upon the exercise of options to acquire PSB
common stock will be issuable in accordance with the terms of the
respective plans and grant agreements of First Bank under which
First Bank issued the options.

Indemnification; Directors and Officers Insurance

PSB has agreed to indemnify all directors and officers
of First Bank against:

- all liabilities and expenses relating to claims,
proceedings or investigations resulting from the
person's status as a director, officer or employee
of First Bank or any First Bank subsidiary,
whether pertaining to matters existing prior to
the merger and whether asserted prior to or after
the merger; and

- all liabilities and expenses relating to claims,
proceedings or investigations arising out of the
agreement or the merger to the same extent as
those officers, directors and employees could be
indemnified by First Bank.

PSB has agreed to maintain First Bank' existing
directors' and officers' liability insurance policy, or a policy
providing comparable coverage amounts on terms no less favorable,
covering persons currently covered by such insurance for a period
of five years after the closing date, subject to certain maximum
cost limits.

Employment Agreement. <PAGE 56>

PSB intends to enter into employment agreements with
Messrs. Lingle and Schaeffer, two officers of First Bank. Under
the agreements, each person will remain as an employee of First
Bank, the surviving institution following the completion of the
merger. The annual salary to be paid to these individuals is
$125,000 plus bonus. Messrs. Lingle and Schaeffer will be
responsible for the management and operation of the Specialized
Lending Department of the new bank. The Specialized Lending
Department will focus on the origination of construction loans,
Sallie Mae loans, vocational school loans, Small Business
Administration loans and various other specialized lending
programs. Each individuals' employment agreements shall be for a
rolling period of two (2) years with an automatic extension on
January 31st of each year subject to usual and customary
termination provisions. The bonus for each shall consist of
12.5% of the net income in excess of one million dollars
($1,000,000) generated by the Specialized Lending Department.

CERTAIN RELATED TRANSACTIONS

Stock Option Agreement

General. As a condition to PSB entering into the
agreement, First Bank executed a stock option agreement, dated
March 19, 1999, which permits PSB to purchase First Bank common
stock under the circumstances described below.

Under the stock option agreement, PSB received an
option to purchase up to 210,625 shares of First Bank common
stock. This number represents approximately 12.6% of the issued
and outstanding shares of First Bank common stock on March 19,
1999. The exercise price per share to purchase First Bank common
stock under the option is $5.75 per share. PSB may only exercise
the option upon the occurrence of certain triggering events,
which are described below. None of the triggering events have
occurred to the best of PSB's or First Bank's knowledge as of the
date of this joint proxy statement/prospectus.

Effect of Stock Option Agreement. The stock option
agreement, together with First Bank's agreement to not solicit
other transactions relating to the acquisition of First Bank by a
third party and the agreement of First Bank's directors and
executive officers to vote their shares in favor of the
agreement, may have the effect of discouraging persons from
making a proposal to acquire First Bank.

Certain attempts to acquire First Bank or an interest
in First Bank would cause the option to become exercisable. This
would significantly increase a potential acquiror's cost of
acquiring First Bank compared to the cost that would be incurred
without the stock option agreement.

Terms of Stock Option Agreement. The following is a
brief summary of the material provisions of the stock option
agreement. A complete copy of the stock option agreement is
<PAGE 57> included as Annex D to this joint proxy statement/
prospectus. We urge you to read it carefully.

The option is exercisable only upon the occurrence of a
triggering event. As used in the stock option agreement, a
"triggering event" means generally any of the following events:

- a person or group, other than PSB or an affiliate
of PSB, acquires beneficial ownership of 25% or
more of the then outstanding shares of First Bank
common stock; or

- a person or group, other than PSB, enters into an
agreement or letter of intent with First Bank to:

* merge or consolidate, or enter into any
similar transaction, with First Bank,

* acquire all or substantially all of the
assets or liabilities of First Bank, or

* acquire beneficial ownership of securities
representing, or the right to acquire
beneficial ownership or to vote securities
representing, 25% or more of the then
outstanding shares of First Bank common
stock; or

- a person or group, other than PSB or an affiliate
of PSB, publicly announces a bona fide proposal
for:

* any merger, consolidation or acquisition of
all or substantially all the assets or
liabilities of First Bank or any other
business combination involving First Bank, or

* a transaction involving the transfer of
beneficial ownership of 10% or more of the
then outstanding shares of First Bank common
stock followed by a failure of First Bank'
shareholders to approve the merger; or

The option expires on the earlier of:

- the effective date of the merger; or

- termination of the agreement in accordance with
its terms, except that if:

* PSB terminates the agreement as a result of
an uncured breach by First Bank which results
in a material adverse effect on the assets,
financial condition or results of operations
of First Bank, or <PAGE 58>

* at the time of termination of the agreement,
a triggering event, or certain other events
have occurred indicating a possible
triggering event or competing transaction.

then the stock option agreement continues until
eighteen (18) months after termination of the
agreement.

In the event of any change in First Bank common stock
by reason of stock dividends, split-ups, recapitalizations,
combinations, conversions, divisions, exchanges of shares or the
like, the number and kind of shares issuable under the option are
adjusted appropriately.
<PAGE 59>
INFORMATION WITH RESPECT TO PSB

For additional information with respect to PSB,
including a description of the business of PSB, and the
consolidated financial statements of PSB and the notes thereto
and managements' discussion of PSB's financial condition and
results of operations, see attached Annex H.

DESCRIPTION OF PSB CAPITAL SECURITIES

The authorized capital stock of PSB consists of
10,000,000 shares of common stock, no par value, and 5,000,000
shares of preferred stock, no par value. As of the PSB record
date, there were [3,101,140] shares of PSB common stock issued
and outstanding, no shares of preferred stock issued and
outstanding and there are no shares held by PSB as treasury
stock. There are no other shares of capital stock of PSB, issued
or outstanding. PSB has 92,242 options outstanding under PSB's
stock option plan. There are no other options, warrants, or
rights issued, or outstanding, except as may be required under
the agreement.

Common Stock

The holders of PSB common stock are entitled to share
ratably in dividends when and if declared by the PSB Board of
Directors from funds legally available therefor. Declaration and
payment of cash dividends by PSB depends upon dividend payments
by Pennsylvania Savings Bank, which is PSB's primary source of
revenue and cash flow. PSB is a legal entity separate and
distinct from its subsidiaries. Accordingly, the right of PSB,
and consequently the right of creditors and shareholders of PSB,
to participate in any distribution of the assets or earnings of
any subsidiary is necessarily subject to the prior claims of
creditors of the subsidiary, except to the extent that claims of
PSB in its capacity as a creditor may be recognized.

Presently, the holders of shares of PSB common stock
possess exclusive voting rights in PSB. Each holder of shares of
PSB common stock is entitled to one vote for each share held on
matters upon which shareholders have the right to vote. PSB
shareholders are not entitled to cumulate votes in the election
of directors.

The PSB Board of Directors is divided into three
classes, each serving three-year terms, so that approximately
one-third of the directors of PSB are elected at each annual
meeting of shareholders of PSB. Classification of the PSB Board
of Directors has the effect of decreasing the number of directors
that could be elected in a single year by any person who seeks to
elect its designees to a majority of the seats on the PSB Board
of Directors and thereby could impede a change in control of PSB.
<PAGE 60>
The holders of PSB common stock have no preemptive
rights to acquire any additional shares of PSB. In addition, PSB
common stock is not subject to redemption.

In the event of liquidation, dissolution, or winding-up
of PSB, whether voluntary or involuntary, holders of PSB common
stock will be entitled to share ratably in any of its assets or
funds that are available for distribution to its shareholders
after the satisfaction of its liabilities (or after adequate
provision is made therefor).

Special Charter and Pennsylvania Corporate Law Provisions

PSB's Articles of Incorporation and Restated Bylaws,
which will be applicable to shareholders of PSB and First Bank in
the event the merger is completed, contain provisions which may
have the effect of deterring or discouraging, among other things,
a non-negotiated tender or exchange offer for PSB stock, a proxy
contest for control of PSB, the assumption of control of PSB by a
holder of a large block of PSB stock and the removal of PSB's
management. These provisions:

(1) divide the PSB Board of Directors into three
classes serving staggered three-year terms;

(2) require a supermajority vote of directors (80%
until January 1, 2006 and 66-2/3% thereafter) to increase the
size of any class of the Board of Directors;

(3) require a supermajority vote of directors and
shareholders (80% of directors and 80% of shareholders until
January 1, 2006 and 66-2/3% of directors and a majority of
shareholders thereafter) to approve certain mergers, asset sales
and similar transactions if the transaction is not approved, in
advance, unanimously by the PSB Board of Directors;

(4) prohibit shareholders' actions without a meeting;

(5) require any person or group who or which becomes
the beneficial owner of 25% or more of the outstanding shares of
PSB common stock to offer to purchase all other outstanding
shares of such common stock for cash at a price equal to the
highest price paid by that person or group for any such shares of
common stock or, if the Board of Directors so elects, at fair
market value determined by an investment banking firm selected by
the Board of Directors;

(6) require a supermajority vote of shareholders and
directors to approve the repeal or amendment of certain
provisions of the Articles of Incorporation and Restated Bylaws;

(7) eliminate cumulative voting in elections of
directors;
<PAGE 61>
(8) require a supermajority vote of directors to take
certain actions which might result in a change in control of PSB;
and

(9) require advance notice of nominations for the
election of directors and the presentation of shareholder
proposals at meetings of shareholders.

The Pennsylvania Business Corporation Law also contains
certain provisions applicable to PSB after completion of the
merger which may have the effect of impeding a change in control
of PSB. These provisions, among other things:

(1) prohibit for five years, subject to certain
exceptions, a "business combination" (which includes a merger or
consolidation of the corporation or a sale, lease, or exchange of
assets) with a shareholder or group of shareholders beneficially
owning 20% or more of a public corporation's voting power;

(2) require disgorgement by any person or group who or
which has acquired or publicly disclosed an intent to acquire 20%
or more of a public corporation's voting power of any profit
realized from the sale of any shares acquired within specified
time periods of such acquisition or disclosure if the shares are
sold within eighteen months thereafter; and

(3) generally prohibit a person or group who or which
exceeds certain stock ownership thresholds (20%, 33-1/3% and 50%)
for the first time from voting the "control shares" (i.e., the
shares owned in excess of the applicable threshold) unless voting
rights are restored by a vote of disinterested shareholders.

In 1990, Pennsylvania adopted legislation further
amending the Pennsylvania Business Corporation Law. This
legislation generally:

(1) expands the factors and groups (including
shareholders) which the PSB Board of Directors can consider in
determining whether a certain action is in the best interests of
the corporation;

(2) provides that the PSB Board of Directors need not
consider the interests of any particular group as dominant or
controlling;

(3) provides that PSB's directors, in order to satisfy
the presumption that they have acted in the best interests of the
corporation, need not satisfy any greater obligation or higher
burden of proof with respect to actions relating to an
acquisition or potential acquisition of control;

(4) provides that actions relating to acquisitions of
control that are approved by a majority of "disinterested
directors" are presumed to satisfy the directors' standard,
unless it is proven by clear and convincing evidence that the
<PAGE 62> directors did not assent to such action in good faith
after reasonable investigation; and

(5) provides that the fiduciary duty of PSB's directors
is solely to the corporation and may be enforced by the
corporation or by a shareholder in a derivative action, but not
by a shareholder directly.

The 1990 amendments to the Pennsylvania Business
Corporation Law explicitly provide that the fiduciary duty of
directors shall not be deemed to require directors:

(1) to redeem any rights under, or to modify or render
inapplicable, any shareholder rights plan;

(2) to render inapplicable, or make determinations
under, provisions of the Pennsylvania Business Corporation Law
relating to control transactions, business combinations, control-
share acquisitions, or disgorgement by certain controlling
shareholders following attempts to acquire control; or

(3) to act as the board of directors, a committee of
the board or an individual director solely because of the effect
such action might have on an acquisition or potential or proposed
acquisition of control of the corporation or the consideration
that might be offered or paid to shareholders in such an
acquisition.

One of the effects of the 1990 fiduciary duty statutory
provisions may be to make it more difficult for a shareholder to
successfully challenge the actions of the PSB Board of Directors
in a potential change in control context. Pennsylvania case law
appears to provide that the fiduciary duty standard under the
1990 amendments to the Pennsylvania Business Corporation Law
grants directors the statutory authority to reject or refuse to
consider any potential or proposed acquisition of the
corporation.
<PAGE 63>
COMPARISON OF SHAREHOLDER RIGHTS

At the effective date, shareholders of First Bank
automatically will become shareholders of PSB, and their rights
as shareholders will thereafter be determined by the Pennsylvania
Business Corporation Law and by PSB's articles of incorporation
and bylaws. The following is a summary of material differences
between the rights of holders of First Bank common stock prior to
the merger, and the rights of shareholders following completion
of the merger under PSB's articles of incorporation and bylaws.
These differences arise from various provisions of the articles
of incorporation and bylaws of PSB, the articles of incorporation
and bylaws of First Bank, and the Pennsylvania Banking Code and
Business Corporation Law. The following summary assures the
adoption of the amendments to PSB's articles of incorporation
being voted on at the PSB annual meeting, which is a condition to
the merger.

This summary does not purport to be a complete
statement of the rights of PSB or First Bank shareholders under
applicable Pennsylvania law and their respective articles of
incorporation or bylaws, a comprehensive comparison among the
rights of shareholders under applicable Pennsylvania law, or a
complete description of the specific provisions referred to
herein. This summary is not meant to be relied upon as an
exhaustive list or a detailed description of the provisions
discussed and is qualified in its entirety by reference to the
Pennsylvania Business Corporation Law and the governing corporate
instruments of PSB and First Bank. Copies of such governing
corporate instruments of First Bank and PSB are available,
without charge, to any person, including any beneficial owner to
whom this joint proxy statement/prospectus is delivered, by
following the instructions listed under "WHERE YOU CAN FIND MORE
INFORMATION."

Directors

Nomination

Shareholders of both PSB and First Bank are required to
submit to their respective companies, in writing and in advance,
any nomination of a candidate for election as a director.

PSB's bylaws provide that such nominations generally
must be submitted not less than 90 days prior to a scheduled
meeting for the election of directors (except that if less than
21 days notice is given to shareholders, such nomination should
be mailed or delivered to the President of PSB not later than the
close of business on the seventh day after the notice of the
meetings was mailed).

First Bank's Bylaws provide that its shareholders must
submit written nominations not less than 5 days prior to any
meeting of shareholders. <PAGE 64>

Election of Directors

PSB's Articles of Incorporation and Bylaws provide that
its Board of Directors shall be composed of not less than six (6)
nor more than twenty-five (25) directors, the number of which is
determined by resolution of the Board of Directors. The present
Board of Directors has six (6) members. The PSB Board of
Directors is divided into three classes, each serving three-year
terms, so that approximately one-third of the directors are
elected at each annual meeting of shareholders. See "PSB ANNUAL
MEETING - OTHER MATTERS." Classification of the Board of
Directors has the effect of decreasing the number of directors
that could be elected in a single year by any person who seeks to
elect its designees to a majority of the seats on the PSB Board
of Directors and thereby could impede a change in control of PSB.

First Bank's Articles of Incorporation provide that the
Board of Directors shall be composed of not less than five (5) or
more than 25 directors which number may be increased or decreased
by resolution of the Board of Directors, provided that the
increase in the number of directors is no more than two (2) in
any one year. Presently, the Board of Directors is composed of
six (6) members. All directors of First Bank are elected
annually.

Cumulative Voting

PSB's shareholders are not permitted to cumulate votes
in the election of directors. First Bank shareholders have
cumulative voting rights in the election of directors.

Limited Liability

As permitted by the Pennsylvania Business Corporation
Law, both PSB's and First Bank's bylaws provide that their
directors are not personally liable to PSB or First Bank, their
shareholders or others for any action taken or any failure to
take any action unless the director breached or failed to perform
the duties of his or her office as set forth under Pennsylvania
law and such breach or failure constitutes self-dealing, willful
misconduct or recklessness; provided, however, that there is no
such elimination of liability arising under any criminal statute
or with respect to the payment of taxes pursuant to local, state
or federal law.

Indemnification

The bylaws of PSB and First Bank each provide for
indemnification of directors, officers, and agents for certain
litigation-related liabilities and expenses to the maximum extent
provided by Pennsylvania laws.

Directors, officers, employees, and agents of PSB and
First Bank are entitled to indemnification in both third party
actions and derivative actions unless there is a court finding
<PAGE 65> that the act or failure to act giving rise to the claim
for indemnification constitutes willful misconduct or
recklessness. There is no requirement of a case-by-case
determination that the applicable standard of conduct has been
met for a person to be entitled to indemnification.

Shareholder Meetings

Under the articles of incorporation and bylaws of PSB,
special meetings of shareholders may not be called unless
specifically authorized by law.

Special meetings of First Bank shareholders may be
called at any time by the Board of Directors, the Chairman of the
Board, the President, or by the shareholders entitled to cast at
least one-fifth of the vote which all shareholders are entitled
to cast at the particular meeting.

Inspection Rights

The Pennsylvania Business Corporation Law provides that
every shareholder of PSB or First Bank, upon written demand under
oath stating the purpose thereof, shall have the right, for any
proper purpose, to examine during usual business hours the share
register, books, or records of account and records of the
proceedings of the shareholders and directors, and make copies or
extracts therefrom. These statutory rights will continue without
change following completion of the merger.

Antitakeover Provisions

PSB is subject to various antitakeover provisions of
the Pennsylvania Business Corporation Law. See the section of
this joint proxy statement\prospectus entitled "DESCRIPTION OF
PSB CAPITAL SECURITIES -- SPECIAL CHARTER AND PENNSYLVANIA
CORPORATE LAW PROVISIONS."

No such provisions are applicable to First Bank.

Required Shareholder Vote

General

Each holder of PSB common stock and each holder of
First Bank common stock is entitled to one vote for each share
owned of record. For general corporate action of the
shareholders of either PSB or First Bank, the affirmative vote of
a majority of the votes cast by shareholders, present in person
or by proxy, at any meeting is required for approval.
(abstentions with respect to any matter are not considered votes
"cast" under Pennsylvania law).

After the merger, voting pertaining to general
corporate issues will remain the same.
<PAGE 66>
Fundamental Changes

The proposed amendment to PSB's articles of
incorporation require, until January 1, 2006, an 80% vote of
directors and the affirmative vote of the holders of 80% of the
outstanding shares of PSB common stock to approve a merger or
consolidation of PSB with or into another corporation or any
division involving the corporation, a share exchange involving an
exchange of shares of PSB capital stock, a sale, lease, exchange
or other transfer of all or substantially all of the assets of
PSB, a liquidation or dissolution involving PSB, or any
transaction similar to or having similar effects as any of the
foregoing. If any of the foregoing transactions occur prior to
January 1, 2006 in which the individuals serving on the Board of
Directors of PSB immediately prior to the transaction continue to
constitute at least a majority of the Board of Directors after
the transaction and shareholders of PSB immediately prior to the
transaction continue to own at least a majority of the
outstanding voting securities of the entity resulting from the
transaction, the shareholder voting requirements decreases from
80% of outstanding shares to 66-2/3% of outstanding shares. On
and after January 1, 2006, approval of these types of
transactions involving PSB requires an affirmative vote of 66-
2/3% of the directors and an affirmative vote of shareholders
entitled to cast a majority of the votes that all shareholders of
PSB are entitled to cast. The supermajority shareholder voting
requirements do not apply to any of these types of transactions
approved in advance unanimously by the Board of Directors.

The Pennsylvania Banking Code requires a 66-2/3%
affirmative vote of the shares issued and outstanding of
shareholders and the affirmative vote of a majority of the
directors to approve a merger, consolidation, liquidation or
dissolution of First Bank or a sale of all or substantially all
of the assets of First Bank if after the transaction the
resulting entity continues to be subject to the Code.

Amendment of Bylaws

The authority to amend or repeal PSB's Bylaws is vested
in PSB's Board of Directors, subject always to the power of the
shareholders of PSB to change such action by the affirmative vote
of shareholders holding at least 66-2/3% of PSB's total voting
power (except that any amendment to the indemnification and
limitation of director liability provisions set forth in the
Bylaws shall require the affirmative vote of 66 2/3% of the
entire Board of Directors or shareholders holding 80% of the
votes that all shareholders are entitled to cast).

First Bank's bylaws may be amended or repealed by vote
of a majority of the Board of Directors or by the shareholders'
affirmative vote of a majority of the shares issued and
outstanding.

Mandatory Tender Offer Provision <PAGE 67>

PSB's articles of incorporation include a provision
requiring any person or group who or which becomes the beneficial
owner of 25% or more of the outstanding shares of PSB common
stock to offer to purchase, within 30 days, all other outstanding
shares of such common stock for cash at a price equal to the
highest price paid by such person or group for any shares of PSB
common stock or if such person or group did not purchase any
shares of PSB common stock in the previous twelve months, then
the offer to purchase shall be at a price per share equal to the
fair market value on the date on which the person or group
becomes the beneficial owner of 25% or more of the outstanding
shares of PSB.

First Bank's articles of incorporation contain no
similar provisions.

Dissenters' Rights

Under the Pennsylvania Business Corporation Law, a
shareholder of a corporation is generally entitled to receive
payment of the fair value of such shareholder's shares if such
shareholder duly exercises its dissenters' rights with respect to
a plan of merger or consolidation, share exchange, asset
transfer, division, or conversion to which such corporation is a
party, unless the shares are (i) listed on a national securities
exchange or (ii) held of record by more than 2,000 shareholders.
The foregoing market exceptions do not apply, and dissenters'
rights generally are available in respect of, (i) shares that are
not converted solely into shares of the acquiring, surviving,
new, or other corporation or solely into such shares and money in
lieu of fractional shares, (ii) shares of any preferred or
special class unless the shareholders of the class are entitled
to vote on the plan and such class vote is required for the
adoption of the plan or to effectuate the transaction, and
(iii) shares which under the plan are treated differently from
shares of the same class or series and which are not entitled to
vote as a special class under Pennsylvania Business Corporation
Law, Section 1906(c). Under the Pennsylvania Business
Corporation Law, if a plan of merger or consolidation, share
exchange, asset transfer, division, or conversion is adopted by
the directors only, without any shareholder approvals required,
the shareholders have no statutory dissenters' rights in respect
of the plan other than optional dissenters' rights, if any.

Shareholders of First Bank will have dissenters' rights
in connection with the merger.

Dividends

Under the Pennsylvania Business Corporation Law, a
corporation may pay dividends unless, after giving effect
thereto, (i) the corporation would be unable to pay its debts as
they become due in the usual course of its business, or (ii) the
total assets of the corporation would be less than the sum of its
total liabilities plus the amount that would be needed, if the
<PAGE 68> corporation were to be dissolved at the time as of
which the distribution is measured, to satisfy the preferential
rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution.

First Bank's ability to pay dividends is governed by
the Pennsylvania Banking Code which provides that cash dividends
may be declared and paid only out of accumulated net earnings and
that, prior to the declaration of any dividend, if the retained
earnings of a bank is less than the amount of its capital, the
bank shall, until the surplus is equal to such amount, transfer
to surplus an amount which is at least ten percent of the net
earnings of the bank for the period since the end of the last
fiscal year or for any shorter period since the declaration of a
dividend. If the surplus of a bank is less than fifty percent of
the amount of the capital, no dividend may be declared or paid
without the prior approval of the Pennsylvania Department of
Banking until the surplus is equal to fifty percent of the bank's
capital. Additionally, the Department has the power to issue
orders prohibiting the payment of dividends where such payment is
deemed to be an unsafe or unsound banking practice.

Under the Federal Reserve Act, as amended, if losses
have at any time been sustained by a bank, equal to or exceeding
its undivided profits then on hand, no dividend shall be made;
and no dividends shall ever be made in an amount greater than the
bank's net profits. Cash dividends must be approved by the
Federal Reserve Board if the total of all cash dividends declared
by the bank in any calendar year, including the proposed cash
dividend, exceeds the total of the bank's net profits for that
year plus its retained net profits from the preceding two years
less any required transfers to surplus or a fund for the
retirement of preferred stock, if any. The Federal Reserve Board
has the authority under the Federal Reserve Act to prohibit the
payment of cash dividend by a bank when it determines such
payment is an "unsafe and unsound banking practice" under the
then existing circumstances.

These statutory provisions applicable to First Bank, as
described above, will continue to apply to PSB's subsidiary bank
following completion of the merger.

Preemptive Rights

Neither the holders of PSB common stock nor First Bank
common stock are entitled to preemptive rights.
<PAGE 69>
INFORMATION WITH RESPECT TO FIRST BANK

For additional information with respect to First Bank,
including a description of the business of First Bank, the
consolidated financial statements of First Bank and the notes
thereto and management's discussion of First Bank's financial
condition and results of operations, see attached Annex I.

MATTER NO. 2
ADJOURNMENT

In the event that there are not sufficient votes to
constitute a quorum or approve the adoption of the agreement at
the time of one or both of the meetings, the agreement could not
be approved unless the meetings were adjourned in order to permit
further solicitation of proxies. In order to allow proxies which
have been received by First Bank or PSB, as the case may be, at
the time of the applicable meeting to be voted for such
adjournment, if necessary, each of First Bank and PSB has
submitted the question of adjournment under such circumstances to
its shareholders as a separate matter for their consideration.

The Boards of Directors of each of First Bank and PSB
recommend that shareholders vote their proxies in favor of the
First Bank adjournment proposal or the PSB adjournment proposal,
as the case may be, so that their proxies may be used for such
purposes in the event it becomes necessary. Properly executed
proxies will be voted in favor of the First Bank adjournment
proposal or the PSB adjournment proposal, as the case may be,
unless otherwise indicated thereon. If it is necessary to
adjourn one or both of the meetings, no notice of the time and
place of the adjourned meeting is required to be given to
shareholders other than an announcement of such time and place at
the meeting.

MATTER NO. 3
ELECTION OF DIRECTORS

Nomination and Election of Directors - PSB

PSB's Bylaws provide that the PSB's business shall be
managed by a Board of Directors of not less than six and not more
than twenty-five persons. At least one-third of the directors
must be persons who are not officers or employees of PSB or of
any entity controlling, controlled by or under common control
with PSB and who are not beneficial owners of a controlling
interest in the voting stock of PSB or of any such entity. The
Board of Directors of PSB, as provided in the Bylaws, is divided
into three classes: Class I, Class II and Class III, with each
class being as nearly equal in number as possible. As of
March 31, 1999, the Board of Directors consisted of six members,
with two members in Class I, two members in Class II, and two
members in Class III.
<PAGE 70>
Two directors have been nominated for election as Class
I directors at the meeting. The two nominees receiving the
highest number of votes at the meeting will be elected to serve
as directors. There is no cumulative voting in the election of
PSB's directors. The term of office for those nominees elected
as Class I directors will expire in 2002.

The Bylaws permit nominations for election to the Board
of Directors to be made by the Board of Directors or by any
shareholder entitled to vote for the election of directors.
Nominations for directors made by shareholders must be made by
notice in writing, delivered by First Class U.S. Mail, postage
prepaid, to the Secretary of PSB no less than ninety (90) days
prior to the meeting (unless less than 21 days prior notice of
the meeting is given, in which case the nomination must be
delivered within seven (7) days of the mailing of the meeting
notice). The notification should contain the following
information: (1) the name, age and business and residence
addresses of each proposed nominee; (2) the principal occupation
of each proposed nominee; and (3) the number of shares of capital
stock of PSB owned by the nominee. Nominations not made in
accordance with the foregoing procedure may be disregarded by the
presiding officer at the meeting. Additionally, the nominee must
be qualified to serve as a director of PSB.

As of the date of this joint proxy statement/
prospectus, PSB has not received a notice of nomination for
election as a director from any shareholder.

Any shareholder who wishes to withhold authority from
the proxyholders to vote for the election of directors or to
withhold authority to vote for any individual nominee may do so
by marking his or her proxy to that effect in accordance with the
instructions on the proxy card. No proxy may be voted for a
greater number of persons than the number of members of the Class
standing for election. If any nominee should become unable to
serve, the persons named in the proxy may vote for another
nominee. PSB's management presently has no reason to believe
that any nominee listed below will be unable to serve as a
director, if elected.

Under the Bylaws, a vacancy in the Board of Directors
is filled by the remaining members of the Board. If the vacancy
is other than from an increase in the size of the Board, the
director elected to fill the vacancy will become a member of the
same class of directors in which the vacancy existed. By
comparison, persons elected by the Board of Directors in
connection with an increase in the size of the Board would be
designated by the Board of Directors as belonging to either
Class I, Class II, or Class III. In either case, the Bylaws
further provide that each director so elected remains a member of
the Board of Directors until his or her successor is elected by
the shareholders at either the next annual meeting of
shareholders or at any special meeting duly called for that
purpose. <PAGE 71>

The following table sets forth information, as of the
record date, with respect to the nominees for director of PSB and
all continuing directors of PSB.

Nominees for Class I Director (Term expiring 2002)

Year
First
Elected Principal Occupation
Name/Position Age Director(1) During Past Five Years

Class I directors:

Anthony DiSandro, 49 1997 President and Chief
Director, President Operating Officer of
and Chief Operating PSB Bancorp, Inc.
Officer

Rosanne Pauciello, 53 1997 Corporate Secretary of
Director and PSB Bancorp, Inc;
Corporate Secretary Philadelphia School
District Home and
School Visitor.

Continuing directors

Class II directors (Term expiring 2000):

James W. Eastwood, 51 1997 President of Granary
Director Associates, Inc.
(hospital development
and consulting firm)

Jane Scaccetti Fumo, 42 1997 Certified Public
Director(2) Accountant, Drucker &
Scaccetti, P.C.

Class III directors (Term expiring 2001):

Vincent J. Fumo, 54 1997 Chairman and Chief
Chairman and Chief Executive Officer of
Executive Officer(2) PSB Bancorp, Inc. and
Pennsylvania State
Senator.

Thomas J. Finley, 76 1997 Retired.
Jr., Director

_____________________________

(1) Period indicated excludes service as a trustee of
Pennsylvania Savings Bank; each director was selected as an
initial director of the PSB Bancorp, Inc. in connection with
its formation on October 3, 1997.
<PAGE 72>
(2) Vincent J. Fumo and Jane Scaccetti Fumo are husband and
wife.

Executive Officers Who Are Not Directors

Principal Occupation
Name/Position Age During Past Five Years

Gary Polimeno, Vice 44 Vice President & Treasurer
President and Treasurer of PSB Bancorp, Inc..

Stock Ownership of Management

The following table sets forth certain information as
to common stock ownership of directors and executive officers of
PSB as of the record date for the PSB annual meeting.

Amount and Percent of
Nature of Outstanding
Beneficial Shares of
Name of Beneficial Owner Ownership common stock

Anthony DiSandro 372,784 (1) 12.02%

James W. Eastwood 30,949 *

Thomas J. Finley, Jr. 18,515 *

Jane Scaccetti Fumo 289,276 (2) 9.32%

Vincent J. Fumo 526,890 (2) 16.99%

Rosanne Pauciello 10,731 *

All executive officers and
directors as a group (6 persons) 1,011,531 32.62%
______________

* Ownership percentage is less than 1%.

(1) Amount includes 50,511 shares held indirectly through the
401(k) Plan, 25,724 shares held through the Profit Sharing
Plan, 26,135 shares held by the 1995 Management Recognition
Plan that have been awarded to Mr. DiSandro, 15,727 shares
held by Mr. DiSandro directly and 17,073 shares subject to
immediately exercisable options. Also includes 237,614
shares held by the ESOP of which Mr. DiSandro is a trustee.

(2) Vincent Fumo and Jane Scaccetti Fumo are husband and wife.
Amount includes 46,303 shares held through the 401(k) Plan,
20,265 shares held through the Profit Sharing Plan, 109,668
held in IRA accounts, 26,138 shares held by the 1995 MRP
that have been awarded to Mr. Fumo, 6,014 shares held by
Jane Scaccetti Fumo, 772 shares held on behalf of the
daughter of Vincent and Jane Scaccetti Fumo and 17,073
<PAGE 73> shares subject to immediately exercisable options.
Also includes 237,614 shares held by the ESOP of which
Mr. Fumo is a trustee.

Meetings and Committees of the Board of Directors/Trustees

PSB as the holding company for Pennsylvania Savings
Bank, does not appoint standing committees; however, the business
of Pennsylvania Savings Bank is conducted at regular and special
meetings of the full Board of Trustees of Pennsylvania Savings
Bank and its standing committees in concert with the Board of
Directors of PSB. The standing committees of Pennsylvania
Savings Bank consist of the Executive, Asset/Liability
Management, Budget, Compensation, Loan, Investment, Strategic
Planning, Audit and Nominating Committees. During 1998, the
Board of Directors met at twelve regular meetings. No member of
the Board thereof attended less than 75% of said meetings.

Director/Trustee Compensation

For the year ended December 31, 1998, directors of PSB
were paid $700 per Board meeting attended and the trustees of
Pennsylvania Savings Bank were paid $700 per Board meeting
attended. In addition, trustees were paid $350 per committee
meeting attended. Directors of the savings bank's subsidiaries
and affiliates PSA Financial Corp., PSA Service Corp., PSA
Consumer Discount Company, Transnational Mortgage Corp. were paid
$250, $150, $150, and $250, respectively, per board meeting
attended.

Executive Compensation.

The following table sets forth, for the years ended
December 31, 1998, 1997 and 1996 certain information as to the
total remuneration paid by the savings bank to executive officers
who received salary and bonuses in excess of $100,000 during such
fiscal year.

<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Other All
Annual Security Other
Fiscal Salary Compensation Restricted Underlying Compensation
Name and Principal Position Year (1) Bonuses (2) Stock(3) Option (4) (5)
<S> <C> <C> <C> <C> <C> <C> <C>
Vincent J. Fumo 1998 $147,788 $150,000 $67,876 0 0 $22,750
Chairman and Chief Executive Officer 1997 $139,987 $117,500 $60,671 0 0 $23,800
1996 $130,478 $117,500 $19,174 $120,713 42,683 $40,758

Anthony DiSandro 1998 $165,115 $150,000 $61,104 0 0 $27,650
President and Chief Operating Officer 1997 $147,456 $125,000 $56,540 0 0 $27,650
1996 $145,782 $125,000 $18,263 $120,701 42,683 $47,250

Gary Polimeno 1998 $102,942 $35,000 $5,671 0 0 $8,400
President and Treasurer 1997 $87,282 $35,000 $2,966 0 0 $8,400
1996 $87,282 $45,000 $0 $12,700 6,876 $17,660
</TABLE>
____________
<PAGE 74>
(1) Includes the portion of salary deferred by the executive
pursuant to the 401(k) Plan.

(2) Consists of lease payments paid by the savings bank with
respect to vehicles provided by the savings bank for the
executive's use and compensation income related to
restricted stock awards. For the year ended December 31,
1998, Mr. Fumo, Mr. DiSandro and Mr. Polimeno recognized
compensation expense of $47,209, $47,209 and $5,671 for
those shares which were vested as of December 31, 1998.

(3) Mr. Fumo, Mr. DiSandro and Mr. Polimeno hold 26,138 shares,
26,135 shares, and 2,750 shares of restricted stock,
respectively, which, as of December 31, 1998, had a fair
market value of $199,302, $199,279 and $20,969,
respectively. Of such shares, 13,754, 13,754 and 2,750
shares of each of Messrs. Fumo, DiSandro and Polimeno,
respectively, were awarded at April 30, 1996 and vest at a
rate of 20% per year over a five (5) year period and 12,383
and 12,381 shares of Messrs. Fumo and DiSandro,
respectively, were granted on December 31, 1996 and vest at
a rate of 20% per year over a five (5) year period.

(4) Includes trustees fees of $14,350 and $19,250 paid to
Mr. Fumo and Mr. DiSandro, respectively, for the year ended
December 31, 1998, and directors fees paid by the savings
bank's subsidiaries to Mr. Fumo, Mr. DiSandro and
Mr. Polimeno of $8,400, $8,400 and $8,400, respectively, for
the year ended December 31, 1998. Includes trustees fees of
$15,400 and $19,250 paid to Mr. Fumo and Mr. DiSandro,
respectively, for the year ended December 31, 1997, and
directors fees paid by the savings bank's subsidiaries to
Mr. Fumo, Mr. DiSandro and Mr. Polimeno of $8,400, $8,400
and $8,400, respectively, for the year ended December 31,
1997. Includes trustees fees of $12,200 and $17,100 paid to
Mr. Fumo and Mr. DiSandro, respectively, for the year ended
December 31, 1996, and directors fees paid by the Bank's
subsidiaries to Mr. Fumo, Mr. DiSandro and Mr. Polimeno of
$11,200, $11,200 and $8,400, respectively, for the year
ended December 31, 1996.

(5) Includes contributions of $17,358, $18,950 and $9,260 made
by the savings bank to the accounts of Mr. Fumo,
Mr. DiSandro and Mr. Polimeno, respectively, pursuant to the
Profit Sharing Plan for the year ended December 31, 1996.
During the year ended December 31, 1996, the savings bank
made no 401(k) contributions to the accounts of Mr. Fumo,
Mr. DiSandro, and Mr. Polimeno, respectively. For the year
ended December 31, 1998 and 1997, no contributions were made
to either the Profit Sharing or the 401k Plan.

Employment Agreements. The savings bank has entered
into employment agreements (the "Employment Agreements") with
Vincent J. Fumo, Chairman and Chief Executive Officer and Anthony
DiSandro, President and Chief Operating Officer. Under the terms
<PAGE 75> of his Employment Agreement, Mr. Fumo serves as
Chairman and Chief Executive Officer of the PSB and the savings
bank at a base salary of $145,000. Under the terms of his
Employment Agreement, Mr. DiSandro serves as President and Chief
Operating Officer of the PSB and the savings bank at a base
salary of $162,000. Each Employment Agreement provides for an
initial term of three years, which will thereafter be
automatically renewed for an additional three years on each
anniversary date unless terminated pursuant to its terms by the
respective parties.

Each Employment Agreement provides for the payment of
certain severance benefits in the event of the executive's
resignation for specified reasons or as a result of his
termination by the PSB or the savings bank without "Cause" (as
defined in each Employment Agreement). The executive would be
entitled to severance payments if: (1) he terminates employment
during the term of such agreement following any breach of the
Employment Agreement by the savings bank or PSB, loss of title,
office or significant authority, reduction in annual compensation
or benefits, or relocation of the executive's principal place of
employment by more than 30 miles, or (2) if the savings bank or
the PSB terminates his employment, other than for Cause.

If either executive becomes entitled to receive
severance payments under his Employment Agreement, he would
receive, over a period of 36 months, a cash payment equal to
three times his average annual compensation during the five-year
period preceding termination of employment. Payments would be
made in equal monthly installments. In addition to the severance
payments, the executive would be entitled to continue to receive
life, medical, dental and other insurance coverages (or a dollar
amount equal to the cost of obtaining each such coverage) for a
period of up to 36 months from the date of termination. Payments
under the Employment Agreements are limited, however, to the
extent (i) that they will constitute excess parachute payments
under Section 280G of the Internal Revenue Code of 1986, as
amended ("Code"), or (ii) not permitted under the Federal Deposit
Insurance Act.

Compensation of Officers and Directors Through Benefit Plans

Defined Benefit Retirement Plan. The savings bank has
maintained a noncontributory defined benefit retirement plan
("Retirement Plan"). Under the terms of the Retirement Plan, all
employees age 21 or older who have worked at the savings bank for
a period of one year and have been credited with 1,000 or more
hours of employment with the savings bank during the year are
eligible to accrue benefits under the Retirement Plan. The
savings bank would annually contribute an amount to the
Retirement Plan necessary to satisfy the actuarially determined
minimum funding requirements in accordance with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). At
December 31, 1998, the Retirement Plan fully met its funding
requirements under Section 412 of the Code. Employee <PAGE 76>
contributions are not permitted under the Retirement Plan. The
Retirement Plan was "frozen" as of September 30, 1994 and
benefits no longer accrue thereunder. Since the Retirement Plan
is fully funded, the savings bank will generally not be required
to make any additional contributions unless asset depreciation
from investment occurs. Participants will continue to vest in
accordance with the provisions of the Retirement Plan. No new
employees will be eligible for participation. The Plan, however,
remains subject to all other requirements of the Code.

Benefits under the Retirement Plan begin to vest after
three years in accordance with the following schedule:

Years of Service Percentage Vested

3 years or less 0%
After 3 years 20%
After 4 years 40%
After 5 years 60%
After 6 years 80%
After 7 years 100%

The following table indicates the annual retirement
benefit that would be payable under the Retirement Plan upon
retirement at age 65 in calendar year 1998, expressed in the form
of a single life annuity for the final average salary and benefit
service classifications specified below.

Years of Service and Benefits Payable at Retirement

Final
Average
Compensation 15 20 25 30 35 40

$ 50,000 $13,804 $18,405 $23,006 $27,608 $27,608 $27,608
$ 75,000 $21,950 $29,267 $36,583 $43,900 $43,900 $43,900
$100,000 $30,096 $40,128 $50,160 $60,192 $60,192 $60,192
$125,000 $38,242 $50,990 $63,827 $65,827 $65,827 $65,827
$150,000* $46,388 $61,851 $65,827 $65,827 $65,827 $65,827

______________

* Represents the limit on plan compensation imposed by the
Code effective January 1, 1994.

As of December 31, 1998, Mr. Fumo, Mr. DiSandro, and
Mr. Polimeno had 19, 18 and 20 years of credited service (i.e.
benefit service), respectively.

Pennsylvania Savings Bank Cash or Deferred Profit
Sharing Plan (401(k)). The savings bank also maintains the
Pennsylvania Savings Cash or Deferred Profit Sharing Plan, which
is a qualified, tax-exempt profit sharing plan with a cash-or-
deferred feature under Section 401(k) of the Code
(the"401(k) Plan"). All employees who have attained age 21 and
<PAGE 77> have completed two years of employment during which
they worked at least 1,000 hours are eligible to participate.
Assets of the 401(k) Plan are managed by the 401(k) Plan's
trustees. Mr. Fumo and Mr. DiSandro presently serve as trustees
to the 401(k) Plan.

Under the 401(k) Plan, participants are permitted to
make pre-tax salary reduction contributions to the plan equal to
a percentage of up to 15% of compensation. Additional after-tax
contributions of up to 10% of compensation may be made to the
Plan. For these purposes, "compensation" includes total
compensation (including salary reduction contributions made under
the 401(k) Plan sponsored by the savings bank), but does not
include compensation in excess of the Code Section 401(a)(17)
limits (presently $160,000). The savings bank may also annually
make a discretionary profit sharing contribution to the
401(k) Plan. A participant must complete 1,000 hours of service
during the plan year and be employed on the last day of the plan
year to receive an allocation of the profit sharing contribution.
For the 1998, 1997 and 1996 plan years, the savings bank made
profit sharing contributions of $0, $0 and $45,568.

All employee contributions and profit sharing
contributions to the 401(k) plan and earnings thereon are fully
and immediately vested.

Plan benefits will be paid to each participant as a
joint and survivor or single life annuity. In addition, a
participant may, under certain circumstances, elect a lump sum or
period certain payment upon normal retirement, death or
disability, or after termination of employment.

Pennsylvania Savings Bank Profit Sharing Plan. The
savings bank also maintains the Pennsylvania Savings Bank Profit
Sharing Plan, which is a qualified plan pursuant to
Section 401(a) of the Code. Employees who have completed at
least two years of service during which they have worked 1,000
hours or more and who have attained age 21 are eligible to
participate in the Profit Sharing Plan. Pursuant to the Profit
Sharing Plan the savings bank, in its discretion, makes
contributions to the accounts of eligible employees. Employee
contributions are neither permitted nor required. Benefits under
the Profit Sharing Plan become 100% vested upon entry to the
Plan.

Employee Stock Ownership Plan. In 1995, the savings
bank ESOP acquired 42,780 shares of the savings bank common stock
with the proceeds of a $427,800 loan from an unaffiliated
financial institution ("1995 Loan"). Due to the conversion and
reorganization, the savings bank common stock held by the ESOP
was converted into 110,046 shares of PSB Bancorp, Inc. common
stock.

In connection with the conversion and reorganization,
the ESOP borrowed $1,288,540 from PSB to purchase an additional
<PAGE 78> 128,854 shares of PSB Bancorp, Inc. common stock. PSB
will lend sufficient funds to the ESOP to enable the ESOP to
repay the 1995 Loan which had an outstanding principal balance of
$234,000 at December 31, 1998. The loan by PSB to the ESOP will
be repaid principally from the savings bank's contributions to
the ESOP and dividends payable on common stock held by the ESOP
over the anticipated 10-year term of the loan. The interest rate
for the ESOP loan is 8.5%.

Shares purchased by the ESOP with the proceeds of the
loan (including shares originally acquired by the ESOP with the
proceeds of the 1995 Loan) will be held in a suspense account and
released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from
the suspense account will be allocated among participants on the
basis of each participant's proportional share of total
compensation. Forfeitures will be reallocated among the
remaining plan participants.

In any plan year, the savings bank may make additional
discretionary contributions to the ESOP for the benefit of plan
participants in either cash or shares of common stock, which may
be acquired through the purchase of outstanding shares in the
market or from individual shareholders or which constitute
authorized but unissued shares or shares held in treasury by PSB.
The timing, amount, and manner of such discretionary
contributions will be affected by several factors, including
applicable regulatory policies, the requirements of applicable
laws and regulations, and market conditions.

Employees of the savings bank who have completed 1,000
hours of service during 12 consecutive months and who have
attained age 21 are eligible to participate in the ESOP.

Benefits under the ESOP generally become 100% vested
after the third year of service or upon normal retirement (as
defined in the ESOP), disability or death of the participant. If
a participant terminates employment for any other reason prior to
fully vesting, his nonvested account balance will be forfeited.
Forfeitures will be reallocated among remaining participating
employees in the same proportion as contributions. Benefits may
be payable upon death, retirement, early retirement, disability
or separation from service. The savings bank's contribution to
the ESOP will not be fixed, so benefits payable under the ESOP
cannot be estimated. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Impact of New
Accounting Standards."

A committee consisting of the savings bank's Chairman
and Chief Executive Officer, President and Vice President and
Treasurer, administers the ESOP (the "ESOP Committee").
Messrs. Fumo and DiSandro serve as trustees of the ESOP. The
ESOP Committee may instruct the trustees regarding investment of
funds contributed to the ESOP. The ESOP trustees must vote all
allocated shares held in the suspense account in a manner
<PAGE 79> calculated to most accurately reflect the instructions
the ESOP trustees have received from participants regarding the
allocated stock, subject to and in accordance with the fiduciary
duties under ERISA owed by the ESOP trustees to the ESOP
participants.

Pursuant to SOP 93-6, compensation expense for a
leveraged ESOP is recorded at the fair market value of the ESOP
shares when committed to be released to participants' accounts.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Comparison of Operating Results for
the Years Ended December 31, 1998 and 1997."

The ESOP is subject to the requirements of ERISA and
the regulations of the IRS and the Department of Labor issued
thereunder. The savings bank has received a favorable
determination letter from the IRS regarding the tax-qualified
status of the ESOP.

1995 Stock Option and Incentive Plan. In connection
with the MHC Reorganization, the savings bank adopted the 1995
Stock Option Plan. Options for all shares reserved for issuance
under the 1995 Stock Option Plan have been granted to officers
and employees of the savings bank. In connection with the
Conversion and Reorganization, the 1995 Stock Option Plan was
assumed by the PSB and appropriate adjustments were made to the
exercise price and the number of shares underlying each option to
reflect the exchange ratio.

There was no exercise of options by any of
Messrs. Fumo, DiSandro and Polimeno under the 1995 Stock Option
Plan at and for the fiscal year ended December 31, 1998.

1995 Management Development and Recognition Plans. In
connection with the reorganization, the savings bank adopted
Management Development and Recognition Plans (collectively, the
"1995 MRPs") for officers, employees and nonemployee directors of
the savings bank. All shares under the 1995 MRP have been
awarded. For purposes of the conversion and reorganization, the
shares awarded to the 1995 MRP participants were treated in the
same manner as shares held by other minority shareholders.
<PAGE 80>
Nomination and Election of Directors - First Bank

The Bylaws of First Bank provide that the Board of
Directors is to consist of not less than five (5) and not more
than twenty-five (25) directors, each holding office for one (1)
year terms and until their respective successor shall have been
elected and qualified. The Bylaws further provide that the exact
number of directors to be elected will be determined by the Board
prior to each annual meeting of shareholders. The Board has
fixed the number of persons to serve on the Board at five (5) and
recommends the election of the five (5) nominees hereinafter
named.

All nominees for election to the Board are currently
serving on the Board and were elected at the Annual Meeting of
Shareholders held on June 16, 1998. Each director has consented
to being named as a nominee for director of First Bank and has
agreed to serve if elected. If any of the nominees become unable
and unwilling to serve, the Board will nominate a substitute
nominee, the proxy holders will vote in accordance with their
best judgment. First Bank anticipates that all nominees will be
willing and able to serve.

Candidates for director are nominated by the Board.
Shareholders are also entitled to nominate candidates for the
Board by providing written notice to the Secretary of First Bank
not later than the close of business on the fifth business day
immediately preceding the date of the Annual Meeting.

The following table sets forth information for each of
the nominees to the Board as of June 15, 1999, including name,
age, position and offices currently held with First Bank, and
business experience during the past five (5) years.

Alvin B. Heller, age 57, has been a Director of the
Bank since January 1995. Mr. Heller is currently employed as a
corporate consultant to mid-cap corporations, and as the owner
and/or manager of real estate located throughout the United
States. Prior thereto, Mr. Heller had a twenty-five year career
as a pharmacist with Rite Aid Corporation.

Carl A. Lingle, age 53, has been a Director, President
and Chief Executive Officer of the Bank since January 1995. From
September 1992 until January 1995, Mr. Lingle served as Executive
Vice President of TEB Associates, Inc., a financial consulting
firm located in Voorhees, New Jersey. Prior thereto, Mr. Lingle
served from 1985 to 1992 as Executive Vice President, Senior
Lending Officer and Branch Administrator of First Peoples Bank of
New Jersey, and from 1981 to 1985 as Senior Vice President of
First Peoples Bank of New Jersey.

Thomas J. Hessert, Jr., age 47, has been a Director of
the Bank since January 1995. Mr. Hessert has been an officer of
Trace International Holdings since 1998. Mr. Hessert was the
<PAGE 81> President and CEO of the Classic Auto Group from 1978
to 1998. Classic Auto Group is the largest independent new car
dealer in the southern New Jersey area.

Ronald B. Portnoy, age 41, has been a Director of the
Bank since January 1995. Mr. Portnoy currently has his own
venture capital firm. From 1993 to 1997 he was Executive Vice
President and Treasurer of Mercury Paging and Communication, Inc.
located in Syosset, New York. From 1991 to the 1993 he was
President of Wren Electronics, Inc., an exporter of consumer
electronics to South America. From 1983 to 1991 Mr. Portnoy
served as President of A.P. Distributors, a wholesale distributor
of consumer electronics located in Long Island, New York.

Hal J. Shaffer, age 40, has been Chairman of the Board
of the Bank and Chairman of the Bank's Executive Committee since
January 1995. Mr. Shaffer is currently the managing partner of
Shaffer Bonfiglio Scerini & D'Elia, LLC, a financial service,
commercial litigation and real estate law firm located in Cherry
Hill, New Jersey, with offices in Mt. Laurel, New Jersey and
Philadelphia, Pennsylvania. Prior thereto, he was the New Jersey
resident partner of Dilworth, Paxson, Kalish & Kauffman.
Mr. Shaffer currently sits on the Board of Trustees of Rowan
University and the New Jersey Alliance for Action.

There is no family relationship between any Director,
Executive Officer, or person chosen to become a Director or
Executive Officer.

THE BOARD OF DIRECTORS RECOMMEND A VOTE "FOR" THE
ELECTION OF EACH OF THE ABOVE NOMINEES FOR ELECTION TO THE BOARD
OF DIRECTORS.

Security Ownership of Certain Beneficial Owners

The following table sets forth certain information
furnished to the Bank as of the record date of the First Bank
annual meeting, with respect to the beneficial ownership of
common stock by (i) each shareholder known to First Bank to be
the beneficial owner of five percent (5%) or more of the
outstanding shares of common stock; (ii) each director of First
Bank; (iii) the executive officer named in the Summary
Compensation Table on page _____ herein, and (iv) all current
executive officers and directors as a group. Except as indicated
in the footnotes to the table, the persons and entities named
have sole voting and investment power with respect to all shares
of common stock of which they are the respective beneficial
owners.

Name and Address(a) Amount and Nature Percent
of of of
Beneficial Owner(b) Beneficial Ownership Class(c)
<S> <C> <C> <PAGE 82>
5% Shareholders

Raymond Silverstein, Trustee(e) 506,362 23.46%
Alloy, Silverstein, Shapiro, Adams
900 North Kings Highway
Cherry Hill, NJ 08034

Directors

Alvin B. Heller 50,724 3.02%

Thomas J. Hessert, Jr.(f) 25,362 1.51%

Ronald H. Portney 0 0%

Hal J. Shaffer(g) 401,585 19.33%

Named Executive Officer

Carl A. Lingle(h) 485,274 23.36%

All Current Directors 962,945 38.88%
and Executive Officers
as A Group (5 persons)(i)
</TABLE>

(a) The address for each of the named directors and executive
officer is c/o First Bank of Philadelphia, 1424 Walnut
Street, Philadelphia, Pennsylvania 19102.

(b) A "beneficial owner" of a security includes any person or
group who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise has or
shares (i) voting power, which includes the power to vote,
or direct the voting of such security. Included in the
calculation of beneficial ownership is common stock which
such person or group has the right to acquire beneficial
ownership of within sixty (60) days, whether from the
exercise of options, warrants, rights, conversion privileges
or otherwise.

(c) Individual percentages have been rounded to the nearest
hundredth of a percent. Common stock which an individual
person or group has the right to acquire beneficial
ownership of within sixty (60) days pursuant to options,
warrants, conversion privileges or other rights, are deemed
to be outstanding for purposes of computing the percentage
of outstanding shares of common stock owned by such
individual or group, but are not deemed to be outstanding
for purposes of computing the percentage of common stock
Owned by any other individual.

(d) Includes 120,000 shares of common stock subject to
immediately exercisable stock options.

(e) Includes 481,000 shares of common stock subject to
immediately exercisable stock options. Also includes 25,362
shares of common stock held of record by Raymond <PAGE 83>
Silverstein, Trustee under Deed of Trust dated April 1,
1993.

(f) All 25,362 shares owned by Mr. Hessert are held jointly with
his wife.

(g) Includes 400,000 shares subject to immediately exercisable
stock options.

(h) Includes 400,000 shares subject to immediately exercisable
stock options and 85,274 shares held in the IRA of Mr.
Lingle. Does not include an aggregate of 9,638 shares held
of record by Mr. Lingle's adult children.

(i) Includes 800,000 shares subject to immediately exercisable
stock options.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934,
as amended, requires First Bank's executive officers, directors
and persons who own more than ten percent (10%) of common stock
(collectively, "Reporting Persons") to file initial reports of
beneficial ownership and changes in beneficial ownership of
common stock on Forms 3, 4 and 5 with the Federal Reserve Bank of
Philadelphia and The NASDAQ Stock Market. Reporting Persons are
required by regulation to furnish First Bank with copies of all
such forms that they file under Section 16(a).

Based solely on First Bank's review of the copies of
such forms that it has received, First Bank believes that all
Reporting Persons complied with all filing requirements
applicable to them with respect to transactions during 1998.

Committees of the Board of Directors and Attendance.
During 1998, the First Bank Board held 12 meetings. Effective
January 1, 1989, the Board adopted a resolution requiring all
members to attend no less than 75% of all Board meetings unless
the member is physically disabled or incapable of attending such
meetings. Failure to attend 75% of such meetings in any fiscal
year will be deemed cause for dismissal from the Board and will
be deemed an automatic resignation as a member of the Board. All
members of the board attended in excess of 75% of all board
meetings.

The First Bank Board has a standing Audit Committee,
Executive Committee, Loan Committee and Compliance Committee.
Information with respect to these committees of the Board is set
forth below.

Audit Committee. The Audit Committee possesses the
primary responsibility for reviewing First Bank's financial
statements, accounting procedures and methods employed in
connection with audit programs and related management policies.
It serves as the principal liaison between the Board and First
<PAGE 84> Bank's independent certified public accountants. The
Audit Committee presently consists of Alvin B. Heller, Hal J.
Shaffer and Ronald H. Portnoy. During 1998, there were
2 meetings of the Audit Committee.

Executive Committee. The Executive Committee guides
and directs management when it is inconvenient for the full Board
to assemble. The Executive Committee presently consists of
Carl A. Lingle, Hal J. Shaffer and Ronald H. Portnoy. The
Executive Committee met twice during 1998.

Loan Committee. The Loan Committee considers credit
applications in amounts in excess of $500,000 and reviews renewed
loans, problem loans, and matters relating to the lending
function. The Loan Committee presently consists of Carl A.
Lingle, Hal J. Shaffer and Thomas J. Hessert. The Loan Committee
met 6 times in 1997.

Compliance Committee. The Compliance Committee ensures
compliance with applicable banking regulations and regulatory
agreements to which the Bank is a party. The Compliance
Committee presently consists of Carl A. Lingle, Hal J. Shaffer
and Alvin B. Heller. The Compliance Committee met 12 times in
1998.

During 1998, no member of the First Bank Board received
any directors fees for any meeting of the Board attended or for
any committee meeting attended.

Executive Compensation

The following table sets forth certain summary
information concerning compensation paid by First Bank for
services rendered during the past three fiscal years by First
Bank's Executive Officers:

SUMMARY COMPENSATION TABLE

Annual Compensation
Name and Principal Other
Position Year Salary Bonus Compensation

Carl A. Lingle, 1998 $150,000 $ 8,654 $13,200
President and 1997 $125,000 $ 4,808 $12,850
Chief Executive Officer 1996 $125,000 $ 0 $12,120

James T. Schaeffer, 1998 $88,000 $40,000 $13,200
Senior Vice President 1997 $80,000 $25,000 $ 0
and Chief Financial 1996 $75,000 $20,000 $ 0
Officer

Charles A. Hunter, Jr., 1998 $84,000 $10,000 $ 4,800
Senior Vice President 1997 $80,000 $25,000 $ 0
and Chief Credit 1996 $75,000 $20,000 $ 0
Officer <PAGE 85>

Aggregated Stock Option Exercises in Last Fiscal Year and Fiscal
Year-End Stock Option Values

There were no stock options granted to or exercised by
Mr. Lingle during 1998, 1997, or 1996. During 1996,
Mr. Schaeffer and Mr. Hunter were granted 5,000 stock options
each at a price of $2.875 from the Bank's stock option plan.
There were no other stock option grants during 1998, 1997 or
1996. At the end of 1998, the dollar value of Mr. Lingle's stock
options was $825,000 and the value of Mr. Schaeffer's and
Mr. Hunter's stock options was $8,438 (in each case, calculated
based on the difference between the exercise price of such option
and the closing price of First Bank common stock on December 31,
1999, multiplied by the number of shares subject to such
options).

Transactions with Management

During 1998, First Bank has had no banking transactions
other than those banking transactions in the ordinary course of
its business with certain of its directors, nominees for
directors, executive officers, principal shareholders, and their
respective associates based on the current published rates.
First Bank paid legal fees of $37,350 to Shaffer Bonfiglio
Scerini & D'Elia during 1998, in which Hal J. Shaffer was
managing partner. During 1998 First Bank paid $10,488 in lease
payments for a car for the use of Hal J. Shaffer, Chairman of
First Bank.
<PAGE 86>
PSB ANNUAL MEETING - OTHER MATTERS

General

In addition to voting on the approval and adoption of
the agreement, the PSB adjournment proposal and the election of
directors, the shareholders of PSB will also be asked to consider
and vote upon the following matters:

(i) the approval of Stockton Bates, LLP as the
auditors for fiscal year 1999;

(ii) adoption of an Amendment to the Articles of
Incorporation;

(iii) the approval of the 1998 PSB Bancorp, Inc.
Employee Stock Option Plan;

(iv) the approval of the 1998 PSB Bancorp, Inc.
Management Recognition Plan; and

(v) the transaction of such other business as may
properly come before the PSB annual meeting.

MATTER NO. 4
APPOINTMENT OF AUDITORS

The PSB Board has appointed Stockton Bates, LLP,
Certified Public Accountants, as the Corporation's independent
auditor for 1999. Stockton Bates, LLP acted as the auditor for
the Corporation's predecessors for the fiscal years ended
December 31, 1998, and December 31, 1997. The appointment of
Stockton Bates, LLP is subject to shareholder approval. The
Board recommends that you vote "FOR" the appointment. No
determination has been made as to what action the corporation's
board of directors would take if shareholders do not ratify the
appointment. A representative of Stockton Bates, LLP will be
available to answer appropriate questions at the Meeting.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL
OF THE APPOINTMENT OF STOCKTON BATES, LLP AS THE CORPORATION'S
AUDITOR FOR FISCAL YEAR 1999.

MATTER NO. 5
ADOPTION OF THE AMENDMENT
TO PSB BANCORP, INC.
ARTICLES OF INCORPORATION

General

The present Articles of Incorporation require the
affirmative vote of 80% of the shareholders entitled to vote to
approve any of the following transactions unless the transaction
<PAGE 87> is approved in advance by 66 2/3% of the members of the
Board of Directors:

(a) any merger or consolidation of PSB with or
into any other corporation;

(b) any share exchange in which a corporation,
person or entity acquires the issued or outstanding shares of
capital stock of the Corporation pursuant to a vote of
shareholders;

(c) any sale, lease, exchange or other transfer
of all, or substantially all, of the assets of the Corporation to
any other corporation, person or entity; or

(d) any transaction similar to, or having similar
effect as, any of the foregoing transactions,

The Board of Directors has approved the following
Amendment, pending shareholder approval:

RESOLVED THAT Article Tenth of PSB Bancorp's Articles
of Incorporation be amended as follows:

TENTH: The affirmative vote of both directors and
shareholders of the Corporation as set forth in this ARTICLE
TENTH shall be required to approve any of the following (each a
"Transaction"):

(a) any merger or consolidation of the
Corporation with or into any other corporation or any division
involving the Corporation;

(b) any share exchange in which a corporation,
person or entity acquires the issued or outstanding shares of
capital stock of the Corporation pursuant to a vote of
shareholders;

(c) any sale, lease, exchange or other transfer
of all, or substantially all, of the assets of the Corporation to
any other corporation, person or entity;

(d) a liquidation or dissolution involving the
Corporation; or

(e) any transaction similar to, or having similar
effect as, any of the foregoing transactions.

In the event of any proposed Transaction, then the
following voting requirements shall apply during the following
applicable time periods: (A) on or before January 1, 2006, the
affirmative vote of both (i) 80% of the total number of directors
then in office (rounding up to the nearest whole number) and
(ii) 80% of the total votes which all shareholders of the
Corporation are entitled to cast, and if any class of shares is
<PAGE 88> entitled to vote as a separate class, the affirmative
vote of at least a majority of the votes entitled to be cast by
the outstanding shares of such class shall be required to approve
any Transaction; and (B) after January 1, 2006, the affirmative
vote of both (i) 66-2/3% of the total number of directors then in
office (rounding up to the nearest whole number) and (ii) at
least a majority of the total votes which all shareholders are
entitled to cast, and if any class of shares is entitled to vote
as a separate class, the affirmative vote of at least a majority
of the votes entitled to be cast by the outstanding shares of
such class shall be required to approve any Transaction.

The provisions of this ARTICLE TENTH shall not apply to
(A) any Transaction occurring prior to January 1, 2006 in which
members of the Corporation's Board of Directors immediately prior
to the Transaction continue to constitute at least a majority of
the Board of Directors of the resulting or surviving corporation
upon completion thereof provided the transaction is approved by
both (i) 80% of the total number of directors then in office
(rounding up to the nearest whole number) and (ii) at least a
majority of the total votes which all shareholders are entitled
to cast, and if any class of shares is entitled to vote as a
separate class, the affirmative vote of at least a majority of
the votes entitled to be cast by the outstanding shares of such
class or (B) any Transaction approved in advance by the unanimous
vote of all directors of the Corporation then in office.

An affirmative vote as provided in the foregoing
provisions shall be in addition to any vote of the shareholders
otherwise required by law.

The Board of Directors of the Corporation shall have
the power and duty to determine, for purposes of this ARTICLE
TENTH, if any transaction is similar to, or has a similar effect
as, any of the Transactions identified above in this ARTICLE
TENTH. Any such determination shall be conclusive and binding
for all purposes of this ARTICLE TENTH.

Shareholder approval of the amendment to the PSB
Articles of Incorporation is a condition to the closing of the
merger agreement. The amendment operates as an additional anti-
takeover provision supplementing the already existing anti-
takeover protections provided by the Pennsylvania Business
Corporation Law. After the merger, PSB will have a new
shareholder base, which will consist of a significant number of
former First Bank shareholders, including several large
shareholders. PSB believes that the implementation of its
business plan over the next five years will enhance shareholder
value. Because the proposed amendment establishes a high
supermajority vote requirement to effect a change in control of
PSB, it will prevent any shareholder from forcing a "change of
control" of PSB and potentially disrupting the implementation of
the PSB business plan. Additionally, this amendment will allow
the present PSB Board of Directors to continue to have the
<PAGE 89> ability to determine the suitability of major
transactions such as:

- a takeover event;

- a merger of PSB; or

- the sale of the assets of PSB.

During the negotiation process, First Bank was aware of
PSB's sensitivity to the addition of a large number of new
shareholders and accepted adoption of this amendment as a
condition to completion of the merger.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL
OF THE AMENDMENT TO THE PSB BANCORP ARTICLES OF INCORPORATION.

MATTER NO. 6
ADOPTION OF THE 1998 PSB BANCORP, INC.
EMPLOYEE STOCK OPTION PLAN

General

PSB's Board of Directors has adopted the 1998 PSB
Bancorp, Inc. Stock Option Plan (the "Option Plan"), subject to
approval of the Option Plan by a majority of PSB's shareholders.
The Option Plan provides for the grant of (i) options to purchase
common stock intended to qualify as incentive stock options
("Incentive Stock Options") under Section 422 of the Code, and
(ii) options that do not so qualify ("Nonqualified Stock
Options"). Pursuant to the Option Plan, up to _________ shares
of common stock (subject to adjustment) will be reserved for
issuance by PSB upon exercise of stock options to be granted to
certain officers and employees of PSB from time to time under the
Option Plan. The purpose of the Option Plan is to give certain
officers and employees an opportunity to acquire common stock and
to thereby help PSB attract, retain and motivate key employees
and officers. This summary of certain features of the Option
Plan is qualified in its entirety by reference to the complete
provisions of the Option Plan attached hereto as Annex K.

Awards Under the Option Plan

The Option Plan shall be administered by a committee of
at least three non-employee directors designated by the Board of
Directors (the "Option Committee"). Such members of the Option
Committee shall be deemed "disinterested" within the meaning of
Rule 16b-3 under the Exchange Act. Directors _________,
___________ and _________ shall initially serve as members of the
Option Committee. None of these members are eligible to
participate in the Option Plan.

The Option Committee will, based upon the
recommendations of PSB's Chief Executive Officer, select the
officers and employees to whom options are to be granted and the
<PAGE 90> number of shares to be granted based upon the
individual's level of responsibility and performance. While PSB
currently has ____ employees, it is anticipated that the Option
Committee would designate between five and seven employees as
"key employees" eligible to participate in the Option Plan.

The exercise price of the Incentive Stock Options and
Nonqualified Stock Options granted under the Stock Option Plan
will be at least equal to the fair market value of the common
stock at the date the option is awarded. Options will generally
be exercisable only after one year of employment from the date of
grant. Except in the case of retirement, death, permanent total
disability or termination deemed to be "at the convenience of
PSB," the option holder must be employed at the time of exercise.

Options will expire on the date specified in the option
agreement entered into at the time of the award, unless the
holder is earlier terminated, dies, retires, becomes totally and
permanently disabled or ceases to be employed by PSB. In no
event will the term of an Incentive Stock Option extend beyond
ten years from the grant date (five years if held by a 10% or
greater shareholder of PSB). The term of a Nonqualified Stock
Option must expire not later than ten years and one month from
the grant date.

If an employee retires, outstanding options will be
exercisable for 3 months from the retirement date in the case of
Incentive Stock Options and for up to two years (at the Option
Committee's discretion) in the case of Nonqualified Stock
Options. In the event of the total and permanent disability or
death of a participant during employment, an exercisable
Incentive Stock Option will continue to be exercisable for the
lesser of one year or the remaining term of the option. Options
may be exercised within limited times specified in the Option
Plan following termination of employment at the convenience of
PSB (as determined in the sole discretion of the Option
Committee).

Officers and employees participating in the Option Plan
would be eligible to receive, at no cost to them, options to
acquire common stock under the Option Plan. Accordingly, PSB
will receive no money for granting stock options under the Option
Plan. Upon exercise of an option, PSB will receive the exercise
price per share of common stock issued pursuant to such option.
Option shares may be paid for in cash, shares of common stock, or
a combination of both.

Shares issuable under the Option Plan may be either
authorized but unissued shares or shares held by PSB in its
treasury, including shares acquired in the open market. Any
shares subject to an award that expires or is terminated prior to
exercise will again be available for issuance under the Option
Plan. No award or any right or interest therein is assignable or
transferable except by will or the laws of descent and
distribution. <PAGE 91>

The number of shares subject to unexercised options and
exercise prices on outstanding options will be adjusted in the
event of certain capital changes such as stock splits, stock
dividends and reclassifications. Because the exercise of options
may result in the issuance of authorized but unissued shares of
common stock, such exercise may have a dilutive effect on the
common stock holdings of existing shareholders.

The Option Plan would permit the Option Committee to
regrant options to participants that were previously granted
options and to make adjustments to the applicable exercise prices
of outstanding options (including downward adjustments). In
either case, applicable regulations would require disclosure of
the regrants and/or price adjustments in PSB's joint proxy
statement.

The last sale price for common stock for March 31,
1999, as reported by one of PSB's market makers, was $6.50 per
share.

Amendment and Termination of the Plan

The Option Plan provides for a term of ten years from
the date of Board approval, after which no awards may be made.
The Option Plan may be terminated earlier by the Board of
Directors.

The Board of Directors may alter, modify, suspend or
discontinue the Option Plan, except that the Board shall not,
without shareholder approval, increase the maximum number of
shares of common stock issuable under the Option Plan (except as
provided in the Option Plan), (b) materially increase the
benefits accruing to participants under the Option Plan or
(c) change the employee eligibility criteria.

Tax Consequences

The Option Plan is not a qualified plan under
Code Section 401(a). PSB has been advised that under the Code,
the following federal income tax consequences will result when
Incentive Stock Options or Nonqualified Stock Options, or any
combination thereof, are granted or exercised, although the
following is not intended to be a complete statement of the
applicable law.

Incentive Stock Options. An optionholder generally
will not be deemed to receive any income for federal tax purposes
at the time an Incentive Stock Option is granted, nor will PSB be
entitled to a tax deduction at that time. Upon the sale or
exchange of the shares at least two years after the grant of the
option and one year after receipt of the shares by the
optionholder upon exercise, the optionholder will recognize long-
term capital gain or loss upon the sale of such shares equal to
the difference between the amount realized on such sale and the
exercise price. <PAGE 92>

If the foregoing holding periods are not satisfied or
the option is exercised more than three months after the
optionholder's employment with PSB has terminated, the
optionholder will recognize ordinary income equal to the
difference between the exercise price and the lower of the fair
market value of the stock at the date of the option exercise or
the sale price of the stock. If the sale price exceeds the fair
market value on the date of exercise, the gain in excess of the
ordinary income portion will be treated as either long-term or
short-term capital gain, depending on whether the stock has been
held for more than 12 months on the date of sale. Any loss on
disposition is a long-term or short-term capital loss, depending
upon whether the optionholder had held the stock for more than
12 months. A different rule for measuring ordinary income upon
such a premature disposition may apply if the optionholder is a
10 percent shareholder of PSB or an officer of PSB subject to
Section 16(b) of the Securities Exchange Act of 1934. If PSB
cancels an option, the optionholder recognizes income to the
extent of the amount paid by PSB to cancel the option over the
optionholder's basis in such option, if any.

No income tax deduction will be allowed PSB with
respect to shares purchased by an optionholder upon the exercise
of an Incentive Stock Option, provided that such shares are held
at least two years after the date of grant and at least one year
after the date of exercise. However, if those holding periods
are not satisfied, PSB may deduct an amount equal to the ordinary
income recognized by the optionholder upon disposition of the
shares.

The exercise of an Incentive Stock Option and the sale
of stock acquired by such exercise could subject an optionholder
to alternative minimum tax liability for federal income tax
purposes.

Nonqualified Stock Options. An optionholder will not
be deemed to receive any income for federal tax purposes at the
time a Nonqualified Stock Option is granted, nor will PSB be
entitled to a tax deduction at that time. At the time of
exercise, however, the optionholder will realize ordinary income
in an amount equal to the excess of the market value of the
shares at the time of exercise of the option over the option
price of such shares. PSB is allowed a federal income tax
deduction in an amount equal to the ordinary income recognized by
the optionholder due to the exercise of a Nonqualified Stock
Option at the time of such recognition by the optionholder.

Stock-for-Stock Exchange. An optionholder who
exchanges "statutory option stock" of PSB in payment of the
purchase price upon the exercise of an Incentive Stock Option
will be deemed to make a "disqualifying disposition" of the
statutory option stock so transferred unless the applicable
holding requirements (two years from the date of the grant and
one year after the exercise of an incentive option) with respect
to such statutory option stock are met after the exercise of
<PAGE 93> Incentive Stock Options. If an optionholder exercises
Nonqualified Stock Options by exchanging previously-owned
statutory option stock, the Internal Revenue Service has ruled
that the optionholder will not recognize gain on the disposition
of the statutory option stock (assuming the holding period
requirements applicable to such statutory option stock have been
satisfied) because of the non-recognition rule of Code
Section 1036.

Reasons for Submission to Shareholders

Shareholder approval of the Option Plan is being sought
to qualify the Option Plan for the granting of Incentive Stock
Options. An affirmative vote of the holders of a majority of
the common stock present at the meeting, in person or by proxy,
and entitled to vote, is required to constitute shareholder
approval of the Option Plan. Directors and executive officers of
PSB and the PSB Employee Stock Ownership Plan ("PSB ESOP")
collectively own 1,011,531 shares of the common stock, which
represents 32.6% of the outstanding common stock. Such shares
are expected to be voted in favor of the Option Plan, and if so
voted, would constitute approximately 65% of the minimum vote
required to approve the Option Plan.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
APPROVAL OF THE 1998 PSB BANCORP, INC. EMPLOYEE STOCK OPTION
PLAN, A COPY OF WHICH IS ATTACHED HERETO AS ANNEX J.

MATTER NO. 7
ADOPTION OF THE 1998 PSB BANCORP, INC.
MANAGEMENT RECOGNITION PLAN

The Board of Directors of PSB has adopted the 1998 PSB
Bancorp, Inc. Management Recognition Plan (the "MRP") as a method
of providing certain senior executive officers of PSB with a
proprietary interest in PSB, to reward such officers for their
service and to encourage such persons to remain in the service of
PSB. Pursuant to the MRP, PSB will award certain senior
executive officers of PSB "plan share awards" representing the
right to earn shares of common stock over a period of five years
from the date of the plan share award. PSB will contribute
sufficient funds to the MRP to enable the MRP to purchase common
stock representing up to 4% of the aggregate number of shares
outstanding.(i.e., up to 124,046 shares of common stock). This
summary of certain material features of the MRP is qualified in
its entirety by reference to the complete provisions of the MRP,
which is attached hereto as Annex K.

Benefits under the MRP may be granted at the sole
discretion of the Compensation Committee of PSB's Board of
Directors. No member of the Compensation Committee is eligible
to participate in the MRP. The MRP will be managed by a director
appointed pursuant to a Management Recognition Plan and Trust
Agreement with PSB (the "MRP Trustee"). The Compensation
Committee will act as the initial MRP Trustee. The MRP Trustee
<PAGE 94> is responsible for investing all funds contributed by
PSB to the MRP.

Unless the Compensation Committee of the Board
specifies otherwise, shares granted to MRP participants will be
in the form of restricted stock payable over a five-year period
at the rate of 20% of such shares per year. Compensation expense
in the amount of the fair market value of the common stock at the
date of the grant to the recipient will be recognized pro rata
over the five years during which the shares are payable. A
recipient of such restricted stock will be entitled to all voting
and other shareholder rights, except that the shares, while
restricted, may not be sold, pledged or otherwise disposed of and
are required to be held in escrow. Any shares not so allocated
shall be voted by the MRP Trustee.

Awards under the MRP will be determined by the
Compensation Committee of the Board of Directors based on the job
position and responsibilities of the executive officers, the
length and value of their service to PSB and/or its subsidiaries,
and any other factor deemed relevant by the Compensation
Committee of the Board. While all of PSB's __ employees are
eligible to participate in the MRP, it is anticipated that the
Compensation Committee will consider granting awards primarily to
between five and seven key employees.

The Board of Directors can terminate the MRP at any
time, and if it does so, any shares not allocated will revert to
PSB. Termination of the MRP will not become effective as to
previously awarded plan share awards unless the Board resolves to
distribute all unearned shares subject to such plan share awards
immediately upon effectiveness of termination.

All of the common stock to be purchased by the MRP will
be purchased at the fair market value of such stock on the date
of purchase. Under the MRP, shares may be acquired on the open
market, from treasury shares, or from authorized but unissued
shares. If shares are acquired from authorized but unissued
shares, such issuance will have a dilutive effect on the
percentage ownership interest of existing shareholders. If and
when grants are made, no participant will be awarded more than
25% of the common stock available to be granted under the MRP
within one year from October 3, 1997 (i.e., the date of PSB's
organization).

Reasons for Submission to Shareholders

The Company is submitting the MRP to shareholders for
approval to provide recipients of MRP awards with certain
exemptive treatment from the short-swing profit recapture
provisions of Section 16(b) of the Exchange Act. An affirmative
vote of the holders of a majority of the common stock present at
the Meeting in person or by proxy, and entitled to vote, is
required to constitute shareholder approval of the MRP.
Directors and executive officers of PSB and PSB ESOP collectively
<PAGE 95> own 1,011,537 shares of the common stock which
represents 32.6% of the outstanding common stock. Such shares
are expected to be voted in favor of the MRP, and, if so voted,
would constitute approximately 65% of the minimum vote required
to approve the MRP.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
APPROVAL OF THE 1998 PSB BANCORP, INC. MANAGEMENT RECOGNITION
PLAN, WHICH IS ATTACHED HERETO AS ANNEX K.
<PAGE 96>
MISCELLANEOUS ADDITIONAL INFORMATION

Conduct of the Meeting

Management of PSB knows of no business other than as
described above that is planned to be brought before the annual
meeting. Should any other matters arise, however, the persons
named on the enclosed proxy will vote thereon according to their
best judgment.

Abstentions or broker nonvotes will be counted for
purposes of determining whether a quorum is present at the annual
meeting but will not be counted as votes cast for or against any
matter to be considered at the annual meeting.

Dissenters Rights

PSB shareholders are not entitled to dissenters rights
with respect to any matter scheduled to be acted upon.

Certain Reporting Requirements

The common stock of PSB is registered pursuant to
Section 12(g) of the Exchange Act. The officers and trustees of
PSB and beneficial owners of greater than 10% of the common stock
("10% Beneficial Owners") are required to file reports on Forms 4
and 5 with the Securities and Exchange Commission disclosing
changes in Beneficial Ownership of the common stock. Based
solely on PSB's review of such ownership reports, collectively,
PSB directors and officers failed to file their initial ownership
reports on Form 3 on a timely basis during the period from
October 3, 1997 through December 31, 1998. All directors and
officers have filed a Form 5 to report initial ownership
positions and subsequent transactions through March 15, 1999.

Shareholder Proposals for Next Annual Meeting

Any shareholder proposal for consideration at the
annual meeting of shareholders of PSB to be held in 2000 must be
received by PSB at its principal offices not later than _________
__ 2000, in order for it to be included in PSB's proxy materials
relating to the 2000 annual meeting of shareholders.
<PAGE 97>
FIRST BANK ANNUAL MEETING - OTHER MATTERS

Shareholder Proposals

If the merger has not been completed, the First Bank
board will consider and include in the proxy statement for the
annual meeting of shareholders in 2000 proposals which meet the
regulations of the Securities and Exchange Commission and
Pennsylvania law. In order to be considered for inclusion,
proposals must be submitted to First Bank by [February 15, 2000].
Proposals should be addressed to the attention of James T.
Schaeffer at First Bank, at the address set forth in this joint
proxy statement/prospectus.

Other Matters

The Board of Directors does not intend to bring any
other matter before the First Bank annual meeting and is not
presently informed of any other business which others may bring
before the First Bank annual meeting other than as set forth in
the First Bank Notice of Annual Meeting of Shareholders. If any
other matters should properly come before the First Bank annual
meeting, or any postponement(s) or adjournment(s) thereof,
however, it is the intention of the proxy holders to vote on such
matters as they, in their discretion, may determine.
<PAGE 98>
EXPERTS

The consolidated financial statements of PSB, as of
December 31, 1998 and for each of the years in the three year
period ended December 31, 1998, appearing elsewhere herein, have
been included in reliance upon the report of Stockton Bates, LLP,
independent public accountants, and upon the authority of said
firm as experts in accounting and auditing. A representative of
Stockton Bates, LLP will be available to answer appropriate
questions at the PSB annual meeting.

The consolidated financial statements of First Bank as
of December 31, 1998 and 1997 and for each of the years then
ended, appearing elsewhere herein, have been included in reliance
upon the report of KPMG LLP, independent public accountants, and
upon the authority of said firm as experts in accounting and
auditing. In light of the planned acquisition by PSB, no
accountant or auditor has been selected by First Bank for 1999.
A representative of KPMG, LLP will be available to answer
appropriate questions at the First Bank annual meeting.

LEGAL MATTERS

The validity of PSB common stock to be issued in the
merger, certain federal income tax consequences of the merger,
and certain other legal matters relating to the merger are being
passed upon for PSB by the law firm of Stevens & Lee, counsel to
PSB.

WHERE YOU CAN FIND MORE INFORMATION

PSB is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and, in accordance therewith, files reports, proxy statements,
and other information with the Securities and Exchange Commission
(the "Commission"). The reports, proxy statements, and other
information filed by PSB with the Commission can be inspected and
copied at the offices of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Seven World Trade
Center, New York, New York 10048, and Citicorp Center, 500 West
Madison Avenue, Suite 1400, Chicago, Illinois 60661-2511. Copies
of such material also can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates, and from the web site that the
Commission maintains at http://www.sec.gov.

First Bank is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), however, because of its status as a bank, First Bank files
reports, proxy statements, and other information with the Board
of Governors of the Federal Reserve System (the "FRS"). The
reports, proxy statements, and other information filed by First
Bank with the FRS can be inspected and copied at the offices of
<PAGE 99> the Board of Governors of the Federal Reserve System,
Washington, D.C. 20551.

PSB has filed with the Commission a Registration
Statement on Form S-4 (together with any amendments thereto, the
"Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the PSB common
stock to be issued pursuant to the Agreement and Plan of
Reorganization. This joint proxy statement/prospectus does not
contain all the information set forth in the Registration
Statement and the exhibits thereto. Such additional information
may be obtained from the Commission's principal office in
Washington, D.C. Statements contained in this joint proxy
statement/prospectus or in any document incorporated in this
joint proxy statement/prospectus by reference or supplied
herewith as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and,
in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being
qualified in all respects by such reference.
<PAGE 100>
ANNEX LISTING

A. Agreement and Plan of Reorganization

B. Berwind Opinion (To Be Filed By Amendment)

C. Hopper Soliday Opinion (To Be Filed By Amendment)

D. Stock Option Purchase Agreement

E. Letter Agreement of First Bank Officers/Directors

G. Pennsylvania Business Corporation Law (Dissenter's
Rights Sections)

H. Additional Information With Respect to PSB

I. Additional Information With Respect to First Bank

J. PSB Employee Stock Option Plan

K. PSB Management Recognition Plan
<PAGE 101>
ANNEX A

Agreement and Plan of Reorganization

<PAGE A-1>
Annex A

AGREEMENT AND PLAN
OF REORGANIZATION

among

PSB BANCORP, INC.

PENNSYLVANIA SAVINGS BANK

and

FIRST BANK OF PHILADELPHIA

March 19, 1999
<PAGE A-2>
AGREEMENT

THIS AGREEMENT AND PLAN OF REORGANIZATION, dated as of
March 19, 1999, is made by and among PSB BANCORP, INC. ("PSB"), a
Pennsylvania corporation and its wholly-owned subsidiary
PENNSYLVANIA SAVINGS BANK (the "Bank"), each having its principal
place of business in Philadelphia, Pennsylvania, and FIRST BANK
OF PHILADELPHIA ("FBKP"), a Pennsylvania bank, having its
principal place of business in Philadelphia, Pennsylvania.

BACKGROUND

1. PSB and FBKP desire for the Bank to merge with and
into FBKP, with FBKP surviving such merger and FBKP shareholders
receiving PSB Common Stock in exchange for FBKP Common Stock in
accordance with the applicable laws of the Commonwealth of
Pennsylvania, and in accordance with the articles and plan of
merger in the form attached hereto as Exhibit 1.

2. PSB and FBKP desire that the merger constitute a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and be accounted for
as a pooling-of-interests under generally accepted accounting
principles.

3. As a condition and inducement to PSB's willingness
to enter into this Agreement, (a) the directors and certain
officers of FBKP are concurrently executing a Letter Agreement in
the form attached hereto as Exhibit 2, and (b) FBKP is
concurrently granting to PSB an option to acquire, under certain
circumstances, FBKP Common Stock (the "PSB Option") pursuant to a
Stock Option Agreement between PSB and FBKP in the form attached
hereto as Exhibit 3.

4. PSB and FBKP desire to provide the terms and
conditions governing the transactions contemplated herein.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and of
the mutual covenants, agreements, representations and warranties
herein contained, the parties hereto, intending to be legally
bound, do hereby agree as follows:

ARTICLE I
THE MERGERS

Section 1.01 Definitions. As used in this Agreement,
the following terms shall have the indicated meanings (such
meanings to be equally applicable to both the singular and plural
forms of the terms defined):

Affiliate means, with respect to any Person, any
Person who directly, or indirectly, through one or more
<PAGE A-3> intermediaries, controls, or is controlled by, or
is under common control with, such Person and, without
limiting the generality of the foregoing, includes any
executive officer or director of such Person and any
Affiliate of such executive officer or director.

Agreement means this agreement, and any amendment
or supplement hereto, which constitutes a "plan of merger"
among PSB, the Bank and FBKP.

Applicable Exchange Ratio shall have the meaning
given to such term in Section 1.02(e)(ii)(A).

Applications means the applications for regulatory
approval which are required by the transactions contemplated
hereby.

Articles of Merger means the articles of merger to
be executed by the Bank and FBKP and to be filed in the PDS,
in accordance with the applicable laws of the Commonwealth
of Pennsylvania.

Banking Code means the Pennsylvania Banking Code
of 1965, as amended.

BCL means the Pennsylvania Business Corporation
Law of 1988, as amended.

BHCA means the Bank Holding Company Act of 1956,
as amended.

Closing Date means the earlier of (i) the day
specified by PSB to FBKP upon five (5) days written notice,
that follows the satisfaction or waiver, to the extent
permitted hereunder, of the conditions to the consummation
of the Merger specified in Article V of this Agreement
(other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing),
(ii) thirty (30) days after the satisfaction or waiver, to
the extent permitted hereunder, of the conditions to the
consummation of the Merger specified in Article V of this
Agreement (other than the delivery of certificates, opinions
and other instruments and documents to be delivered at the
Closing) or (iii) such other date as PSB and FBKP may
mutually agree.

Dissenting Shares shall have the meaning set forth
in Section 1.02(e)(ii)(E) hereof.

DOJ means the United States Department of Justice.

Effective Date means the date upon which the
Articles of Merger shall be filed in the PDS, and shall be
the same as the Closing Date.
<PAGE A-4>
Environmental Law means any federal, state, local
or foreign law, statute, ordinance, rule, regulation, code,
license, permit, authorization, approval, consent, order,
judgment, decree, injunction or agreement with any
Regulatory Authority relating to (i) the protection,
preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface
soil, plant and animal life or any other natural resource),
and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling,
production, release or disposal of any substance presently
listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, or otherwise regulated,
whether by type or by quantity, including any material
containing any such substance as a component.

ERISA means the Employee Retirement Income
Security Act of 1974, as amended.

Exchange Act means the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated
from time to time thereunder.

FDIA means the Federal Deposit Insurance Act, as
amended.

FDIC means the Federal Deposit Insurance
Corporation.

FBKP Common Stock means the common stock of FBKP
described in Section 2.02(a).

FBKP Disclosure Schedule means a disclosure
schedule delivered by FBKP to PSB pursuant to Article II of
this Agreement.

FBKP Financials means (i) the audited consolidated
financial statements of FBKP as of December 31, 1998,
including the notes, and (ii) the unaudited interim
consolidated financial statements of FBKP as of each
calendar quarter thereafter included in Securities Documents
filed by FBKP.

FBKP Options means options to purchase shares of
FBKP Common Stock granted pursuant to the FBKP Stock Option
Plan and the FBKP Standby Options.

FBKP Standby Options means the options
certificates issued pursuant to the Standby Purchase Agreement
dated December 15, 1994 and the Option Certificates issued
thereunder.

<PAGE A-5>
FBKP Regulatory Reports means the annual and
quarterly reports of FBKP filed with the FRB since
December 31, 1996 through the Closing Date.

FBKP Stock Option Plan means the First Bank of
Philadelphia 1998 Stock Option Plan.

FBKP Subsidiaries means (i) any corporation, 50%
or more of the capital stock of which is owned, either
directly or indirectly, by FBKP, except any corporation the
stock of which is held in the ordinary course of the lending
activities of FBKP.

FRB means the Board of Governors of the Federal
Reserve System.

GAAP means generally accepted accounting
principles as in effect at the relevant date.

IRC means the Internal Revenue Code of 1986, as
amended.

IRS means the Internal Revenue Service.

Material Adverse Effect shall mean, with respect
to PSB or FBKP, respectively, any effect that is material
and adverse to its assets, financial condition or results of
operations on a consolidated basis, provided, however, that
Material Adverse Effect shall not be deemed to include
(a) any change in the value of the respective investment and
loan portfolios of PSB or FBKP resulting from a change in
interest rates generally, (b) any change occurring after the
date hereof in any federal or state law, rule or regulation
or in GAAP, which change affects banking institutions
generally, (c) reasonable expenses incurred in connection
with this Agreement and the transactions contemplated
hereby, (d) actions or omissions of a party (or any of its
Subsidiaries) taken with the prior informed written consent
of the other party in contemplation of the transactions
contemplated hereby, and (e) any effect with respect to a
party hereto caused, in whole or in part, by the other
party.

Merger means the merger of the Bank with and into
FBKP, with FBKP surviving such merger, and the exchange of
shares of FBKP Common Stock for shares of PSB Common Stock,
contemplated by this Agreement.

NASD means the National Association of Securities
Dealers, Inc.

PDOB means the Pennsylvania Department of Banking.

PDS means the Department of State of the
Commonwealth of Pennsylvania. <PAGE A-6>

Person means any individual, corporation, limited
liability company, partnership, joint venture, association,
trust or "group" (as that term is defined in
Section 13(d)(3) of the Exchange Act).

Prospectus/Proxy Statement means the
prospectus/proxy statement, together with any amendments and
supplements thereto, to be transmitted to holders of FBKP
Common Stock and PSB Common Stock in connection with the
transactions contemplated by this Agreement.

PSB Common Stock has the meaning given to that
term in Section 3.02(a) of this Agreement.

PSB Disclosure Schedule means a disclosure
schedule delivered by PSB to FBKP pursuant to Article III of
this Agreement.

PSB Financials means (i) the audited consolidated
financial statements of PSB as of December 31, 1998 and for
the three years ended December 31, 1998, including the notes
thereto, and (ii) the unaudited interim consolidated
financial statements of PSB as of each calendar quarter
thereafter included in Securities Documents filed by PSB.

PSB Market Price means, as of any date, the
average between the closing high bid and low asked prices of
a share of PSB Common Stock on the Nasdaq National Market
System (as reported in The Wall Street Journal, or if not
reported therein, in another authoritative source).

PSB Market Value means the average of the PSB
Market Prices for the twenty (20) consecutive trading days
ending on the trading day three (3) trading days preceding
the Closing Date.

PSB Option means the option granted to PSB to
acquire shares of FBKP Common Stock referenced in the
recitals to this Agreement.

PSB Regulatory Reports means the annual and
quarterly reports of PSB and the Bank with the FRB and the
FDIC since December 31, 1996 through the Closing Date.

PSB Subsidiaries means any corporation, 50% or
more of the capital stock of which is owned, either directly
or indirectly, by PSB, except any corporation the stock of
which is held in the ordinary course of the lending
activities of a bank.

Registration Statement means the registration
statement on Form S-4, including any pre-effective or
post-effective amendments or supplements thereto, as filed
with the SEC under the Securities Act with respect to the
<PAGE A-7> PSB Common Stock to be issued in connection with
the transactions contemplated by this Agreement.

Regulatory Agreement has the meanings given to
that term in Sections 2.11 and 3.10 of this Agreement.

Regulatory Authority means any banking agency or
department of any federal or state government, including
without limitation the FRB, the FDIC, the PDOB, or the
respective staffs thereof.

Rights means warrants, options, rights,
convertible securities and other capital stock equivalents
which obligate an entity to issue its securities.

SEC means the Securities and Exchange Commission.

Securities Act means the Securities Act of 1933,
as amended, and the rules and regulations promulgated from
time to time thereunder.

Securities Documents means all registration
statements, schedules, statements, forms, reports, proxy
material, and other documents required to be filed under the
Securities Laws.

Securities Laws means the Securities Act, the
Exchange Act, the Investment Company Act of 1940, as
amended, the Investment Advisors Act of 1940, as amended,
the Trust Indenture Act of 1939, as amended, and in each
case the rules and regulations promulgated from time to time
thereunder.

Subsidiary means any corporation, 50% or more of
the capital stock of which is owned, either directly or
indirectly, by another entity, except any corporation the
stock of which is held in the ordinary course of the lending
activities of a bank.

Section 1.02 The Merger.

(a) Closing. The closing will take place at
10:00 a.m. on the Closing Date at the offices of Stevens & Lee,
1818 Market Street, Philadelphia, Pennsylvania, unless another
time and place are agreed to by the parties hereto; provided, in
any case, that all conditions to closing set forth in Article V
(other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing) have
been satisfied or waived at or prior to the Closing Date. On the
Closing Date, FBKP, PSB and the Bank shall cause the Articles of
Merger to be duly executed and to be filed in the PDS.

(b) The Merger. Subject to the terms and
conditions of this Agreement, on the Effective Date, the Bank
shall merge with and into FBKP in accordance with the provisions
<PAGE A-8> of the Banking Code and the BCL and the outstanding
shares of FBKP Common Stock shall be converted into shares of PSB
Common Stock as provided in Section 1.02(e). FBKP shall be the
surviving corporation of the Merger and shall continue its
corporate existence under the laws of the Commonwealth of
Pennsylvania. From and after the Effective Date, the Merger
shall have the effects set forth in Section 1606 of the Banking
Code.

(c) Articles of Incorporation and Bylaws. On and
after the Effective Date, the articles of incorporation and the
bylaws of PSB, as in effect immediately prior to the Effective
Date, shall automatically be and remain the articles of
incorporation and bylaws of PSB, until thereafter altered,
amended or repealed. On and after the Effective Date, the
Articles of Incorporation and Bylaws of FBKP, as in effect
immediately prior to the Effective Date, shall automatically be
and remain the Articles of Incorporation and Bylaws of the
surviving bank, until altered, amended or repealed.

(d) Board of Directors and Officers of the Bank.

(i) On the Effective Date, the Board of
Directors of FBKP shall resign and the existing Board of
Directors of the Bank shall be elected the Board of Directors of
FBKP.

(ii) On the Effective Date the newly elected
Board of Directors of FBKP shall elect the following officers:

Chairman - Vincent J. Fumo
President - Anthony DiSandro
Vice President - Carl A. Lingle
Treasurer - Gary Polimeno

and such other officers as such Board may determine.

(e) Conversion of Shares.

(i) PSB Common Stock.

(A) Each share of PSB Common Stock
issued and outstanding immediately prior to the Effective
Date shall, on and after the Effective Date, continue to be
issued and outstanding as an identical share of PSB Common
Stock. Shares of PSB Common Stock owned by FBKP (other than
shares held in trust, managed, custodial or nominee accounts
and the like, that in any such case are beneficially owned
by third parties (any such shares, "trust account shares")
and shares acquired in respect of debts previously
contracted (any such shares, "DPC shares")) shall become
treasury stock of PSB on the Effective Date.

(B) Each share of PSB Common Stock
issued and held in the treasury of PSB as of the Effective
<PAGE A-9> Date, if any, shall, on and after the Effective
Date, continue to be issued and held in the treasury of PSB.

(ii) FBKP Common Stock.

(A) Subject to the provisions of
subparagraphs (B), (C), (D) and (E) of this Section
1.02(e)(ii), each share of FBKP Common Stock issued and
outstanding immediately prior to the Effective Date (other
than shares of FBKP Common Stock, if any, then owned by PSB
or FBKP or any FBKP Subsidiary) shall, on the Effective
Date, by reason of the Merger and without any action on the
part of the holder thereof, be converted into and become a
right to receive:

(i) if the PSB Market Value is
greater than or equal to $7.00 and less than or equal
to $9.00, then that number of shares of fully paid and
nonassessable shares of PSB Common Stock as shall equal
$6.00 divided by the PSB Market Value;

(ii) if the PSB Market Value is
less than $7.00, then .857 shares of fully paid and
nonassessable shares of PSB Common Stock, provided that
if the PSB Market Value is less than $6.50 and FBKP
exercises its rights under Section 6.01(c) hereof, PSB
shall have the option to elect, by written notice to
FBKP, within 3 business days of FBKP exercise, to have
the Exchange Ratio be equal to that number (rounded to
the nearest thousandth) of shares of fully paid and
nonassessable shares of PSB Common Stock, equal to
$6.00 divided by the PSB Market Value; or

(iii) if the PSB Market Value is
greater than $9.00, then .667 shares of fully paid and
nonassessable shares of PSB Common Stock.

The Exchange Ratio, as determined pursuant to any of
Sections 1.02(e)(ii)(A)(i), 1.02(e)(ii)(A)(ii) or
1.02(e)(ii)(A)(iii), is hereinafter referred to as the
"Applicable Exchange Ratio".

(B) Each share of FBKP Common Stock
(other than trust account shares or DPC shares) owned by PSB
or a PSB Subsidiary on the Effective Date, if any, shall be
cancelled.

(C) Each share of FBKP Common Stock
issued and held in the treasury of FBKP or owned by FBKP or
any FBKP Subsidiary (other than trust account shares or DPC
shares) as of the Effective Date, if any, shall be
cancelled, and no cash, stock or other property shall be
delivered in exchange therefor.
<PAGE A-10>
(D) No fraction of a whole share of PSB
Common Stock and no scrip or certificates therefor shall be
issued in connection with the Merger. Any former holder of
FBKP Common Stock who would otherwise be entitled to receive
a fraction of a share of PSB Common Stock shall receive, in
lieu thereof, cash in an amount equal to such fraction of a
share multiplied by the PSB Market Price determined as of
the Effective Date.

(E) Each outstanding share of FBKP
Common Stock the holder of which has perfected his right to
dissent under Section 1607 of the Banking Code and the BCL
and has not effectively withdrawn or lost such right as of
the Effective Date shall not be converted into or represent
a right to receive shares of PSB Common Stock hereunder, and
the holder thereof shall be entitled only to such rights as
are granted by the BCL. FBKP shall give PSB prompt notice
upon receipt by FBKP of any such written demands for payment
of the fair value of such shares of FBKP Common Stock
("Dissenting Shares") and of withdrawals of such demands and
any other instruments provided pursuant to the BCL (any
shareholder duly making such demand being hereinafter called
a "Dissenting Shareholder"). If any Dissenting Shareholder
shall effectively withdraw or lose (through failure to
perfect or otherwise) his right to such payment at any time,
such holder's shares of FBKP Common Stock shall be converted
into the right to receive PSB Common Stock in accordance
with Section 1.02(e)(ii) of this Agreement. Any payments
made in respect of Dissenting Shares shall be made by FBKP,
as the surviving corporation of the Merger.

(f) Stock Options.

(i) On the Effective Date, each FBKP Option
which is then outstanding, whether or not exercisable, shall
cease to represent a right to acquire shares of FBKP Common
Stock and shall be converted automatically into an option to
purchase shares of PSB Common Stock, and PSB shall assume
each FBKP Option, in accordance with the terms of the FBKP
Stock Option Plan, the FBKP Standby Options and the stock
option agreements and certificates by which they are
evidenced, except that from and after the Effective Date,
(i) PSB and its Board of Directors or a duly authorized
committee thereof shall be substituted for FBKP and FBKP's
Board of Directors or duly authorized committee thereof
administering such FBKP Stock Option Plan, (ii) each FBKP
Option assumed by PSB may be exercised solely for shares of
PSB Common Stock, (iii) the number of shares of PSB Common
Stock subject to such FBKP Option shall be equal to the
number of shares of FBKP Common Stock subject to such FBKP
Option immediately prior to the Effective Date multiplied by
the Applicable Exchange Ratio, provided that any fractional
shares of PSB Common Stock resulting from such
multiplication shall be rounded to the nearest share, and
(iv) the per share exercise price under each such FBKP
<PAGE A-11> Option shall be adjusted by dividing the per
share exercise price under each such FBKP Option by the
Applicable Exchange Ratio, provided that such exercise price
shall be rounded to the nearest cent. Notwithstanding
clauses (iii) and (i
v) of the preceding sentence, each FBKP Option which is an
"incentive stock option" shall be adjusted as required by
Section 424 of the IRC, and the regulations promulgated
thereunder, so as not to constitute a modification,
extension or renewal of the option within the meaning of
Section 424(h) of the IRC. PSB and FBKP agree to take all
necessary steps to effect the foregoing provisions of this
Section 1.02(f).

(ii) On the Effective Date, PSB shall
deliver an assumption agreement expressly assuming the FBKP
Standby Options in accordance with the terms of this
Section 1.02(f)(i). As soon as practicable after the
Effective Date, PSB shall deliver to each holder of the
other FBKP Options an appropriate notice setting forth such
participant's rights pursuant thereto and the grants subject
to such FBKP Options shall continue in effect on the same
terms and conditions, including without limitation the
duration thereof, subject to the adjustments required by
Section 1.02(f)(i) hereof after giving effect to the Merger.
Within 30 days after the Effective Date, PSB shall file a
registration statement on Form S-3 or Form S-8, as the case
may be (or any successor or other appropriate forms), with
respect to the shares of PSB Common Stock subject to such
options and shall use its reasonable best efforts to
maintain the current status of the prospectus or
prospectuses contained therein for so long as such options
remain outstanding.

(g) Surrender and Exchange of FBKP Stock
Certificates.

(i) Exchange of Certificates. Each holder
of shares of FBKP Common Stock who surrenders to PSB (or its
agent) the certificate or certificates representing such
shares will be entitled to receive, as soon as practicable
after the Effective Date, in exchange therefor a certificate
or certificates for the number of whole shares of PSB Common
Stock into which such holder's shares of FBKP Common Stock
have been converted pursuant to the Merger, together with a
check for cash in lieu of any fractional share in accordance
with Section 1.02(e)(ii)(D) hereof.

(ii) Rights Evidenced by Certificates. Each
certificate for shares of PSB Common Stock issued in
exchange for certificates for FBKP Common Stock pursuant to
Section 1.02(g)(i) hereof will be dated the Effective Date
and be entitled to dividends and all other rights and
privileges pertaining to such shares of stock from and after
the Effective Date. Until surrendered, each certificate
<PAGE A-12> theretofore evidencing shares of FBKP Common
Stock will, from and after the Effective Date, evidence
solely the right to receive certificates for shares of PSB
Common Stock pursuant to Section 1.02(g)(i) hereof and a
check for cash in lieu of any fractional share in accordance
with Section 1.02(e)(ii)(D) hereof. If certificates for
shares of FBKP Common Stock are exchanged for PSB Common
Stock at a date following one or more record dates for the
payment of dividends or of any other distribution on the
shares of PSB Common Stock, PSB will pay cash in an amount
equal to dividends theretofore payable on such PSB Common
Stock and pay or deliver any other distribution to which
holders of shares of PSB Common Stock have theretofore
become entitled. Upon surrender of certificates for shares
of FBKP Common Stock in exchange for certificates for PSB
Common Stock, PSB also shall pay any dividends to which such
holder of FBKP Common Stock may be entitled as a result of
the declaration of a dividend on the FBKP Common Stock by
FBKP in accordance with the terms of this Agreement with a
record date prior to the Effective Date and a payment date
after the Effective Date. No interest will accrue or be
payable in respect of dividends or cash otherwise payable
under this Section 1.02(g) upon surrender of certificates
for shares of FBKP Common Stock. Notwithstanding the
foregoing, no party hereto will be liable to any holder of
FBKP Common Stock for any amount paid in good faith to a
public official or agency pursuant to any applicable
abandoned property, escheat or similar law. Until such time
as certificates for shares of FBKP Common Stock are
surrendered by a FBKP shareholder to PSB for exchange, PSB
shall have the right to withhold dividends or any other
distributions on the shares of PSB Common Stock issuable to
such shareholder.

(iii) Exchange Procedures. Each certificate
for shares of FBKP Common Stock delivered for exchange under
this Section 1.02(g) must be endorsed in blank by the
registered holder thereof or be accompanied by a power of
attorney to transfer such shares endorsed in blank by such
holder. If more than one certificate is surrendered at one
time and in one transmittal package for the same shareholder
account, the number of whole shares of PSB Common Stock for
which certificates will be issued pursuant to this
Section 1.02(g) will be computed on the basis of the
aggregate number of shares represented by the certificates
so surrendered. If shares of PSB Common Stock or payments
of cash are to be issued or made to a person other than the
one in whose name the surrendered certificate is registered,
the certificate so surrendered must be properly endorsed in
blank, with signature(s) guaranteed, or otherwise in proper
form for transfer, and the person to whom certificates for
shares of PSB Common Stock is to be issued or to whom cash
is to be paid shall pay any transfer or other taxes required
by reason of such issuance or payment to a person other than
the registered holder of the certificate for shares of FBKP
<PAGE A-13> Common Stock which are surrendered. As promptly
as practicable after the Effective Date, PSB shall send or
cause to be sent to each shareholder of record of FBKP
Common Stock transmittal materials for use in exchanging
certificates representing FBKP Common Stock for certificates
representing PSB Common Stock into which the former have
been converted in the Merger. Certificates representing
shares of PSB Common Stock and checks for cash in lieu of
fractional shares shall be mailed to former shareholders of
FBKP as soon as reasonably possible but in no event later
than thirty (30) business days following the receipt of
certificates representing former shares of FBKP Common Stock
duly endorsed or accompanied by the materials referenced
herein and delivered by certified mail, return receipt
requested (but in no event earlier than the second business
day following the Effective Date).

(iv) Closing of Stock Transfer Books;
Cancellation of FBKP Certificates. Upon the Effective Date,
the stock transfer books for FBKP Common Stock will be
closed and no further transfers of shares of FBKP Common
Stock will thereafter be made or recognized. All
certificates for shares of FBKP Common Stock surrendered
pursuant to this Section 1.02(g) will be cancelled by PSB.

(h) Anti-Dilution Provisions. If, PSB has, at
any time after the date hereof and before the Effective Date,
(A) issued a dividend in shares of PSB Common Stock, (B) combined
the outstanding shares of PSB Common Stock into a smaller number
of shares, (C) subdivided the outstanding shares of PSB Common
Stock, or (D) reclassified the shares of PSB Common Stock, then
the number of shares of PSB Common Stock to be delivered to FBKP
shareholders who are entitled to receive shares of PSB Common
Stock in exchange for shares of FBKP Common Stock shall be
adjusted so that each FBKP shareholder shall be entitled to
receive such number of shares of PSB Common Stock as such
shareholder would have been entitled to receive if the Effective
Date had occurred prior to the happening of such event. (By way
of illustration, if PSB shall declare a stock dividend of 7%
payable with respect to a record date on or prior to the
Effective Date and the conditions set forth above are satisfied,
the Applicable Exchange Ratio shall be adjusted upward by 7%).

ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FBKP

FBKP hereby represents and warrants to PSB that, except
as specifically set forth in the FBKP Disclosure Schedule
delivered to PSB by FBKP on the date hereof:

Section 2.01 Organization.

(a) FBKP is a banking corporation duly organized,
validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. FBKP has the corporate power and
<PAGE A-14> authority to carry on its business and operations as
now being conducted and to own and operate the properties and
assets now owned and being operated by it. FBKP is not qualified
or licensed to do business as a foreign corporation in any other
jurisdiction and is not required to be so qualified or licensed
as the result of the ownership or leasing of property or the
conduct of its business except where the failure to be so
qualified or licensed would not have a Material Adverse Effect on
FBKP.

(b) There are no FBKP Subsidiaries other than
those identified in the FBKP Disclosure Schedule.

(d) The respective minute books of FBKP and each
FBKP Subsidiary accurately record, in all material respects, all
material corporate actions of their respective shareholders and
boards of directors (including committees).

(e) Prior to the date of this Agreement, FBKP has
delivered to PSB true and correct copies of the articles of
incorporation and bylaws of FBKP.

Section 2.02 Capitalization.

(a) The authorized capital stock of FBKP consists
of (a) 3,500,000 shares of common stock, $0.25 par value ("FBKP
Common Stock"), of which 1,676,875 shares are outstanding,
validly issued, fully paid and nonassessable and free of
preemptive rights, and (b) 500,000 shares of preferred stock,
$2.00 par value, none of which are issued or outstanding.
Neither FBKP nor any FBKP Subsidiary has or is bound by any
subscription, option, warrant, call, commitment, agreement, plan
or other Right of any character relating to the purchase, sale or
issuance or voting of, or right to receive dividends or other
distributions on any shares of FBKP Common Stock, FBKP preferred
stock or any other security of FBKP or any securities
representing the right to vote, purchase or otherwise receive any
shares of FBKP Common Stock, FBKP preferred stock or any other
security of FBKP, other than (i) shares issuable under the PSB
Option and (ii) 1,612,500 shares of FBKP Common Stock issuable
under the FBKP Options.

(b) FBKP owns all of the outstanding shares of
capital stock of each FBKP Subsidiary free and clear of all
liens, security interests, pledges, charges, encumbrances,
agreements and restrictions of any kind or nature.

(c) Except as set forth in the FBKP Disclosure
Schedule, neither (i) FBKP, nor (ii) any FBKP Subsidiary, owns
any equity interest, directly or indirectly, other than treasury
stock, in any other company or controls any other company, except
for equity interests held in the investment portfolios of FBKP
<PAGE A-15> Subsidiaries, equity interests held by FBKP
Subsidiaries in a fiduciary capacity, and equity interests held
in connection with the commercial loan activities of FBKP. There
are no subscriptions, options, warrants, calls, commitments,
agreements or other Rights outstanding and held by FBKP with
respect to any other company's capital stock or the equity of any
other person.

(d) To the best of FBKP's knowledge, except as
disclosed in FBKP's proxy statement dated June 18, 1998, no
person or "group" (as that term is used in Section 13(d)(3) of
the Exchange Act), is the beneficial owner (as defined in Section
13(d) of the Exchange Act) of 5% or more of the outstanding
shares of FBKP Common Stock.

Section 2.03 Authority; No Violation.

(a) FBKP has full corporate power and authority
to execute and deliver this Agreement and to complete the
transactions contemplated hereby. The execution and delivery of
this Agreement by FBKP and the completion by FBKP of the
transactions contemplated hereby have been duly and validly
approved by the Board of Directors of FBKP and, except for
approval by the shareholders of FBKP as required under the
Banking Code, FBKP's articles of incorporation and bylaws and
Nasdaq requirements applicable to it, no other corporate
proceedings on the part of FBKP are necessary to complete the
transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by FBKP and, subject to
approval of the shareholders of FBKP as required under the
Banking Code, FBKP's articles of incorporation and bylaws and
Nasdaq requirements applicable to it and receipt of the required
approvals from Regulatory Authorities described in Section 3.04
hereof, constitutes the valid and binding obligation of FBKP,
enforceable against FBKP in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to
general principles of equity.

(b) (A) The execution and delivery of this
Agreement by FBKP, (B) subject to receipt of approvals from the
Regulatory Authorities referred to in Section 3.04 hereof and
FBKP's and PSB's compliance with any conditions contained
therein, the completion of the transactions contemplated hereby,
and (C) compliance by FBKP with any of the terms or provisions
hereof, will not (i) conflict with or result in a breach of any
provision of the articles of incorporation or other
organizational document or bylaws of FBKP or any FBKP Subsidiary;
(ii) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to FBKP or
any FBKP Subsidiary or any of their respective properties or
assets; or (iii) except as set forth in the FBKP Disclosure
Schedule, violate, conflict with, result in a breach of any
provisions of, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default)
<PAGE A-16> under, result in the termination of, accelerate the
performance required by, or result in a right of termination or
acceleration or the creation of any lien, security interest,
charge or other encumbrance upon any of the properties or assets
of FBKP or any FBKP Subsidiary under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement, commitment or other
instrument or obligation to which FBKP or any FBKP Subsidiary is
a party, or by which they or any of their respective properties
or assets may be bound or affected, except for such violations,
conflicts, breaches or defaults under clause (ii) or (iii) hereof
which, either individually or in the aggregate, will not have a
Material Adverse Effect on FBKP.

Section 2.04 Consents. Except for the consents,
approvals, filings and registrations from or with the Regulatory
Authorities referred to in Section 3.04 hereof and compliance
with any conditions contained therein, and the approval of this
Agreement by the shareholders of FBKP under the Banking Code,
FBKP's articles of incorporation and bylaws and Nasdaq
requirements applicable to it, and except as disclosed in the
FBKP Disclosure Schedule, no consents or approvals of, or filings
or registrations with, any public body or authority are
necessary, and no consents or approvals of any third parties are
necessary, or will be, in connection with (a) the execution and
delivery of this Agreement by FBKP, and (b) the completion by
FBKP of the transactions contemplated hereby. As of the date
hereof, FBKP has no reason to believe that (i) any required
consents or approvals will not be received or will be received
with conditions, limitations or restrictions unacceptable to it
or which would adversely impact FBKP's ability to complete the
transactions contemplated by this Agreement or that (ii) any
public body or authority, the consent or approval of which is not
required or any filing with which is not required, will object to
the completion of the transactions contemplated by this
Agreement.

Section 2.05 Financial Statements.

(a) FBKP has made available to PSB the FBKP
Regulatory Reports. The FBKP Regulatory Reports have been, or
will be, prepared in all material respects in accordance with
applicable regulatory accounting principles and practices
throughout the periods covered by such statements, and fairly
present, or will fairly present in all material respects, the
financial position, results of operations and changes in
shareholders' equity of FBKP as of and for the periods ended on
the dates thereof, in accordance with applicable regulatory
accounting principles applied on a consistent basis.

(b) FBKP has previously delivered to PSB the FBKP
Financials. The FBKP Financials have been, or will be, prepared
in accordance with GAAP applied on a consistent basis throughout
the periods covered by such statements, and fairly present, or
will fairly present, the consolidated financial position, results
<PAGE A-17> of operations, changes in shareholders' equity and
cash flows of FBKP as of and for the periods ending on the dates
thereof, in accordance with generally accepted accounting
principles applied on a consistent basis, except as noted
therein.

(c) At the date of each balance sheet included in
the FBKP Financials or the FBKP Regulatory Reports, FBKP did not
have, or will not have any liabilities, obligations or loss
contingencies of any nature (whether absolute, accrued,
contingent or otherwise) of a type required to be reflected in
such FBKP Financials or FBKP Regulatory Reports or in the
footnotes thereto which are not fully reflected or reserved
against therein or fully disclosed in a footnote thereto, except
for liabilities, obligations and loss contingencies which are not
material in the aggregate and which are incurred in the ordinary
course of business, consistent with past practice and except for
liabilities, obligations and loss contingencies which are within
the subject matter of a specific representation and warranty
herein and subject, in the case of any unaudited statements, to
normal, recurring audit adjustments and the absence of footnotes.

(d) All amounts payable as of any date under the
First Bank of Philadelphia Deferred Compensation Plan upon a
Change in Control (as defined therein) have been accrued as
compensation expense on each income statement heretofore
delivered to PSB.

Section 2.06 Taxes.

(a) FBKP has duly filed, and will file, all
federal, state and local tax returns required to be filed by or
with respect to FBKP and all FBKP Subsidiaries on or prior to the
Closing Date (all such returns being accurate and correct in all
material respects) and has duly paid or will pay, or made or will
make, provisions for the payment of all federal, state and local
taxes which have been incurred by or are due or claimed to be due
from FBKP and any FBKP Subsidiary by any taxing authority or
pursuant to any tax sharing agreement or arrangement (written or
oral) on or prior to the Closing Date other than taxes which
(i) are not delinquent or (ii) are being contested in good faith.

(b) No consent pursuant to IRC Section 341(f) has
been filed (or will be filed prior to the Closing Date) by or
with respect to FBKP or any FBKP Subsidiary.

Section 2.07 No Material Adverse Effect. FBKP has not
suffered any Material Adverse Effect since December 31, 1998.

Section 2.08 Contracts.

(a) Except as described in FBKP's proxy statement
dated June 18, 1998 and Annual Reports on Form 10-K for the years
ended December 31, 1996, 1997 and 1998, previously delivered to
PSB, in the footnotes to the audited consolidated financial
<PAGE A-18> statements of FBKP as of December 31, 1998, and for
the three years ended December 31, 1998, or in the FBKP
Disclosure Schedule, neither FBKP nor any FBKP Subsidiary is a
party to or subject to: (i) any employment, consulting or
severance contract or arrangement with any past or present
officer, director or employee of FBKP or any FBKP Subsidiary,
except for "at will" arrangements; (ii) any plan, arrangement or
contract providing for bonuses, pensions, options, deferred
compensation, retirement payments, profit sharing or similar
arrangements for or with any past or present officers, directors
or employees of FBKP or any FBKP Subsidiary; (iii) any collective
bargaining agreement with any labor union relating to employees
of FBKP or any FBKP Subsidiary; (iv) any agreement which by its
terms limits the payment of dividends by any FBKP Subsidiary;
(v) any instrument evidencing or related to indebtedness for
borrowed money whether directly or indirectly, by way of purchase
money obligation, conditional sale, lease purchase, guaranty or
otherwise, in respect of which FBKP or any FBKP Subsidiary is an
obligor to any person, which instrument evidences or relates to
indebtedness other than deposits, repurchase agreements, Federal
Home Loan Bank advances, bankers acceptances and "treasury tax
and loan" accounts established in the ordinary course of business
and transactions in "federal funds" or which contains financial
covenants or other restrictions (other than those relating to the
payment of principal and interest when due) which would be
applicable on or after the Closing Date to PSB or any PSB
Subsidiary; or (vi) any contract (other than this Agreement)
limiting the freedom of any FBKP Subsidiary to engage in any type
of banking or bank-related business permissible under law.

(b) True and correct copies of agreements, plans,
arrangements and instruments referred to in Section 2.08(a),
described in the FBKP proxy statement dated June 18, 1998 or in a
footnote to the FBKP Financials, have been provided to PSB on or
before the date hereof, are listed on the FBKP Disclosure
Schedule and are in full force and effect on the date hereof and
neither FBKP nor any FBKP Subsidiary (nor, to the knowledge of
FBKP, any other party to any such contract, plan, arrangement or
instrument) has breached any provision of, or is in default in
any respect under any term of, any such contract, plan,
arrangement or instrument which breach has resulted in or will
result in a Material Adverse Effect with respect to FBKP. Except
as set forth in the FBKP Disclosure Schedule, no party to any
material contract, plan, arrangement or instrument will have the
right to terminate any or all of the provisions of any such
contract, plan, arrangement or instrument as a result of the
transactions contemplated by this Agreement. Except as set forth
in the FBKP Disclosure Schedule, none of the employees (including
officers) of FBKP or any FBKP Subsidiary have written employment
contracts which include the right to terminate their employment
as a result of the execution of this Agreement. Except as set
forth in the FBKP Disclosure Schedule, no plan, employment
agreement, termination agreement, or similar agreement or
arrangement to which FBKP or any FBKP Subsidiary is a party or
under which FBKP or any FBKP Subsidiary may be liable contains
<PAGE A-19> provisions which permit an employee or independent
contractor to terminate it without cause and continue to accrue
future benefits thereunder. Except as set forth in the FBKP
Disclosure Schedule, no such agreement, plan or arrangement
(x) provides for acceleration in the vesting of benefits or
payments due thereunder upon the occurrence of a change in
ownership or control of FBKP or any FBKP Subsidiary absent the
occurrence of a subsequent event; (y) provides for benefits which
may cause the disallowance of a federal income tax deduction
under IRC Section 280G; or (z) requires FBKP or any FBKP
Subsidiary to provide a benefit in the form of FBKP Common Stock
or determined by reference to the value of FBKP Common Stock.

Section 2.09 Ownership of Property; Insurance
Coverage.

(a) Except as disclosed in the FBKP Disclosure
Schedule, FBKP and the FBKP Subsidiaries have, or will have as to
property acquired after the date hereof, good and, as to real
property, marketable title to all assets and properties owned by
FBKP or any FBKP Subsidiary in the conduct of their businesses,
whether such assets and properties are real or personal, tangible
or intangible, including assets and property reflected in the
balance sheets contained in the FBKP Regulatory Reports and in
the FBKP Financials or acquired subsequent thereto (except to the
extent that such assets and properties have been disposed of for
fair value, in the ordinary course of business, since the date of
such balance sheets), subject to no encumbrances, liens,
mortgages, security interests or pledges, except (i) those items
which secure repurchase agreements and liabilities for borrowed
money from a Federal Home Loan Bank, (ii) statutory liens for
amounts not yet delinquent or which are being contested in good
faith and (iii) items permitted under Article IV. FBKP and the
FBKP Subsidiaries, as lessee, have the right under valid and
subsisting leases of real and personal properties used by FBKP
and its Subsidiaries in the conduct of their businesses to occupy
or use all such properties as presently occupied and used by each
of them. Except as disclosed in the FBKP Disclosure Schedule,
such existing leases and commitments to lease constitute or will
constitute operating leases for both tax and financial accounting
purposes and the lease expense and minimum rental commitments
with respect to such leases and lease commitments are as
disclosed in the notes to the FBKP Financials.

(b) With respect to all agreements pursuant to
which FBKP or any FBKP Subsidiary has purchased securities
subject to an agreement to resell, if any, FBKP or such FBKP
Subsidiary, as the case may be, has a valid, perfected first lien
or security interest in the securities or other collateral
securing the repurchase agreement, and the value of such
collateral equals or exceeds the amount of the debt secured
thereby.

(c) FBKP and the FBKP Subsidiaries currently
maintain insurance considered by FBKP to be reasonable for their
<PAGE A-20> respective operations and similar in scope and
coverage to that maintained by other businesses similarly
engaged. Neither FBKP nor any FBKP Subsidiary has received
notice from any insurance carrier that (i) such insurance will be
cancelled or that coverage thereunder will be reduced or
eliminated, or (ii) premium costs with respect to such policies
of insurance will be substantially increased. There are
presently no material claims pending under such policies of
insurance and no notices have been given by FBKP under such
policies. All such insurance is valid and enforceable and in
full force and effect, and within the last three years FBKP has
received each type of insurance coverage for which it has applied
and during such periods has not been denied indemnification for
any material claims submitted under any of its insurance
policies.

Section 2.10 Legal Proceedings. Except as disclosed
in the FBKP Disclosure Schedule, neither FBKP nor any FBKP
Subsidiary is a party to any, and there are no pending or, to the
best of FBKP's knowledge, threatened legal, administrative,
arbitration or other proceedings, claims (whether asserted or
unasserted), actions or governmental investigations or inquiries
of any nature (i) against FBKP or any FBKP Subsidiary, (ii) to
which FBKP or any FBKP Subsidiary's assets are or may be subject,
(iii) challenging the validity or propriety of any of the
transactions contemplated by this Agreement, or (iv) which could
adversely affect the ability of FBKP to perform under this
Agreement, except for any proceedings, claims, actions,
investigations or inquiries referred to in clauses (i) or (ii)
which, if adversely determined, individually or in the aggregate,
could not be reasonably expected to have a Material Adverse
Effect on FBKP.

Section 2.11 Compliance With Applicable Law.

(a) FBKP and FBKP Subsidiaries hold all licenses,
franchises, permits and authorizations necessary for the lawful
conduct of their businesses under, and have complied in all
material respects with, applicable laws, statutes, orders, rules
or regulations of any federal, state or local governmental
authority relating to them, other than where such failure to hold
or such noncompliance will neither result in a limitation in any
material respect on the conduct of their businesses nor otherwise
have a Material Adverse Effect on FBKP.

(b) Except as disclosed in the FBKP Disclosure
Schedule, neither FBKP nor any FBKP Subsidiary has received any
notification or communication from any Regulatory Authority
(i) asserting that FBKP or any FBKP Subsidiary is not in
compliance with any of the statutes, regulations or ordinances
which such Regulatory Authority enforces; (ii) threatening to
revoke any license, franchise, permit or governmental
authorization which is material to FBKP or any FBKP Subsidiary;
(iii) requiring or threatening to require FBKP or any FBKP
Subsidiary, or indicating that FBKP or any FBKP Subsidiary may be
<PAGE A-21> required, to enter into a cease and desist order,
agreement or memorandum of understanding or any other agreement
restricting or limiting, or purporting to restrict or limit, in
any manner the operations of FBKP or any FBKP Subsidiary,
including without limitation any restriction on the payment of
dividends; or (iv) directing, restricting or limiting, or
purporting to direct, restrict or limit, in any manner the
operations of FBKP or any FBKP Subsidiary, including without
limitation any restriction on the payment of dividends (any such
notice, communication, memorandum, agreement or order described
in this sentence is hereinafter referred to as a "Regulatory
Agreement"). Neither FBKP nor any FBKP Subsidiary has consented
to or entered into any Regulatory Agreement, except as heretofore
disclosed to PSB.

Section 2.12 ERISA. FBKP has previously delivered to
PSB true and complete copies of all employee pension benefit
plans within the meaning of ERISA Section 3(2), profit sharing
plans, stock purchase plans, deferred compensation and
supplemental income plans, supplemental executive retirement
plans, employment agreements, annual or long term incentive
plans, severance plans, policies and agreements, group insurance
plans, and all other employee welfare benefit plans within the
meaning of ERISA Section 3(1) (including vacation pay, sick
leave, short-term disability, long-term disability, and medical
plans) and all other employee benefit plans, policies, agreements
and arrangements, all of which are set forth in the FBKP
Disclosure Schedule, maintained or contributed to for the benefit
of the employees or former employees (including retired
employees) and any beneficiaries thereof or directors or former
directors of FBKP or any FBKP Subsidiary, together with (i) the
most recent actuarial (if any) and financial reports relating to
those plans which constitute "qualified plans" under IRC
Section 401(a), (ii) the most recent annual reports relating to
such plans filed by them, respectively, with any government
agency, and (iii) all rulings and determination letters which
pertain to any such plans. Neither FBKP, any FBKP Subsidiary nor
any pension plan maintained by FBKP or any FBKP Subsidiary, has
incurred, directly or indirectly, within the past six (6) years
any liability under Title IV of ERISA (including to the Pension
Benefit Guaranty Corporation) or to the IRS with respect to any
pension plan qualified under IRC Section 401(a) which liability
has resulted in or will result in a Material Adverse Effect with
respect to FBKP, except liabilities to the Pension Benefit
Guaranty Corporation pursuant to ERISA Section 4007, all of which
have been fully paid, nor has any reportable event under ERISA
Section 4043 occurred with respect to any such pension plan.
With respect to each of such plans that is subject to Title IV of
ERISA, the present value of the accrued benefits under such plan,
based upon the actuarial assumptions used for funding purposes in
the plan's most recent actuarial report did not, as of its latest
valuation date, exceed the then current value of the assets of
such plan allocable to such accrued benefits. Neither FBKP nor
any FBKP Subsidiary has incurred or is subject to any liability
under ERISA Section 4201 for a complete or partial withdrawal
<PAGE A-22> from a multi-employer plan. All "employee benefit
plans," as defined in ERISA Section 3(3), comply and within the
past six (6) years have complied in all material respects with
(i) relevant provisions of ERISA and (ii) in the case of plans
intended to qualify for favorable income tax treatment,
provisions of the IRC relevant to such treatment. No prohibited
transaction (which shall mean any transaction prohibited by ERISA
Section 406 and not exempt under ERISA Section 408 or any
transaction prohibited under IRC Section 4975) has occurred
within the past six (6) years with respect to any employee
benefit plan maintained by FBKP or any FBKP Subsidiary which
would result in the imposition, directly or indirectly, of an
excise tax under IRC Section 4975 or other penalty under ERISA or
the IRC, which, individually or in the aggregate, has resulted in
or will result in a Material Adverse Effect with respect to FBKP.
FBKP and the FBKP Subsidiaries provide continuation coverage
under group health plans for separating employees and "qualified
beneficiaries" in accordance with the provisions of IRC
Section 4980B(f). Such group health plans are in compliance with
Section 1862(b)(1) of the Social Security Act. Neither FBKP nor
any FBKP Subsidiary is aware of any existing or contemplated
audit of any of its employee benefit plans by the Internal
Revenue Service or U.S. Department of Labor.

Section 2.13 Brokers, Finders and Financial Advisors.
Except for FBKP's engagement of Berwind Financial L.P. in
connection with the transactions contemplated by this Agreement,
neither FBKP nor any FBKP Subsidiary, nor any of their respective
officers, directors, employees or agents, has employed any
broker, finder or financial advisor in connection with the
transactions contemplated by this Agreement or in connection with
any transaction other than the Merger, or, except for its
commitments disclosed in the FBKP Disclosure Schedule, incurred
any liability or commitment for any fees or commissions to any
such person in connection with the transactions contemplated by
this Agreement or in connection with any transaction other than
the Merger, which has not been reflected in the FBKP Financials.
The FBKP Disclosure Schedule shall contain as an exhibit the
engagement letter between FBKP and Berwind Financial L.P.

Section 2.14 Environmental Matters. To the knowledge
of FBKP, neither FBKP nor any FBKP Subsidiary, nor any properties
owned or operated by FBKP or any FBKP Subsidiary has been or is
in violation of or liable under any Environmental Law which
violation or liability, individually or in the aggregate,
resulted in, or will result, in a Material Adverse Effect with
respect to FBKP. There are no actions, suits or proceedings, or
demands, claims, notices or investigations (including without
limitation notices, demand letters or requests for information
from any environmental agency) instituted or pending, or to the
knowledge of FBKP, threatened, relating to the liability of any
property owned or operated by FBKP or any FBKP Subsidiary under
any Environmental Law.
<PAGE A-23>
Section 2.15 Allowance for Loan Losses. The allowance
for loan losses reflected, and to be reflected, in the FBKP
Regulatory Reports, and shown, and to be shown, on the balance
sheets contained in the FBKP Financials have been, and will be,
established in accordance with the requirements of GAAP and all
applicable regulatory criteria.

Section 2.16 Information to be Supplied. The
information to be supplied by FBKP for inclusion in the
Registration Statement (including the Prospectus/Proxy Statement)
will not, at the time the Registration Statement is declared
effective pursuant to the Securities Act and as of the date the
Prospectus/Proxy Statement is mailed to shareholders of PSB and
FBKP and up to and including the date(s) of the meetings of
shareholders of PSB and FBKP to which such Prospectus/Proxy
Statement relates, contain any untrue statement of a material
fact or omit to state any material fact necessary in order to
make the statements therein not misleading. The information
supplied, or to be supplied, by FBKP for inclusion in the
Applications will, at the time such documents are filed with any
Regulatory Authority and up to and including the date(s) of the
obtainment of any required regulatory approvals or consents, be
accurate in all material aspects.

Section 2.17 Securities Documents. FBKP has made
available to PSB copies of its (i) annual reports on SEC
Form 10-K for the years ended December 31, 1998, 1997 and 1996,
and (ii) proxy materials used in connection with its meetings of
shareholders held in 1998, 1997 and 1996. Such reports and such
proxy materials complied, at the time filed with the FRB, in all
material respects, with the Exchange Act and all applicable rules
and regulations of the FRB.

Section 2.18 Related Party Transactions. Except as
disclosed (i) in the FBKP Disclosure Schedule, (ii) in the FBKP
proxy statement dated June 18, 1998 or (iii) in the footnotes to
the FBKP Financials, FBKP is not a party to any transaction
(including any loan or other credit accommodation but excluding
deposits in the ordinary course of business) with any Affiliate
of FBKP (except an FBKP Subsidiary); and all such transactions
(a) were made in the ordinary course of business, (b) were made
on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other Persons, and (c) did not involve more
than the normal risk of collectability or present other
unfavorable features. Except as set forth on the FBKP Disclosure
Schedule, no loan or credit accommodation to any Affiliate of
FBKP is presently in default or, during the three year period
prior to the date of this Agreement, has been in default or has
been restructured, modified or extended. FBKP has not been
notified that principal and interest with respect to any such
loan or other credit accommodation will not be paid when due or
that the loan grade classification accorded such loan or credit
accommodation by FBKP is inappropriate.
<PAGE A-24>
Section 2.19 Loans. Each loan reflected as an asset
in the FBKP Financial Statements (i) is evidenced by notes,
agreements or other evidences of indebtedness which are true,
genuine and correct (ii) to the extent secured, has been secured
by valid liens and security interests which have been perfected,
and (ii) is the legal, valid and binding obligation of the
obligor named therein, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent conveyance and
other laws of general applicability relating to or affecting
creditors' rights and to general equity principles, in each case
other than loans as to which the failure to satisfy the foregoing
standards would not have a Material Adverse Effect on FBKP.

Section 2.20 Accounting for the Merger;
Reorganization. As of the date hereof, FBKP does not have any
reason to believe that the Merger will fail to qualify (i) for
pooling-of-interests accounting treatment under GAAP, or (ii) as
a reorganization under Section 368(a) of the IRC.

Section 2.21 Fairness Opinion. FBKP has received a
written opinion from Berwind Financial L.P. to the effect that,
as of the date hereof, the consideration to be received by
shareholders of FBKP pursuant to this Agreement is fair, from a
financial point of view, to such shareholders.

Section 2.22 Quality of Representations. The
representations made by FBKP in this Agreement are true, correct
and complete in all material respects, and do not omit statements
necessary to make them not misleading under all facts and
circumstances.

Section 2.23 Year 2000 Compliance. To the best of
FBKP's knowledge, the advent of the year 2000 will not adversely
effect the FBKP's operations or the performance of information
technology used by FBKP. Without limiting the generality of the
foregoing, (i) the hardware and software used by FBKP is designed
to be used prior to, during, and after the calendar 2000 A.D. and
such hardware and software will operate during each time period
without error relating to date data which represents or
references different centuries or more than one century, (ii) the
hardware and software will not abnormally end or provide invalid
or incorrect results as a result of date data, and (iii) the
hardware and software used by FBKP will be designed to ensure
year 2000 A.D. compatibility, including date data, century
recognition, leap year, calculations which accommodate same
century and multi-century formulae in date values, and date data
interface values that reflect the century.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PSB

PSB hereby represents and warrants to FBKP that, except
as set forth in the PSB Disclosure Schedule delivered by PSB to
FBKP on or prior to the date hereof:
<PAGE A-25>
Section 3.01 Organization.

(a) PSB is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth
of Pennsylvania. PSB is a bank holding company duly registered
under the BHCA. PSB has the corporate power and authority to
carry on its business and operations as now being conducted and
to own and operate the properties and assets now owned and being
operated by it. Each PSB Subsidiary is duly organized, validly
existing, and in good standing under the laws of the jurisdiction
of its incorporation and each possesses full corporate power and
authority to carry on its respective business and to own, lease
and operate its properties as presently conducted. Neither PSB
nor any PSB Subsidiary is required by the conduct of its business
or the ownership or leasing of its assets to qualify to do
business as a foreign corporation in any jurisdiction other than
the Commonwealth of Pennsylvania except where the failure to be
so qualified would not have a Material Adverse Effect on PSB.

(b) The Bank is a state savings bank, duly
organized and validly existing under the laws of the Commonwealth
of Pennsylvania. The Bank has the corporate power and authority
to carry on its business and operations as now being conducted
and to own and operate the properties and assets now owned and
being operated by it.

(d) The respective minute books of PSB and the
Bank accurately record in all material respects all material
corporate action of their respective shareholders and boards of
directors (including committees).

(e) Prior to the execution of this Agreement, PSB
has delivered to FBKP true and correct copies of the articles of
incorporation and the bylaws of PSB and the Bank, respectively,
as in effect on the date hereof.

Section 3.02 Capital Structure.

(a) The authorized capital stock of PSB consists
of (a) 10,000,000 shares of common stock, no par value ("PSB
Common Stock"), of which, at the date of this Agreement, no
shares were issued and held by PSB as treasury stock and
3,101,140 shares are outstanding, validly issued, fully paid and
nonassessable, and (b) 5,000,000 shares of preferred stock, no
par value, of which no shares are issued or outstanding. No
shares of PSB Common Stock were issued in violation of any
preemptive rights. PSB has no Rights authorized, issued or
outstanding, other than options to acquire 92,242 shares of PSB
Common Stock under PSB's stock option plan.

(b) To the best of PSB's knowledge, except as
disclosed in the PSB Disclosure Schedule, no person or "group"
<PAGE A-26> (as that term is used in Section 13(d)(3) of the
Exchange Act) is the beneficial owner (as defined in
Section 13(d) of the Exchange Act) of 5% or more of the
outstanding shares of PSB Common Stock.

(c) PSB owns all of the capital stock of the
Bank, free and clear of any lien or encumbrance. Except for the
PSB Subsidiaries, PSB does not possess, directly or indirectly,
any material equity interest in any corporation, except for
equity interests held in the investment portfolios of PSB
Subsidiaries, equity interests held by PSB Subsidiaries in a
fiduciary capacity, and equity interests held in connection with
the commercial loan activities of the Bank.

Section 3.03 Authority; No Violation.

(a) PSB has full corporate power and authority to
execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The Bank has full corporate
power and authority to execute and deliver the plan of merger and
to consummate the Merger. The execution and delivery of this
Agreement by PSB and the completion by PSB of the transactions
contemplated hereby have been duly and validly approved by the
Board of Directors of PSB and, except for approval of the
shareholders of PSB under Nasdaq requirements applicable to it,
no other corporate proceedings on the part of PSB are necessary
to complete the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by PSB and,
subject to approval by the shareholders of PSB under Nasdaq
requirements applicable to it and receipt of the required
approvals of Regulatory Authorities described in Section 3.04
hereof, constitutes the valid and binding obligation of PSB,
enforceable against PSB in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to
general principles of equity.

(b) (A) The execution and delivery of this
Agreement by PSB, (B) subject to receipt of approvals from the
Regulatory Authorities referred to in Section 3.04 hereof and
FBKP's and PSB's compliance with any conditions contained
therein, the consummation of the transactions contemplated
hereby, and (C) compliance by PSB with any of the terms or
provisions hereof or of the plan of merger will not (i) conflict
with or result in a breach of any provision of the articles of
incorporation or other organizational document or bylaws of PSB
or any PSB Subsidiary; (ii) violate any statute, code, ordinance,
rule, regulation, judgment, order, writ, decree or injunction
applicable to PSB or any PSB Subsidiary or any of their
respective properties or assets; or (iii) violate, conflict with,
result in a breach of any provisions of, constitute a default (or
an event which, with notice or lapse of time, or both, would
constitute a default), under, result in the termination of,
accelerate the performance required by, or result in a right of
termination or acceleration or the creation of any lien, security
<PAGE A-27> interest, charge or other encumbrance upon any of the
properties or assets of PSB or any PSB Subsidiary under, any of
the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other
investment or obligation to which PSB or any PSB Subsidiary is a
party, or by which they or any of their respective properties or
assets may be bound or affected, except for such violations,
conflicts, breaches or defaults under clause (ii) or (iii) hereof
which, either individually or in the aggregate, will not have a
Material Adverse Effect on PSB.

Section 3.04 Consents. Except for consents,
approvals, filings and registrations from or with the FRB, the
DOJ, the SEC, the PDOB, the PDS, the NASD and state "blue sky"
authorities, and compliance with any conditions contained
therein, and the approval of this Agreement by the shareholders
of PSB in accordance with Nasdaq requirements applicable to it,
and the approval of the plan of merger by PSB as the sole
shareholder of the Bank, no consents or approvals of, or filings
or registrations with, any public body or authority are
necessary, and no consents or approvals of any third parties are
necessary, or will be, in connection with (a) the execution and
delivery of this Agreement by PSB and (b) the completion by PSB
of the transactions contemplated hereby. As of the date hereof,
PSB has no reason to believe that (i) any required consents or
approvals will not be received or will be received with
conditions, limitations or restrictions unacceptable to it or
which would adversely impact PSB's or the Bank's ability to
complete the transactions contemplated by this Agreement or that
(ii) any public body or authority, the consent or approval of
which is not required or any filing with which is not required,
will object to the completion of the transactions contemplated by
this Agreement.

Section 3.05 Financial Statements.

(a) PSB has made, or will make, the PSB
Regulatory Reports available to FBKP for inspection. The PSB
Regulatory Reports have been, or will be, prepared in all
material respects in accordance with applicable regulatory
accounting principles and practices throughout the periods
covered by such statements, and fairly present, or will fairly
present in all material respects, the financial position, results
of operations, and changes in shareholders' equity of PSB as of
and for the periods ended on the dates thereof, in accordance
with applicable regulatory accounting principles applied on a
consistent basis.

(b) PSB has previously delivered, or will
deliver, to FBKP the PSB Financials. The PSB Financials have
been, or will be, prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered by such
statements, except as noted therein, and fairly present, or will
fairly present, the consolidated financial position, results of
operations and cash flows of PSB as of and for the periods ending
<PAGE A-28> on the dates thereof, in accordance with GAAP applied
on a consistent basis, except as noted therein.

(c) At the date of each balance sheet included in
the PSB Financials or PSB Regulatory Reports, PSB did not have
any liabilities, obligations or loss contingencies of any nature
(whether absolute, accrued, contingent or otherwise) of a type
required to be reflected in such PSB Financials or PSB Regulatory
Reports or in the footnotes thereto which are not fully reflected
or reserved against therein or disclosed in a footnote thereto,
except for liabilities, obligations or loss contingencies which
are not material in the aggregate and which are incurred in the
ordinary course of business, consistent with past practice, and
except for liabilities, obligations or loss contingencies which
are within the subject matter of a specific representation and
warranty herein and subject, in the case of any unaudited
statements, to normal recurring audit adjustments and the absence
of footnotes.

Section 3.06 Taxes. PSB and the PSB Subsidiaries are
members of the same affiliated group within the meaning of IRC
Section 1504(a). PSB has duly filed, and will file, all federal,
state and local tax returns required to be filed by or with
respect to PSB and all PSB Subsidiaries on or prior to the
Closing Date (all such returns being accurate and correct in all
material respects) and has duly paid or will pay, or made or will
make, provisions for the payment of all federal, state and local
taxes which have been incurred by or are due or claimed to be due
from PSB and any PSB Subsidiary by any taxing authority or
pursuant to any tax sharing agreement or arrangement (written or
oral) on or prior to the Closing Date other than taxes which
(i) are not delinquent or (ii) are being contested in good faith.

Section 3.07 No Material Adverse Effect. PSB has not
suffered any Material Adverse Effect since December 31, 1998.

Section 3.08 Ownership of Property; Insurance
Coverage.

(a) PSB and the PSB Subsidiaries have good and,
as to real property, marketable title to all assets and
properties owned by PSB or any of its Subsidiaries in the conduct
of their businesses, whether such assets and properties are real
or personal, tangible or intangible, including assets and
property reflected in the balance sheets contained in the PSB
Regulatory Reports and in the PSB Financials or acquired
subsequent thereto (except to the extent that such assets and
properties have been disposed of for fair value, in the ordinary
course of business, since the date of such balance sheets),
subject to no encumbrances, liens, mortgages, security interests
or pledges, except (i) those items that secure liabilities for
borrowed money and that are described in the PSB Disclosure
Schedule or permitted under Article IV hereof, and (ii) statutory
liens for amounts not yet delinquent or which are being contested
in good faith. PSB and the PSB Subsidiaries, as lessee, have the
<PAGE A-29> right under valid and subsisting leases of real and
personal properties used by PSB and its Subsidiaries in the
conduct of their businesses to occupy and use all such properties
as presently occupied and used by each of them.

(b) PSB and the PSB Subsidiaries currently
maintain insurance in amounts considered by PSB to be reasonable
for their respective operations, and such insurance is similar in
scope and coverage to that maintained by other businesses
similarly engaged. Neither PSB nor any PSB Subsidiary has
received notice from any insurance carrier that (i) such
insurance will be cancelled or that coverage thereunder will be
reduced or eliminated or (ii) premium costs with respect to such
insurance will be substantially increased.

Section 3.09 Legal Proceedings. Neither PSB nor any
PSB Subsidiary is a party to any, and there are no pending or, to
the best of PSB's knowledge, threatened legal, administrative,
arbitration or other proceedings, claims, actions or governmental
investigations or inquiries of any nature (i) against PSB or any
PSB Subsidiary, (ii) to which PSB's or any PSB Subsidiary's
assets are or may be subject, (iii) challenging the validity or
propriety of any of the transactions contemplated by this
Agreement, or (iv) which could adversely affect the ability of
PSB to perform under this Agreement, except for any proceedings,
claims, actions, investigations or inquiries referred to in
clauses (i) or (ii) which, individually or in the aggregate,
could not be reasonably expected to have a Material Adverse
Effect on PSB.

Section 3.10 Compliance With Applicable Law.

(a) PSB and the PSB Subsidiaries hold all
licenses, franchises, permits and authorizations necessary for
the lawful conduct of their businesses under, and have complied
in all material respects with, applicable laws, statutes, orders,
rules or regulations of any federal, state or local governmental
authority relating to them, other than where such failure to hold
or such noncompliance will neither result in a limitation in any
material respect on the conduct of their businesses nor otherwise
have a Material Adverse Effect on PSB.

(b) Neither PSB nor any PSB Subsidiary has
received any notification or communication from any Regulatory
Authority (i) asserting that PSB or any PSB Subsidiary is not in
compliance with any of the statutes, regulations or ordinances
which such Regulatory Authority enforces; (ii) threatening to
revoke any license, franchise, permit or governmental
authorization which is material to PSB or any PSB Subsidiary;
(iii) requiring or threatening to require PSB or any PSB
Subsidiary, or indicating that PSB or any PSB Subsidiary may be
required, to enter into a cease and desist order, agreement or
memorandum of understanding or any other agreement restricting or
limiting, or purporting to restrict or limit, in any manner the
operations of PSB or any PSB Subsidiary, including without
<PAGE A-30> limitation any restriction on the payment of
dividends; or (iv) directing, restricting or limiting, or
purporting to direct, restrict or limit, in any manner the
operations of PSB or any PSB Subsidiary, including without
limitation any restriction on the payment of dividends (any such
notice, communication, memorandum, agreement or order described
in this sentence is hereinafter referred to as a "Regulatory
Agreement"). Neither PSB nor any PSB Subsidiary has consented to
or entered into any Regulatory Agreement, except as heretofore
disclosed to FBKP.

Section 3.11 Information to be Supplied. The
information to be supplied by PSB for inclusion in the
Registration Statement (including the Prospectus/Proxy Statement)
will not, at the time the Registration Statement is declared
effective pursuant to the Securities Act and as of the date the
Prospectus/Proxy Statement is mailed to shareholders of PSB and
FBKP and up to and including the date(s) of the meetings of
shareholders of PSB and FBKP to which such Prospectus/Proxy
Statement relates, contain any untrue statement of a material
fact or omit to state any material fact necessary in order to
make the statements therein not misleading. The information
supplied, or to be supplied, by PSB for inclusion in the
Applications will, at the time such documents are filed with any
Regulatory Authority and up to and including the date(s) of the
obtainment of any required regulatory approvals or consents, be
accurate in all material aspects.

Section 3.12 ERISA. PSB has previously made available
to FBKP true and complete copies of the employee pension benefit
plans within the meaning of ERISA Section 3(2), profit sharing
plans, stock purchase plans, deferred compensation and
supplemental income plans, supplemental executive retirement
plans, annual incentive plans, group insurance plans, and all
other employee welfare benefit plans within the meaning of ERISA
Section 3(1) (including vacation pay, sick leave, short-term
disability, long-term disability, and medical plans), and all
other employee benefit plans, policies, agreements and
arrangements, all of which are set forth on the PSB Disclosure
Schedule, maintained or contributed to for the benefit of the
employees or former employees (including retired employees) and
any beneficiaries thereof or directors or former directors of PSB
or any PSB Subsidiary, together with (i) the most recent
actuarial (if any) and financial reports relating to those plans
which constitute "qualified plans" under IRC Section 401(a),
(ii) the most recent annual reports relating to such plans filed
by them, respectively, with any government agency, and (iii) all
rulings and determination letters which pertain to any such
plans. Neither PSB nor any PSB Subsidiary, and no pension plan
maintained by PSB or any PSB Subsidiary, has incurred, directly
or indirectly, within the past six (6) years any liability under
Title IV of ERISA (including to the Pension Benefit Guaranty
Corporation) or to the IRS with respect to any pension plan
qualified under IRC Section 401(a) which liability has resulted
in or will result in a Material Adverse Effect with respect to
<PAGE A-31> PSB, except liabilities to the Pension Benefit
Guaranty Corporation pursuant to ERISA Section 4007, all of which
have been fully paid, nor has any reportable event under ERISA
Section 4043 occurred with respect to any such pension plan.
With respect to each of such plans that is subject to Title IV of
ERISA, the present value of the accrued benefits under such plan,
based upon the actuarial assumptions used for funding purposes in
the plan's most recent actuarial report did not, as of its latest
valuation date, exceed the then current value of the assets of
such plan allocable to such accrued benefits. Neither PSB nor
any PSB Subsidiary has incurred or is subject to any liability
under ERISA Section 4201 for a complete or partial withdrawal
from a multi-employer plan. All "employee benefit plans," as
defined in ERISA Section 3(3), comply and within the past six
(6) years have complied in all material respects with
(i) relevant provisions of ERISA, and (ii) in the case of plans
intended to qualify for favorable income tax treatment,
provisions of the IRC relevant to such treatment. No prohibited
transaction (which shall mean any transaction prohibited by ERISA
Section 406 and not exempt under ERISA Section 408 or any
transaction prohibited under IRC Section 4975) has occurred
within the past six (6) years with respect to any employee
benefit plan maintained by PSB or any PSB Subsidiary that would
result in the imposition, directly or indirectly, of an excise
tax under IRC Section 4975 or other penalty under ERISA or the
IRC, which individually or in the aggregate, has resulted in or
will result in a Material Adverse Effect with respect to PSB.
PSB and the PSB Subsidiaries provide continuation coverage under
group health plans for separating employees and "qualified
beneficiaries" in accordance with the provisions of IRC Section
4980B(f). Such group health plans are in compliance with Section
1862(b)(1) of the Social Security Act.

Section 3.13 Securities Documents. PSB has made, or
will make, available to FBKP copies of its annual reports on SEC
Form 10-K for the years ended December 31, 1996, 1997 and 1998.
Such reports complied, at the time filed with the FDIC, in all
material respects, with the Exchange Act and the applicable rules
and regulations of the FDIC and the SEC.

Section 3.14 Environmental Matters. To the knowledge
of PSB, neither PSB nor any PSB Subsidiary, nor any properties
owned or operated by PSB or any PSB Subsidiary has been or is in
violation of or liable under any Environmental Law which
violation or liability, individually or in the aggregate,
resulted in or will result in a Material Adverse Effect with
respect to PSB. There are no actions, suits or proceedings, or
demands, claims, notices or investigations (including without
limitation notices, demand letters or requests for information
from any environmental agency) instituted or pending, or to the
knowledge of PSB, threatened, relating to the liability of any
property owned or operated by PSB or any PSB Subsidiary under any
Environmental Law.
<PAGE A-32>
Section 3.15 Allowance for Loan Losses. The allowance
for loan losses reflected, and to be reflected, in the PSB
Regulatory Reports, and shown, and to be shown, on the balance
sheets contained in the PSB Financials have been, and will be,
established in accordance with the requirements of GAAP and all
applicable regulatory criteria.

Section 3.16 Brokers and Finders. Except for PSB's
engagement of Hopper Soliday in connection with the transactions
contemplated by this Agreement, neither PSB nor any PSB
Subsidiary, nor any of their respective officers, directors,
employees or agents, has employed any broker, finder or financial
advisor, or incurred any liability for any fees or commissions to
any such person, in connection with the transactions contemplated
by this Agreement.

Section 3.17 Loans. Each loan reflected as an asset
in the PSB Financials (i) is evidenced by notes, agreements or
other evidences of indebtedness which are true, genuine and
correct (ii) to the extent secured, has been secured by valid
liens and security interests which have been perfected, and
(ii) is the legal, valid and binding obligation of the obligor
named therein, enforceable in accordance with its terms, subject
to bankruptcy, insolvency, fraudulent conveyance and other laws
of general applicability relating to or affecting creditors'
rights and to general equity principles, in each case other than
loans as to which the failure to satisfy the foregoing standards
would not have a Material Adverse Effect on PSB.

Section 3.18 Accounting for the Merger;
Reorganization. As of the date hereof, PSB does not have any
reason to believe that the Merger will fail to qualify (i) for
pooling-of-interests treatment under GAAP, or (ii) as a
reorganization under Section 368(a) of the IRC.

Section 3.19 Quality of Representations. The
representations made by PSB in this Agreement are true, correct
and complete in all material respects and do not omit statements
necessary to make the representations not misleading under the
circumstances.

Section 3.20 Year 2000 Compliance. To the best of
PSB's knowledge, the advent of the year 2000 will not adversely
effect PSB's or the Bank's operations or the performance of
information technology used by PSB or the Bank. Without limiting
the generality of the foregoing, (i) the hardware and software
used by PSB or the Bank is designed to be used prior to, during,
and after the calendar 2000 A.D. and such hardware and software
will operate during each time period without error relating to
date data which represents or references different centuries or
more than one century, (ii) the hardware and software will not
abnormally end or provide invalid or incorrect results as a
result of date data, and (iii) the hardware and software used by
PSB or the Bank will be designed to ensure year 2000 A.D.
compatibility, including date data, century recognition, leap
<PAGE A-33> year, calculations which accommodate same century and
multi-century formulae in date values, and date data interface
values that reflect the century."

ARTICLE IV
COVENANTS OF THE PARTIES

Section 4.01 Conduct of FBKP's Business.

(a) From the date of this Agreement to the
Closing Date, FBKP and each FBKP Subsidiary will conduct its
business and engage in transactions, including extensions of
credit, only in the ordinary course and consistent with past
practice and policies, except as otherwise required by this
Agreement or with the written consent of PSB. FBKP will use its
reasonable good faith efforts, to (i) preserve its business
organizations intact, (ii) maintain good relationships with
employees, and (iii) preserve for itself the good will of
customers of FBKP and FBKP Subsidiaries and others with whom
business relationships exist. From the date hereof to the
Closing Date, except as otherwise consented to or approved by PSB
in writing or as permitted or required by this Agreement, FBKP
will not, and FBKP will not permit any FBKP Subsidiary to:

(i) amend or change any provision of its
articles of incorporation or bylaws;

(ii) change the number of authorized or
issued shares of its capital stock or issue or grant any
option, warrant, call, commitment, subscription, Right or
agreement of any character relating to its authorized or
issued capital stock or any securities convertible into
shares of such stock, or split, combine or reclassify any
shares of capital stock, or declare, set aside or pay any
dividend or other distribution in respect of capital stock,
or redeem or otherwise acquire any shares of capital stock,
except that (A) FBKP may issue up to an aggregate of
1,612,500 shares of FBKP Common Stock upon the valid
exercise of FBKP Options, and (B) FBKP may issue shares of
FBKP Common Stock pursuant to the PSB Option.

(iii) grant any severance or termination pay
(other than pursuant to written policies or written
agreements of FBKP or FBKP Subsidiaries in effect on the
date hereof and provided to PSB prior to the date hereof)
to, or enter into any new or amend any existing employment
agreement with, or increase the compensation of, any
employee, officer or director of FBKP or any FBKP
Subsidiary, except for routine periodic increases,
individually and in the aggregate, in accordance with past
practice;

(iv) merge or consolidate FBKP or any FBKP
Subsidiary with any other corporation; sell or lease all or
<PAGE A-34> any substantial portion of the assets or
business of FBKP or any FBKP Subsidiary; make any
acquisition of all or any substantial portion of the
business or assets of any other person, firm, association,
corporation or business organization other than in
connection with the collection of any loan or credit
arrangement between any FBKP Subsidiary and any other
person; enter into a purchase and assumption transaction
with respect to deposits and liabilities; permit the
revocation or surrender by any FBKP Subsidiary of its
certificate of authority to maintain, or file an application
for the relocation of, any existing branch office, or file
an application for a certificate of authority to establish a
new branch office;

(v) Sell or otherwise dispose of any asset
of FBKP or of any FBKP Subsidiary other than in the ordinary
course of business consistent with past practice; subject
any asset of FBKP or of any FBKP Subsidiary to a lien,
pledge, security interest or other encumbrance (other than
in connection with deposits, repurchase agreements, bankers
acceptances, "treasury tax and loan" accounts established in
the ordinary course of business and transactions in "federal
funds" and the satisfaction of legal requirements in the
exercise of trust powers) other than in the ordinary course
of business consistent with past practice; incur any
indebtedness for borrowed money (or guarantee any
indebtedness for borrowed money), except in the ordinary
course of business consistent with past practice;

(vi) take any action which would result in
any of the representations and warranties of FBKP set forth
in this Agreement becoming untrue as of any date after the
date hereof or in any of the conditions set forth in
Article V hereof not being satisfied, except in each case as
may be required by applicable law;

(vii) change any method, practice or
principle of accounting, except as may be required from time
to time by GAAP (without regard to any optional early
adoption date) or any Regulatory Authority responsible for
regulating FBKP;

(viii) waive, release, grant or transfer any
rights of value or modify or change in any material respect
any existing material agreement to which FBKP or any FBKP
Subsidiary is a party, other than in the ordinary course of
business consistent with past practice;

\EDD implement any pension, retirement,
profit sharing, bonus, welfare benefit or similar plan or
arrangement that was not in effect on the date of this
Agreement, or, except as required by law, materially amend
any existing plan or arrangement except to the extent such
amendments do not result in an increase in cost; <PAGE A-
35>

(x) purchase any security for its investment
portfolio not rated "A" or higher by either Standard &
Poor's Corporation or Moody's Investor Services, Inc.;

(xi) amend or otherwise modify the
underwriting and other lending guidelines and policies of
FBKP in effect as of the date hereof or otherwise fail to
conduct its lending activities in the ordinary course of
business consistent with past practice;

(xii) enter into, renew, extend or modify
any other transaction with any Affiliate, other than deposit
and loan transactions in the ordinary course of business and
which are in compliance with the requirements of applicable
laws and regulations;

(xiii) enter into any interest rate swap,
floor or cap or similar commitment, agreement or
arrangement;

(xiv) except for the execution of this
Agreement, take any action that would give rise to a right
of payment to any individual under any employment agreement;

(xv) take any action that would preclude the
Merger from qualifying (A) for pooling-of-interests
accounting treatment under GAAP or (B) as a reorganization
within the meaning of Section 368 of the IRC, provided,
however, that nothing contained herein shall limit the
ability of FBKP to comply with its obligations under the PSB
Option; or

(xvi) agree to do any of the foregoing.

For purposes of this Section 4.01, it shall not be
considered in the ordinary course of business for FBKP or any
FBKP Subsidiary to do any of the following: (i) make any capital
expenditure of $10,000 or more not disclosed on FBKP Disclosure
Schedule 4.01, without the prior written consent of PSB;
(ii) make any sale, assignment, transfer, pledge, hypothecation
or other disposition of any assets having a book or market value,
whichever is greater, in the aggregate in excess of $100,000,
other than pledges of assets to secure government deposits, to
exercise trust powers, sales of assets received in satisfaction
of debts previously contracted in the normal course of business,
issuance and sales of loans, or transactions in the investment
securities portfolio by FBKP or a FBKP Subsidiary or repurchase
agreements, in each case, in the ordinary course of business; or
(iii) undertake or enter any lease, contract or other commitment
for its account, other than in the normal course of providing
credit to customers as part of its banking business, involving a
payment by FBKP or any FBKP Subsidiary of more than $10,000
<PAGE A-36> annually, or containing a material financial
commitment and extending beyond 12 months from the date hereof.

Section 4.02 Access; Confidentiality.

(a) From the date of this Agreement through the
Closing Date, FBKP or PSB, as the case may be, shall afford to,
the other party and its authorized agents and representatives,
complete access to their respective properties, assets, books and
records and personnel, at reasonable hours and after reasonable
notice; and the officers of FBKP and PSB will furnish any person
making such investigation on behalf of the other party with such
financial and operating data and other information with respect
to the businesses, properties, assets, books and records and
personnel as the person making such investigation shall from time
to time reasonably request.

(b) FBKP and PSB each agree to conduct such
investigation and discussions hereunder in a manner so as not to
interfere unreasonably with normal operations and customer and
employee relationships of the other party.

(c) In addition to the access permitted by
subparagraph (a) above, from the date of this Agreement through
the Closing Date, FBKP shall permit employees of PSB reasonable
access to and participation in matters relating to problem loans,
loan restructurings and loan work-outs of FBKP and the FBKP
Subsidiaries, provided that nothing contained in this
subparagraph shall be construed to grant PSB or any PSB employee
any decision-making authority with respect to such matters. PSB
shall have the right, however, at PSB's expense, to cause FBKP or
any FBKP Subsidiary to obtain an appraisal by an independent
third party experienced in such matters, and mutually
satisfactory to PSB and FBKP, of the assets or property securing
any loan made by FBKP or any FBKP Subsidiary, with a principal
balance of $250,000 or more.

(d) All information furnished to PSB by FBKP or
by FBKP to PSB previously in connection with the transactions
contemplated by this Agreement or pursuant hereto shall be held
in confidence to the extent required by, and in accordance with,
the confidentiality agreement executed between FBKP and PSB (the
"Confidentiality Agreement").

Section 4.03 Regulatory Matters and Consents.

(a) FBKP and PSB shall promptly prepare a
Prospectus/Proxy Statement to be mailed to their respective
shareholders in connection with the meetings of their respective
shareholders and transactions contemplated hereby, which
Prospectus/Proxy Statement shall conform to all applicable legal
requirements. PSB shall, as promptly as practicable following
the preparation thereof, file the Registration Statement with the
SEC and FBKP and PSB shall use all reasonable efforts to have the
Registration Statement declared effective under the Securities
<PAGE A-37> Act as promptly as practicable after such filing.
PSB will advise FBKP, promptly after PSB receives notice thereof,
of the time when the Registration Statement has become effective
or any supplement or amendment has been filed, of the issuance of
any stop order or the suspension of the qualification of the
shares of capital stock issuable pursuant to the Registration
Statement, or the initiation or threat of any proceeding for any
such purpose, or of any request by the SEC for the amendment or
supplement of the Registration Statement or for additional
information. PSB shall use its reasonable best efforts to
obtain, prior to the effective date of the Registration
Statement, all necessary state securities laws or "Blue Sky"
permits and approvals required to carry out the transactions
contemplated by this Agreement. PSB will provide FBKP with as
many copies of such Registration Statement and all amendments
thereto promptly upon the filing thereof as FBKP may reasonably
request.

(b) PSB and FBKP will prepare all Applications to
Regulatory Authorities and make all filings for, and use their
reasonable best efforts to obtain as promptly as practicable
after the date hereof, all necessary permits, consents,
approvals, waivers and authorizations of all Regulatory
Authorities necessary or advisable to consummate the transactions
contemplated by this Agreement.

(c) FBKP will furnish PSB with all information
concerning FBKP and FBKP Subsidiaries as may be reasonably
necessary or advisable in connection with the Registration
Statement and any Application or filing made by or on behalf of
PSB to any Regulatory Authority in connection with the
transactions contemplated by this Agreement.

(d) PSB and FBKP shall have the right to review
in advance, and to the extent practicable each will consult with
the other on, all information which appears in any filing made
with or written materials submitted to the SEC, any Regulatory
Authority or any third party in connection with the transactions
contemplated by this Agreement. In exercising the foregoing
right, each of the parties hereto shall act reasonably and as
promptly as practicable. The parties hereto agree that they will
consult with each other with respect to the obtaining of all
permits, consents, approvals and authorizations of the SEC,
Regulatory Authorities and third parties necessary or advisable
to consummate the transactions contemplated by this Agreement and
each party will keep the other apprised of the status of matters
relating to completion of the transactions contemplated hereby
and thereby.

(e) PSB will promptly furnish FBKP with copies of
all Applications and other written communications to, or received
by PSB or any PSB Subsidiary from, any Regulatory Authority in
respect of the transactions contemplated hereby.
<PAGE A-38>
Section 4.04 Taking of Necessary Action. PSB and FBKP
shall each use its reasonable best efforts in good faith, and
each of them shall cause its Subsidiaries to use their reasonable
best efforts in good faith, to take or cause to be taken all
action necessary or desirable on its part so as to permit
completion of the Merger as soon as practicable after the date
hereof, including, without limitation, (A) obtaining the consent
or approval of each individual, partnership, corporation,
association or other business or professional entity whose
consent or approval is required or desirable for consummation of
the transactions contemplated hereby (including assignment of
leases without any change in terms), provided that neither FBKP
nor any FBKP Subsidiary shall agree to make any payments or
modifications to agreements in connection therewith without the
prior written consent of PSB, and (B) requesting the delivery of
appropriate opinions, consents and letters from its counsel and
independent auditors. No party hereto shall take, or cause, or
to the best of its ability permit to be taken, any action that
would substantially impair the prospects of completing the Merger
pursuant to this Agreement; provided that nothing herein
contained shall preclude PSB or FBKP or from exercising its
rights under this Agreement or the PSB Option.

Section 4.05 Indemnification; Insurance.

(a) In the event of any threatened or actual
claim, action, suit, proceeding or investigation, whether civil,
criminal or administrative, in which any person who is now, or
has been at any time prior to the date of this Agreement, or who
becomes prior to the Effective Date, a director or officer or
employee of FBKP or any of its Subsidiaries (the "Indemnified
Parties") is, or is threatened to be, made a party to a suit
based in whole or in part on, or arising in whole or in part out
of, or pertaining to (i) the fact that he is or was a director,
officer or employee of FBKP, any of the FBKP Subsidiaries or any
of their respective predecessors or (ii) this Agreement or any of
the transactions contemplated hereby, whether in any case
asserted or arising before or after the Effective Date, the
parties hereto agree to cooperate and use their best efforts to
defend against and respond thereto to the extent permitted by the
BCL and the Articles of Incorporation and Bylaws of FBKP. On and
after the Effective Date, PSB shall indemnify, defend and hold
harmless all prior and then-existing directors and officers of
FBKP or of any FBKP Subsidiary, against (i) all losses, claims,
damages, costs, expenses, liabilities or judgments or amounts
that are paid in settlement (with the prior approval of PSB) of
or in connection with any claim, action, suit, proceeding or
investigation ("Indemnified Liabilities") based in whole or in
part on or arising in whole or in part out of the fact that such
person is or was a director, officer or employee of FBKP or any
FBKP Subsidiary, whether pertaining to any matter existing or
occurring at or prior to the Effective Date and whether asserted
or claimed prior to, or at or after, the Effective Date and
(ii) all Indemnified Liabilities based in whole or in part on, or
arising in whole or in part out of, or pertaining to this
<PAGE A-39> Agreement or the transactions contemplated hereby, to
the same extent as such officer, director or employee may be
indemnified by FBKP or any FBKP Subsidiary as of the date hereof
including the right to advancement of expenses, provided,
however, that any such officer, director or employee of FBKP or
any FBKP Subsidiary may not be indemnified by PSB and/or the Bank
if such indemnification is prohibited by applicable law.

(b) PSB shall maintain FBKP's existing directors'
and officers' liability insurance policy (or a policy providing
comparable coverage amounts on terms generally no less favorable,
including PSB's existing policy if it meets the foregoing
standard) covering persons who are currently covered by such
insurance for a period of five years after the Effective Date;
provided, however, that in no event shall PSB be obligated to
expend, in order to maintain or provide insurance coverage
pursuant to this Section 4.05(b), any amount per annum in excess
of 125% of the amount of the annual premiums paid as of the date
hereof by FBKP for such insurance (the "Maximum Amount"). If the
amount of the annual premiums necessary to maintain or procure
such insurance coverage exceeds the Maximum Amount, PSB shall use
all reasonable efforts to maintain the most advantageous policies
of directors' and officers' insurance obtainable for an annual
premium equal to the Maximum Amount.

(c) In the event that PSB or any of its
respective successors or assigns (i) consolidates with or merges
into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger
or (ii) transfers all or substantially all of its properties and
assets to any Person, then, and in each such case the successors
and assigns of such entity shall assume the obligations set forth
in this Section 4.05.

Section 4.06 No Other Bids and Related Matters. So
long as this Agreement remains in effect, FBKP shall not and FBKP
shall not authorize or permit any of its directors, officers,
employees or agents, to directly or indirectly (i) respond to,
solicit, initiate or encourage any inquiries relating to, or the
making of any proposal which relates to, an Acquisition
Transaction (as defined below), (ii) recommend or endorse an
Acquisition Transaction, (iii) participate in any discussions or
negotiations regarding an Acquisition Transaction, (iv) provide
any third party (other than PSB or an affiliate of PSB) with any
nonpublic information in connection with any inquiry or proposal
relating to an Acquisition Transaction or (v) enter into an
agreement with any other party with respect to an Acquisition
Transaction. Notwithstanding the foregoing, (i) the Board of
Directors of FBKP may respond to unsolicited inquiries relating
to an Acquisition Transaction or (ii) the Board of Directors of
FBKP may recommend or endorse an Acquisition Transaction, in each
case, if it receives a written opinion of outside counsel that
the failure to do so would constitute a breach of their fiduciary
duty. FBKP will immediately cease and cause to be terminated any
existing activities, discussions or negotiations previously
<PAGE A-40> conducted with any parties other than PSB with
respect to any of the foregoing, and will take all actions
necessary or advisable to inform the appropriate individuals or
entities referred to in the first sentence hereof of the
obligations undertaken in this Section 4.06. FBKP will notify
PSB orally (within one day) and in writing (as promptly as
practicable) if any inquiries or proposals relating to an
Acquisition Transaction are received by, any such information is
requested from, or any such negotiations or discussions are
sought to be initiated or continued with, FBKP. As used in this
Agreement, "Acquisition Transaction" shall mean one of the
following transactions with a party other than PSB or an
affiliate of PSB: (i) a merger or consolidation, or any similar
transaction, involving FBKP or an FBKP Subsidiary, (ii) a
purchase, lease or other acquisition of all or a substantial
portion of the assets or liabilities of FBKP or an FBKP
Subsidiary or (iii) a purchase or other acquisition (including by
way of share exchange, tender offer, exchange offer or otherwise)
of a substantial interest in any class or series of equity
securities of FBKP (other than as permitted by Section
4.01(a)(ii) hereof) or an FBKP Subsidiary.

Section 4.07 Duty to Advise; Duty to Update Disclosure
Schedule. Each party shall promptly advise the other party of
any change or event having a Material Adverse Effect on it or
which it believes would or would be reasonably likely to cause or
constitute a material breach of any of its representations,
warranties or covenants set forth herein. Each party shall
update its respective Disclosure Schedule as promptly as
practicable after the occurrence of an event or fact which, if
such event or fact had occurred prior to the date of this
Agreement, would have been disclosed in such Disclosure Schedule.
The delivery of such updated Schedule shall not relieve a party
from any breach or violation of this Agreement and shall not have
any effect for the purposes of determining the satisfaction of
the condition set forth in Section 5.01(c) or 5.02(c) hereof, as
applicable.

Section 4.08 Conduct of PSB's Business. From the date
of this Agreement to the Closing Date, PSB will use its best
efforts to (x) preserve its business organizations intact,
(y) maintain good relationships with employees, and (z) preserve
for itself the goodwill of customers of PSB and PSB Subsidiaries
and others with whom business relationships exist.

Section 4.09 Current Information.

(a) During the period from the date of this
Agreement to the Effective Date, the respective Presidents shall
confer on a monthly or more frequent basis with representatives
of the other party regarding its financial condition, operations
and business and matters relating to the completion of the
transactions contemplated hereby. As soon as reasonably
available, but in no event more than 45 days after the end of
each calendar quarter ending after the date of this Agreement,
<PAGE A-41> and within 25 days after the end of each month, FBKP
and PSB will deliver to the other party a consolidated balance
sheet and a consolidated statement of operations, without related
notes, for such month.

Section 4.10 Undertakings by PSB and FBKP.

(a) From and after the date of this Agreement,
FBKP shall:

(i) Phase I Environmental Audit. Permit
PSB, if PSB elects to do so, at its own expense, to cause a
"phase I environmental audit" to be performed at any
physical location owned or occupied by FBKP or any FBKP
Subsidiary on the date hereof;

(ii) Timely Review. If requested by PSB at
PSB's sole expense, cause its independent certified public
accountants to perform a review of its unaudited
consolidated financial statements as of the end of any
calendar quarter, in accordance with Statement of Auditing
Standards No. 36, and to issue its report on such financial
statements as soon as is practicable thereafter; and

(iii) List of Nonperforming Assets. Provide
PSB, within fifteen (15) days after each quarter a written
list of nonperforming assets;

(b) From and after the date of this Agreement,
PSB and FBKP shall each:

(i) Shareholders Meetings. Take all action
necessary to properly call and convene a special meeting of
its shareholders as soon as practicable after the date
hereof to consider and vote upon this Agreement and the
transactions contemplated hereby. Subject to the provisions
of Section 4.06, the Board of Directors of FBKP and the
Board of Directors of PSB will recommend that the
shareholders of FBKP and PSB, respectively, approve this
Agreement and the transactions contemplated hereby.

(ii) Public Announcements. Cooperate and
cause its respective officers, directors, employees and
agents to cooperate in good faith, consistent with their
respective legal obligations, in the preparation and
distribution of, and agree upon the form and substance of,
any press release related to this Agreement and the
transactions contemplated hereby, and any other public
disclosures related thereto, including without limitation,
communications to FBKP shareholders and FBKP's internal
announcements and customer disclosures, but nothing
contained herein shall prohibit either party from making any
disclosure which its counsel deems necessary under
applicable law;
<PAGE A-42>
(iii) Maintenance of Insurance. Maintain,
and cause their respective Subsidiaries to maintain,
insurance in such amounts as are reasonable to cover such
risks as are customary in relation to the character and
location of its properties and the nature of its business;

(iv) Maintenance of Books and Records.
Maintain, books of account and records in accordance with
GAAP applied on a basis consistent with those principles
used in preparing the financial statements heretofore
delivered;

(v) Delivery of Securities Documents.
Deliver to the other, copies of all Securities Documents
simultaneously with the filing thereof; and

(vi) Taxes. File all federal, state, and
local tax returns required to be filed by them or their
respective Subsidiaries on or before the date such returns
are due (including any extensions) and pay all taxes shown
to be due on such returns on or before the date such payment
is due.

Section 4.11 Employee Benefits and Termination
Benefits.

(a) Employee Benefits. On and after the
Effective Date, the employee pension and welfare benefit plans of
PSB and FBKP (as well as any other plan of FBKP providing for
benefits not subject to ERISA) may, at PSB's election and subject
to the requirements of the IRC, continue to be maintained
separately or consolidated, except as set forth below. In
connection with implementation of the foregoing, the following
provisions and guidelines shall apply:

(i) PSB Employee Stock Ownership Plan
("ESOP"). Employees of FBKP and FBKP Subsidiaries who
become employees of PSB or a PSB Subsidiary shall become
entitled to participate in the PSB ESOP in accordance with
its terms by treating them as newly employed individuals
without any prior service credit under such plan.

(ii) PSB 401(k) Retirement Savings Plan
("401(k) Plan") and Profit Sharing Plan. Employees of FBKP
and FBKP Subsidiaries who become employees of PSB or a PSB
Subsidiary shall become entitled to participate in the PSB
401(k) Plan and the PSB Profit Sharing Plan in accordance
with their terms. In this regard, each such employee shall
(A) receive, for purposes of participation and vesting only,
credit for all service with FBKP or an FBKP Subsidiary, and
(B) enter the PSB 401(k) Plan and the PSB Profit Sharing
Plan on the entry date concurrent with or next following the
employee's satisfaction of such plan's minimum participation
requirements.
<PAGE A-43>
(iii) Welfare Benefit Plans. Following the
Merger, the welfare benefit plans of PSB and FBKP (and their
respective subsidiaries) shall initially remain unchanged.
PSB shall undertake a study, in consultation with
appropriate professional advisors, with a view toward the
possible combination of some or all of such plans or the
benefits provided thereunder. Following such study, PSB
shall take such action with respect to such plans (which may
include the implementation of new benefits, reduction or
elimination of some benefits, and the alteration of the
respective cost allocation between employer and employee) as
it deems appropriate under the circumstances.

(b) Severance Policy. PSB agrees to cause the
Bank to adopt the severance policy dated October 1, 1998 adopted
by FBKP for executive officers named therein.

(c) Deferred Compensation Plan. PSB agrees to
pay all amounts due under the First Bank of Philadelphia Deferred
Compensation Plan in accordance with its terms.

Section 4.12 Stock Exchange Listing. PSB shall use
all reasonable efforts to cause the shares of PSB Common Stock to
be issued in connection with the Merger to be approved for
quotation on the Nasdaq Stock Market's National Market, subject
to official notice of issuance, as of or prior to the Effective
Date.

Section 4.13 Affiliate Letters.

(a) FBKP has provided to PSB a schedule of each
person that, to the best of its knowledge, is deemed to be an
"Affiliate" of it, as that term is used in Rule 145 under the
Securities Act or Accounting Series Releases 130 and 135 of the
Commission.

(b) FBKP shall use its reasonable best efforts to
cause each person who may be deemed to be an Affiliate of FBKP to
execute and deliver to PSB as soon as practicable after the date
of this Agreement, and in any event prior to the date of the
meetings of shareholders of FBKP and PSB to be called pursuant to
Section 4.10(b)(i) hereof, a written agreement in the form of
Exhibit 2.

Section 4.14 Covenant of PSB. Neither PSB or the Bank
shall take any action that would preclude the Merger from
qualifying (A) for pooling-of-interests accounting treatment
under GAAP or (B) as a reorganization within the meaning of
Section 368 of the IRC.

ARTICLE V
CONDITIONS

Section 5.01 Conditions to FBKP's Obligations under
this Agreement. The obligations of FBKP hereunder shall be
<PAGE A-44> subject to satisfaction at or prior to the Closing
Date of each of the following conditions, unless waived by FBKP
pursuant to Section 7.03 hereof:

(a) Corporate Proceedings. All action required
to be taken by, or on the part of, PSB and the Bank to authorize
the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated by this Agreement
shall have been duly and validly taken by PSB and the Bank; and
FBKP shall have received certified copies of the resolutions
evidencing such authorizations;

(b) Covenants. The obligations and covenants of
PSB required by this Agreement to be performed by PSB at or prior
to the Closing Date shall have been duly performed and complied
with in all material respects;

(c) Representations and Warranties. The
representations and warranties of PSB set forth in this Agreement
shall be true and correct, as of the date of this Agreement, and
as of the Closing Date as though made on and as of the Closing
Date, except as to any representation or warranty (i) which
speaks only as of an earlier date or (ii) where the breach of the
representation or warranty would not, either individually or in
the aggregate, constitute a Material Adverse Effect with respect
to PSB;

(d) Approvals of Regulatory Authorities. PSB
shall have received all required approvals of Regulatory
Authorities of the Merger, and delivered copies thereof to FBKP;
and all notice and waiting periods required thereunder shall have
expired or been terminated;

(e) No Injunction. There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;

(f) Officer's Certificate. PSB shall have
delivered to FBKP a certificate, dated the Closing Date and
signed, without personal liability, by its chairman or president,
to the effect that the conditions set forth in subsections (a)
through (e) of this Section 5.01 have been satisfied, to the best
knowledge of the officer executing the same;

(g) Opinion of PSB's Counsel. FBKP shall have
received an opinion of Stevens & Lee, counsel to PSB, dated the
Closing Date, in form and substance reasonably satisfactory to
FBKP and its counsel to the effect set forth on Exhibit 4
attached hereto;

(h) Registration Statement. The Registration
Statement shall be effective under the Securities Act and no
proceedings shall be pending or threatened by the SEC to suspend
the effectiveness of the Registration Statement; all required
<PAGE A-45> approvals by state securities or "blue sky"
authorities with respect to the transactions contemplated by this
Agreement, shall have been obtained; and neither the Registration
Statement nor any such approval by state securities or "blue sky"
authorities shall be subject to a stop order or threatened stop
order by the SEC or any such authority.

(i) Tax Opinion. FBKP shall have received an
opinion of Stevens & Lee as to federal tax matters substantially
to the effect set forth on Exhibit 5 attached hereto; and

(j) Approval of FBKP's Shareholders. This
Agreement shall have been approved by the shareholders of FBKP by
such vote as is required under the Banking Code, FBKP's articles
of incorporation and bylaws or under Nasdaq requirements
applicable to it;

(k) Fairness Opinion. As of the date of this
Agreement, the Board of Directors of FBKP shall have received a
written or oral fairness opinion from its financial advisor,
Berwind Financial, L.P., that the transaction contemplated by
this Agreement is fair from a financial viewpoint to FBKP
shareholders.

(l) Employment Agreements. Carl A. Lingle and
James T. Schaeffer each shall have executed employment agreements
with the Bank reasonably acceptable to them and the Bank.

Section 5.02 Conditions to PSB's Obligations under
this Agreement. The obligations of PSB hereunder shall be
subject to satisfaction at or prior to the Closing Date of each
of the following conditions, unless waived by PSB pursuant to
Section 7.03 hereof:

(a) Corporate Proceedings. All action required
to be taken by, or on the part of, FBKP to authorize the
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated by this Agreement
shall have been duly and validly taken by FBKP; and PSB shall
have received certified copies of the resolutions evidencing such
authorizations;

(b) Covenants. The obligations and covenants of
FBKP required by this Agreement to be performed by FBKP at or
prior to the Closing Date shall have been duly performed and
complied with in all material respects;

(c) Representations and Warranties. The
representations and warranties of FBKP set forth in this
Agreement shall be true and correct as of the date of this
Agreement, and as of the Closing Date as though made on and as of
the Closing Date, except as to any representation or warranty
(i) which specifically relates to an earlier date or (ii) where
the breach of the representation or warranty would not, either
<PAGE A-46> individually or in the aggregate, result in a
Material Adverse Effect with respect to FBKP;

(d) Approvals of Regulatory Authorities. PSB
shall have received all required approvals of Regulatory
Authorities for the Merger, without the imposition of any term or
condition that would have a Material Adverse Effect on PSB upon
completion of the Merger; and all notice and waiting periods
required thereunder shall have expired or been terminated;

(f) Officer's Certificate. FBKP shall have
delivered to PSB a certificate, dated the Closing Date and
signed, without personal liability, by its chairman of the board
or president, to the effect that the conditions set forth in
subsections (a) through (c) and (e) of this Section 5.02 have
been satisfied, to the best knowledge of the officer executing
the same;

(g) Opinions of FBKP's Counsel. PSB shall have
received an opinion of Pepper Hamilton L.L.P., special counsel to
FBKP, dated the Closing Date, in form and substance reasonably
satisfactory to PSB and its counsel to the effect set forth on
Exhibit 6 attached hereto;

(h) Registration Statement. The Registration
Statement shall be effective under the Securities Act and no
proceedings shall be pending or threatened by the SEC to suspend
the effectiveness of the Registration Statement; all required
approvals by state securities or "blue sky" authorities with
respect to the transactions contemplated by this Agreement, shall
have been obtained; and neither the Registration Statement nor
any such approval by state securities or "blue sky" authorities
shall be subject to a stop order or threatened stop order by the
SEC or any such authority;

(i) Tax Opinion. PSB shall have received an
opinion of Stevens & Lee as to federal tax matters substantially
to the effect set forth on Exhibit 5 attached hereto;

(j) Pooling Letter. PSB shall have received a
letter from Stockton Bates, LLP to the effect that, based on a
review of this Agreement and related agreements and the facts and
circumstances then known to it, the Merger shall be accounted for
as a pooling-of-interests under GAAP.

(k) Fairness Opinion. As of the date of this
Agreement, the Board of Directors of PSB shall have received a
written or oral fairness opinion from its financial advisor,
Hopper Soliday, that the transaction contemplated by this
Agreement is fair from a financial viewpoint to PSB shareholders.
<PAGE A-47>

(l) Approval of PSB's Shareholders. This
Agreement shall have been approved by the shareholders of PSB by
such vote as is required under PSB's articles of incorporation
and bylaws or under Nasdaq requirements applicable to it;

(m) Approval of Amendment to PSB Articles of
Incorporation. PSB shareholders shall have approved the
amendment to the PSB Articles of Incorporation attached hereto as
Exhibit 7.

(n) Other. FBKP shall have furnished PSB with
such certificates of its officers or others and such documents to
evidence fulfillment of the conditions set forth in this
Section 5.02 as PSB may reasonably request.

ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT

Section 6.01 Termination. This Agreement may be
terminated on or at any time prior to the Closing Date:

(a) By the mutual written consent of the parties
hereto;

(b) By PSB or FBKP:

(i) if the Closing Date shall not have
occurred on or before December 31 1999, unless the failure
of such occurrence shall be due to the failure of the party
seeking to terminate this Agreement to perform or observe in
any material respect its agreements set forth in this
Agreement required to be performed or observed by such party
on or before the Closing Date; or

(ii) if either party has received a final
unappealable administrative order from a Regulatory
Authority whose approval or consent has been requested that
such approval or consent will not be granted, or in the case
of a termination by PSB, will not be granted absent the
imposition of terms and conditions which would permit
satisfaction of the condition set forth at Section 5.02(d)
hereof, unless the failure of such occurrence shall be due
to the failure of the party seeking to terminate this
Agreement to perform or observe in any material respect its
agreements set forth herein required to be performed or
observed by such party on or before the Closing Date;

(c) By FBKP if the PSB Market Value is less than
$6.50 and PSB shall not make the election specified in the
proviso clause to Section 1.02(e)(ii)(A)(ii) hereof;
<PAGE A-48>
(d) at any time on or prior to the Effective
Date, by FBKP in writing if PSB has, or by PSB in writing if FBKP
has, in any material respect, breached (i) any material covenant
or undertaking contained herein or (ii) any representation or
warranty contained herein, which in the case of a breach by PSB
would have a Material Adverse Effect on PSB and in the case of a
breach by FBKP would have a Material Adverse Effect on FBKP, in
any case if such breach has not been substantially cured by the
earlier of (i) 30 days after the date on which written notice of
such breach is given to the party committing such breach or (ii)
or if on such date such breach no longer causes a Material
Adverse Effect; or

(e) by either the Board of Directors of PSB or
the Board of Directors of FBKP if the Board of Directors of the
other party shall have withdrawn, modified or changed in a manner
adverse to the terminating party its approval or recommendation
of this Agreement and the transactions contemplated hereby.

(f) By PSB on or before April 30, 1999 if either
Mr. Lingle or Mr. Schaeffer shall fail to confirm in writing
(which confirmation shall be deemed satisfaction of the condition
to closing set forth in Section 5.01(l)) that the form of
employment agreement tendered to them is acceptable.

Section 6.02 Effect of Termination. If this Agreement
is terminated pursuant to Section 6.01 hereof, this Agreement
shall forthwith become void (other than Section 4.02(d) and
Section 7.01 hereof, which shall remain in full force and
effect), and there shall be no further liability on the part of
PSB or FBKP to the other, except for any liability arising out of
any uncured willful breach of any covenant or other agreement
contained in this Agreement, any fraudulent breach of a
representation or warranty, in this Agreement and any obligation
or liability arising under the PSB Option. Nothing contained in
this Section 6.02 shall be deemed to prohibit PSB or FBKP from
maintaining an action against a third party for tortious
interference or otherwise.

ARTICLE VII
MISCELLANEOUS

Section 7.01 Expenses. Except for the cost of
printing and mailing the Proxy Statement/Prospectus which shall
be shared equally, each party hereto shall bear and pay all costs
and expenses incurred by it in connection with the transactions
contemplated hereby, including fees and expenses of its own
financial consultants, accountants and counsel.

Section 7.02 Non-Survival of Representations and
Warranties. All representations, warranties and, except to the
extent specifically provided otherwise herein, agreements and
covenants, other than those covenants that by their terms are to
be performed after the Effective Date, including without
limitation the covenants set forth in Sections 1.02(f) and (g)
<PAGE A-49> and 4.05 hereof, which will survive the Merger, shall
terminate on the Closing Date.

Section 7.03 Amendment, Extension and Waiver. Subject
to applicable law, at any time prior to the consummation of the
transactions contemplated by this Agreement, the parties may
(a) amend this Agreement, (b) extend the time for the performance
of any of the obligations or other acts of either party hereto,
(c) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, or
(d) waive compliance with any of the agreements or conditions
contained in Articles IV and V hereof or otherwise, provided that
any amendment, extension or waiver granted or executed after
shareholders of FBKP or PSB have approved this Agreement shall
not modify either the amount or the form of the consideration to
be provided hereby to holders of FBKP Common Stock upon
consummation of the Merger or otherwise materially adversely
affect the shareholders of FBKP or PSB without the approval of
the shareholders who would be so affected. This Agreement may
not be amended except by an instrument in writing authorized by
the respective Boards of Directors and signed, by duly authorized
officers, on behalf of the parties hereto. Any agreement on the
part of a party hereto to any extension or waiver shall be valid
only if set forth in an instrument in writing signed by a duly
authorized officer on behalf of such party, but such waiver or
failure to insist on strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.

Section 7.04 Entire Agreement. This Agreement,
including the documents and other writings referred to herein or
delivered pursuant hereto, contains the entire agreement and
understanding of the parties with respect to its subject matter.
This Agreement supersedes all prior arrangements and
understandings between the parties, both written or oral with
respect to its subject matter. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors; provided, however, that nothing in this
Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto and their respective
successors, any rights, remedies, obligations or liabilities
other than pursuant to Sections 1.02(f) and (g) and 4.05.

Section 7.05 No Assignment. Neither party hereto may
assign any of its rights or obligations hereunder to any other
person, without the prior written consent of the other party
hereto.

Section 7.06 Notices. All notices or other
communications hereunder shall be in writing and shall be deemed
given if delivered personally, mailed by prepaid registered or
certified mail (return receipt requested), or sent by telecopy,
addressed as follows:

(a) If to PSB, to: <PAGE A-50>
PSB Bancorp, Inc.
1835 Market Street
Eleven Penn Center
Suite 2601
Philadelphia, Pennsylvania 19103

Attention: Anthony DiSandro, President and
Chief Executive Officer

Telecopy No.: (610) 979-7979

with a copy to:

Stevens & Lee
One Glenhardie Corporate Center
Suite 202
1275 Drummers Lane
P.O. Box 236
Wayne, Pennsylvania 19087-0236

Attention: Jeffrey P. Waldron, Esquire

Telecopy No.: (610) 687-1384

(b) If to FBKP, to:

First Bank of Philadelphia
1424 Walnut Street
Philadelphia, Pennsylvania 19102

Attention: Carl A. Lingle,
President and Chief
Executive Officer

Telecopy No.: (215) 790-5209

with copies to:

Hal Jonathan Shaffer, Esquire
Shaffer, Bonfigleo, Scerini & D'Elia, L.L.C.
Pleasant Valley Building
921 Pleasant Valley Avenue, 2nd Floor
Mt. Laurel, New Jersey 08054

Telecopy No.: (609) 866-1188

and

Pepper Hamilton, L.L.P.
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, Pennsylvania 19103

Attention: L. Garrett Dutton, Jr., Esquire
<PAGE A-51>
Telecopy No.: (215) 981-4750

Section 7.07 Captions. The captions contained in this
Agreement are for reference purposes only and are not part of
this Agreement.

Section 7.08 Counterparts. This Agreement may be
executed in any number of counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.

Section 7.09 Severability. If any provision of this
Agreement or the application thereof to any person or
circumstance shall be invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such
provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent
permitted by law.

Section 7.10 Governing Law. This Agreement shall be
governed by and construed in accordance with the domestic
internal law (including the law of conflicts of law) of the
Commonwealth of Pennsylvania.

IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed by their duly authorized officers as of
the day and year first above written.

PSB BANCORP, INC.

By
Anthony DiSandro,
President and Chief
Executive Officer

PENNSYLVANIA SAVINGS BANK

By
Anthony DiSandro,
President and Chief
Executive Officer

FIRST BANK OF PHILADELPHIA

By
Carl A. Lingle,
President and Chief
Executive Officer
<PAGE A-52>
Exhibit 1

ARTICLES AND PLAN OF REORGANIZATION

THESE ARTICLES AND Plan of Reorganization ("Plan of
Reorganization") dated ____________, 1999, is by and between
PENNSYLVANIA SAVINGS BANK, a Pennsylvania-chartered savings bank
(the "Bank"), with offices at 1835 Market Street, Eleven Penn
Center, Philadelphia, Pennsylvania 19103, and FIRST BANK OF
PHILADELPHIA, a Pennsylvania-chartered bank ("FBKP"), with
offices at 1424 Walnut Street, Philadelphia, Pennsylvania 19102.

BACKGROUND

1. The Bank is a Pennsylvania bank and a wholly-owned
subsidiary of PSB Bancorp, Inc., a Pennsylvania corporation
("PSB"). The authorized capital stock of the Bank consists of
3,000 shares of common stock, par value $1.00 per share ("Bank
Common Stock"), of which at the date hereof 3,000 shares are
issued and outstanding, and 3,000 shares of preferred stock, none
of which are outstanding.

2. FBKP is a Pennsylvania bank. The authorized
capital stock of FBKP consists of 3,500,000 shares of common
stock, par value $.25 per share ("FBKP Common Stock"), of which
at the date hereof 1,676,875 shares are issued and outstanding,
and 500,000 shares of preferred stock $2.00 par value, none of
which are outstanding.

3. The respective Boards of Directors of PSB, the
Bank and FBKP deem the merger of the Bank with and into FBKP,
pursuant to the terms and conditions set forth or referred to
herein, to be desirable and in the best interests of the
respective corporations and their respective shareholders.

4. The respective Boards of Directors of PSB, the
Bank and FBKP have adopted resolutions approving this Plan of
Merger and approving an Agreement dated March __, 1999 (the
"Agreement") between the Bank, PSB, and FBKP, pursuant to which
this Plan of Reorganization is being executed by the Bank and
FBKP.

AGREEMENT

In consideration of the premises and of the mutual
covenants and agreements herein contained, and in accordance with
the applicable laws and regulations of the Commonwealth of
Pennsylvania, the Bank and FBKP, intending to be legally bound
hereby, agree:

ARTICLE I
MERGER
<PAGE A-53>
Subject to the terms and conditions of this Plan of
Reorganization and in accordance with the applicable laws and
regulations of the Commonwealth of Pennsylvania, on the Effective
Date (as that term is defined in Article V hereof): the Bank
shall merge with and into FBKP; the separate existence of the
Bank shall cease; and FBKP shall be the surviving corporation
(such transaction referred to herein as the "Reorganization" and
FBKP, as the surviving corporation in the Reorganization,
referred to herein as the "Surviving Bank"). The name of the
Surviving Bank shall be "________" and it shall have its home
office at 1835 Market Street, Eleven Penn Center, Philadelphia,
Pennsylvania 19103.

ARTICLE II
ARTICLES OF INCORPORATION AND BYLAWS

On and after the Effective Date, the Articles of
Incorporation and Bylaws of FBKP, as in effect immediately prior
to the Effective Date, shall automatically be and remain the
Articles of Incorporation and Bylaws of the Surviving Bank, until
altered, amended or repealed.

ARTICLE III
BOARD OF DIRECTORS AND OFFICERS

3.1 Board of Directors. On and after the Effective
Date, the directors of the Surviving Bank shall consist of the
directors of the Bank duly elected and holding office immediately
prior to the Effective Date. Directors shall be elected annually
and shall hold office until their successors are elected and
qualified. The names and residence addresses of the directors
are:

Name Residence Address

P. Charles DeRita
Sylvia M. DiBona
Anthony DiSandro
James W. Eastwood
Thomas J. Finley, Jr.
Jane Scaccetti Fumo
Vincent J. Fumo
James F. Kenney
S. Michael Palermo
Rosanne Pauciello
Alfonso Tumini

3.2 Officers. On and after the Effective Date, the
officers of the Surviving Bank shall consist of the officers of
the Bank duly elected and holding office immediately prior to the
Effective Date and such other officers as the Board of Directors
of FBKP may elect.

ARTICLE IV
CONVERSION OF SHARES <PAGE A-54>

4.1 Stock of the Bank. Each share of FBKP Common
Stock issued and outstanding immediately prior to the Effective
Date shall be automatically converted into ________ shares of
common stock of PSB pursuant to the provisions of Section 1.02(e)
of the Agreement.

4.2 Stock of FBKP. Each share of the Bank Common
Stock issued and outstanding immediately prior to the Effective
Date, shall, on the Effective Date, be cancelled, and no cash,
stock or other property shall be delivered in exchange therefor.

4.3 FBKP Stock Options. Each option to acquire FBKP
Common Stock issued and outstanding immediately prior to the
Effective Date shall be automatically converted into an option to
acquire PSB common stock pursuant to the provisions of
Section 1.02(f) of the Agreement.

ARTICLE V
EFFECTIVE DATE OF THE MERGER

The Merger shall be effective on the date on which
articles of merger executed by the Bank and FBKP are filed with
the Secretary of State of the Commonwealth of Pennsylvania,
unless a later date is specified in such articles (the "Effective
Date").

ARTICLE VI
EFFECT OF THE MERGER

6.1 Separate Existence. On the Effective Date: the
separate existence of the Bank shall cease; and all of the
property (real, personal and mixed), rights, powers, duties and
obligations of the Bank shall be taken and deemed to be
transferred to and vested in the Surviving Bank, without further
act or deed, as provided by applicable laws and regulations.

ARTICLE VII
APPROVALS

The approval of this Plan of Reorganization has been
received by (i) PSB, as sole shareholder of the Bank, (ii) a vote
of ______ issued and outstanding shares of FBKP which constitutes
more than 2/3 of the issued and outstanding shares of FBKP Common
Stock (iii) the Board of Governors of the Federal Reserve System,
and (iv) the Pennsylvania Department of Banking.

ARTICLE VIII
AMENDMENT

Subject to applicable law, this Plan of Reorganization
may be amended, by action of the respective Boards of Directors
of the parties hereto, at any time prior to consummation of the
Merger, but only by an instrument in writing signed by duly
authorized officers on behalf of the parties hereto. <PAGE A-55>

ARTICLE IX
MISCELLANEOUS

10.1 Extensions; Waivers. Any of the terms and
conditions of this Plan of Reorganization may be waived at any
time by whichever of the parties hereto is, or the shareholders
of which are, entitled to the benefit thereof by a written
instrument signed by a duly authorized officer of such party.

10.2 Notices. Any notice or other communication
required or permitted under this Plan of Reorganization shall be
given, and shall be effective, in accordance with the provisions
of Section 7.06 of the Agreement.

10.3 Captions. The headings of the several Articles
and Sections herein are inserted for convenience of reference
only and are not intended to be part of, or to affect the meaning
or interpretation of, this Plan of Reorganization.

10.4 Counterparts. For the convenience of the parties
hereto, this Plan of Reorganization may be executed in several
counterparts, each of which shall be deemed the original, but all
of which together shall constitute one and the same instrument.

10.5 Governing Law. This Plan of Reorganization shall
be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania.

IN WITNESS WHEREOF, the Bank and FBKP have caused this
Plan of Reorganization to be executed by their duly authorized
officers and their corporate seals to be hereunto affixed on the
date first written above.

PENNSYLVANIA SAVINGS BANK

By________________________________
Anthony DiSandro,
President and Chief Executive
Officer

Attest:____________________________

FIRST BANK OF PHILADELPHIA

By_________________________________
Carl A. Lingle,
President and Chief Executive
Officer

Attest:____________________________
<PAGE A-56>
ANNEX B

Berwind Opinion
<PAGE B-1>
ANNEX C

Hopper Soliday Opinion
<PAGE C-1>
ANNEX D

Stock Option Purchase Agreement

<PAGE D-1>
Annex D

STOCK OPTION AGREEMENT

THIS STOCK OPTION AGREEMENT ("Stock Option Agreement")
dated March 19, 1999, is by and between PSB BANCORP, INC., a
Pennsylvania corporation ("PSB") and FIRST BANK OF PHILADELPHIA,
INC., a Pennsylvania banking corporation ("FBKP").

BACKGROUND

1. PSB and FBKP desire to enter into an Agreement and
Plan of Reorganization, dated March 19, 1999 (the "Agreement"),
providing, among other things, for the acquisition by PSB of FBKP
(the "Merger").

2. As a condition to PSB to enter into the Plan, FBKP
is granting to PSB an option to purchase up to 210,625 shares of
common stock, par value $.25 per share (the "Common Stock") of
FBKP, on the terms and conditions hereinafter set forth.

AGREEMENT

In consideration of the foregoing and the mutual
covenants and agreements set forth herein, PSB and FBKP,
intending to be legally bound hereby, agree:

1. Grant of Option. FBKP hereby grants to PSB, on
the terms and conditions set forth herein, the option to purchase
(the "Option") up to 210,625 shares of Common Stock of FBKP (as
adjusted as set forth herein, the "Option Shares") at a price per
share (as adjusted as set forth herein, the "Option Price") equal
to $5.75.

2. Exercise of Option.

(a) Provided that (i) PSB shall not be, on the
date of exercise, in material breach of the agreements or
covenants contained in the Agreement or this Stock Option
Agreement, and (ii) no preliminary or permanent injunction or
other order against the delivery of shares covered by the Option
issued by any court of competent jurisdiction in the United
States shall be in effect on the date of exercise, upon or after
the occurrence of a Triggering Event (as such term is hereinafter
defined) PSB may exercise the Option, in whole or in part, at any
time or one or more times, from time to time; provided that the
Option shall terminate and be of no further force and effect upon
the earliest to occur of (A) the Effective Date of the Merger, as
provided in the Agreement, (B) termination of the Agreement in
accordance with the terms thereof prior to the occurrence of a
Triggering Event or a Preliminary Triggering Event, other than a
termination of the Agreement pursuant to Section 6.01(d), unless
in the case of termination by FBKP pursuant to Section 6.01(d),
<PAGE D-2> such termination is as a result of a willful breach of
the Agreement by PSB (a termination pursuant to Section 6.01(d),
except a termination by FBKP as a result of a willful breach by
PSB, being referred to herein as a "Default Termination"),
(C) 18 months after the termination of the Agreement by PSB or
FBKP pursuant to a Default Termination, and (D) 18 months after
termination of the Agreement (other than pursuant to a Default
Termination) following the occurrence of a Triggering Event or a
Preliminary Triggering Event; and provided, further, that any
purchase of shares upon exercise of the Option shall be subject
to compliance with applicable securities and banking laws. The
rights set forth in Section 3 hereof shall terminate when the
right to exercise the Option terminates (other than as a result
of a complete exercise of the Option) as set forth above.

(b) As used herein, the term "Triggering Event"
means the occurrence of any of the following events:

(i) a person or group (as such terms are
defined in the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations
thereunder), other than PSB or an affiliate of PSB, acquires
beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act) of 25% or more of the then outstanding
shares of Common Stock (excluding any shares eligible to be
reported on Schedule 13G of the Securities and Exchange
Commission); or

(ii) a person or group, other than PSB or an
affiliate of PSB, enters into an agreement or letter of
intent or memorandum of understanding with FBKP pursuant to
which such person or group or any affiliate of such person
or group would (i) merge or consolidate, or enter into any
similar transaction, with FBKP, (ii) acquire all or
substantially all of the assets or liabilities of FBKP or
(iii) acquire beneficial ownership of securities
representing, or the right to acquire beneficial ownership
or to vote securities representing, 25% or more of the then
outstanding shares of Common Stock (excluding any shares
eligible to be reported on Schedule 13G of the Securities
and Exchange Commission) or the then outstanding shares of
common stock of FBKP Bank, or FBKP shall have authorized,
recommended or publicly proposed, or publicly announced an
intention to authorize, recommend or propose, such an
agreement or letter of intent or memorandum of
understanding.

(i) a person or group (as such terms are
defined in the Exchange Act and the rules and regulations
thereunder), other than PSB or an affiliate of PSB, acquires
beneficial ownership (within the meaning of Rule 13d-3 under
<PAGE D-3> the Exchange Act) of 10% or more of the then
outstanding shares of Common Stock (excluding any shares
eligible to be reported on Schedule 13G of the Securities
and Exchange Commission);

(ii) a person or group, other than PSB or an
affiliate of PSB, publicly announces a bona fide proposal
(including a written communication that is or becomes the
subject of public disclosure) for (i) any merger,
consolidation or acquisition of all or substantially all the
assets or liabilities of FBKP or all or substantially all
the assets or liabilities of FBKP Bank, or any other
business combination involving FBKP or FBKP Bank, or (ii) a
transaction involving the transfer of beneficial ownership
of securities representing, or the right to acquire
beneficial ownership or to vote securities representing, 10%
or more of the then outstanding shares of Common Stock or
the then outstanding shares of Common Stock of FBKP Bank
(collectively, a "Proposal"), and thereafter, if such
Proposal has not been Publicly Withdrawn (as such term is
hereinafter defined) at least 30 days prior to the meeting
of shareholders of FBKP called to vote on the Merger, FBKP's
shareholders fail to approve the Merger by the vote required
by applicable law at the meeting of shareholders called for
such purpose or such meeting has been cancelled; or

(iii) the Board of Directors of FBKP shall
(A) fail to recommend the Merger, (B) recommend an
Acquisition Transaction or (C) have withdrawn or modified
in a manner adverse to PSB the recommendation of the Board
of Directors of FBKP with respect to the Agreement and
thereafter FBKP's shareholders fail to approve the Merger by
the vote required by law at the meeting of shareholders
called for such purpose or such meeting is not scheduled or
is cancelled; or

(iv) a person or group, other than PSB or an
affiliate of PSB, makes a bona fide Proposal and thereafter,
but before such Proposal has been Publicly Withdrawn, FBKP
shall have breached any representation, warranty, covenant
or obligation contained in the Agreement and such breach
would entitle PSB to terminate the Agreement under Section
6.01(d) thereof (without regard to the cure period provided
for therein unless such cure is promptly effected without
jeopardizing consummation of the Merger pursuant to the
Agreement).

If more than one of the transactions giving rise to a Triggering
Event or a Preliminary Triggering Event under this Section 2 is
undertaken or effected, then all such transactions shall give
rise only to one Triggering Event or Preliminary Triggering
Event, as applicable, which Triggering Event or Preliminary
Triggering Event shall be deemed continuing for all purposes
hereunder until all such transactions are abandoned.
<PAGE D-4>
"Publicly Withdrawn" for purposes of this Section 2
shall mean an unconditional bona fide withdrawal of the Proposal
coupled with a public announcement of no further interest in
pursuing such Proposal or in acquiring any controlling influence
over FBKP or in soliciting or inducing any other person (other
than PSB or an affiliate of PSB) to do so.

Notwithstanding the foregoing, the obligation of FBKP
to issue Option Shares upon exercise of the Option shall be
deferred (but shall not terminate): (i) until the receipt of all
required governmental or regulatory approvals or consents
necessary for FBKP to issue the Option Shares or PSB to exercise
the Option, or until the expiration or termination of any waiting
period required by law, or (ii) so long as any injunction or
other order, decree or ruling issued by any federal or state
court of competent jurisdiction is in effect which prohibits the
sale or delivery of the Option Shares, and, in each case,
notwithstanding any provision to the contrary set forth herein,
the Option shall not expire or otherwise terminate.

FBKP shall notify PSB promptly in writing of the
occurrence of any Triggering Event known to it, it being
understood that the giving of such notice by FBKP shall not be a
condition to the right of PSB to exercise the Option. FBKP will
not take any action which would have the effect of preventing or
disabling FBKP from delivering the Option Shares to PSB upon
exercise of the Option or otherwise performing its obligations
under this Stock Option Agreement, except to the extent required
by applicable securities and banking laws and regulations. In
the event PSB wishes to exercise the Option, PSB shall send a
written notice to FBKP (the date of which is hereinafter referred
to as the "Notice Date") specifying the total number of Option
Shares it wishes to purchase and a place and date between two and
ten business days inclusive from the Notice Date for the closing
of such a purchase (a "Closing"); provided, however, that a
Closing shall not occur prior to two days after the later of
receipt of any necessary regulatory approvals or the expiration
of any legally required notice or waiting period, if any.

3. Repurchase of Option by FBKP.

(a) Subject to the last sentence of Section 2(a),
at the request of PSB at any time commencing upon the first
occurrence of a Repurchase Event (as defined in Section 3(d)) and
ending 18 months immediately thereafter, FBKP shall repurchase
from PSB (x) the Option and (y) all shares of Common Stock
purchased by PSB pursuant hereto with respect to which PSB then
has beneficial ownership. The date on which PSB exercises its
rights under this Section 3 is referred to as the "Request Date."
Such repurchase shall be at an aggregate price (the "Section 3
Repurchase Consideration") equal to the sum of:

(i) the aggregate Purchase Price paid by PSB
for any shares of Common Stock acquired pursuant to the
<PAGE D-5> Option with respect to which PSB then has
beneficial ownership;

(ii) the excess, if any, of (x) the
Applicable Price (as defined below) for each share of Common
Stock over (y) the Option Price (subject to adjustment
pursuant to Section 6), multiplied by the number of shares
of Common Stock with respect to which the Option has not
been exercised; and

(iii) the excess, if any, of the Applicable
Price over the Option Price (subject to adjustment pursuant
to Section 6) paid (or, in the case of Option Shares with
respect to which the Option has been exercised, but the
Closing has not occurred, payable) by PSB for each share of
Common Stock with respect to which the Option has been
exercised and with respect to which PSB then has beneficial
ownership, multiplied by the number of such shares.

(b) If PSB exercises it rights under this
Section 3, FBKP shall, within ten (10) business days after the
Request Date, pay the Section 3 Repurchase Consideration to PSB
in immediately available funds, and contemporaneously with such
payment, PSB shall surrender to FBKP the Option and the
certificate evidencing the shares of Common Stock purchased
thereunder with respect to which PSB then has beneficial
ownership, and PSB shall warrant that it has sole record and
beneficial ownership of such shares, and that the same are then
free and clear of all liens, claims, charges and encumbrances of
any kind whatsoever. Notwithstanding the foregoing, to the
extent that prior notification to or approval of any banking
agency or department of any federal or state government, or the
respective staffs thereof (the "Regulatory Authority"), is
required in connection with the payment of all or any portion of
the Section 3 Repurchase Consideration, PSB shall have the
ongoing option to revoke its request for repurchase pursuant to
Section 3, in whole or in part, or to require that FBKP deliver
from time to time that portion of the Section 3 Repurchase
Consideration that it is not then so prohibited from paying and
promptly file the required notice or application for approval and
expeditiously process the same (and each party shall cooperate
with the other in the filing of any such notice or application
and the obtaining of any such approval), in which case the ten
(10) business day period of time that would otherwise run
pursuant to the preceding sentence for the payment of the portion
of the Section 3 Repurchase Consideration shall run instead from
the date on which, as the case may be, any required notification
period has expired or been terminated or such approval has been
obtained and, in either event, any requisite waiting period shall
have passed. If any Regulatory Authority disapproves of any part
of FBKP's proposed repurchase pursuant to this Section 3, FBKP
shall promptly give notice of such fact to PSB. If any
Regulatory Authority prohibits the repurchase pursuant to this
Section 3, FBKP shall promptly give notice of such fact to PSB.
If any Regulatory Authority prohibits the repurchase in part but
<PAGE D-6> not in whole, then PSB shall have the right (i) to
revoke the repurchase request or (ii) to the extent permitted by
such Regulatory Authority, determine whether the repurchase
should apply to the Option and/or Option Shares and to what
extent to each, and PSB shall thereupon have the right to
exercise the Option as to the number of Option Shares for which
the Option was exercisable at the Request Date less the sum of
the number of shares covered by the Option in respect of which
payment has been made pursuant to Section 3(a)(ii) and the number
of shares covered by the portion of the Option (if any) that has
been repurchased. PSB shall notify FBKP of its determination
under the preceding sentence within five (5) business days of
receipt of notice of disapproval of the repurchase.

(c) For purposes of this Agreement, the
"Applicable Price" means the highest of (i) the highest price per
share of Common Stock paid for any such share by the person or
groups described in Section 3(d)(i), (ii) the price per share of
Common Stock received by a holder of Common Stock in connection
with any merger or other business combination transaction
described in Section 3(d)(ii), (iii) or (iv), or (iii) the
highest closing sales price per share of Common Stock quoted on
the Nasdaq Stock Market during the 40 business days preceding the
Request Date; provided, however, that in the event of a sale of
less than all of FBKP's assets, the Applicable Price shall be the
sum of the price paid in such sale for such assets and the
current market value of the remaining assets of FBKP as
determined by a nationally-recognized investment banking firm
selected by PSB, divided by the number of shares of Common Stock
outstanding at the time of such sale. If the consideration to be
offered, paid or received pursuant to either of the foregoing
clauses (i) or (ii) shall be other than in cash, the value of
such consideration shall be determined in good faith by an
independent nationally-recognized investment banking firm
selected by PSB and reasonably acceptable to FBKP, which
determination shall be conclusive for all purposes of this
Agreement.

(d) As used herein, a Repurchase Event shall
occur if (i) any person or group (as such terms are defined in
the Exchange Act and the rules and regulations thereunder), other
than PSB or an affiliate of PSB, acquires beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of, or
the right to acquire beneficial ownership of, 25% or more of the
then-outstanding shares of Common Stock, (ii) FBKP shall have
merged or consolidated with any person, other than PSB or an
affiliate of PSB, and shall not be the surviving or continuing
corporation of such merger or consolidation, (iii) any person,
other than PSB or an affiliate of PSB, shall have merged into
FBKP and FBKP shall be the surviving corporation, but, in
connection with such merger, the then-outstanding shares of
Common Stock have been changed into or exchanged for stock or
other securities of FBKP or any other person or cash or any other
property or the outstanding shares of Common Stock immediately
prior to such merger shall after such merger represent less than
<PAGE D-7> 50% of the outstanding shares and share equivalents of
the surviving corporation or (iv) FBKP shall have sold or
otherwise transferred more than 25% of its consolidated assets to
any person, other than PSB or an affiliate of PSB.

4. Payment and Delivery of Certificates. At any
Closing hereunder, (a) PSB will make payment to FBKP of the
aggregate price for the Option Shares so purchased by wire
transfer of immediately available funds to an account designated
by FBKP, (b) FBKP will deliver to PSB a stock certificate or
certificates representing the number of Option Shares so
purchased, registered in the name of PSB or its designee, in such
denominations as were specified by PSB in its notice of exercise,
and (c) PSB will pay any transfer or other taxes required by
reason of the issuance of the Option Shares so purchased.

A legend will be placed on each stock certificate
evidencing Option Shares issued pursuant to this Stock Option
Agreement, which legend will read substantially as follows:

"The shares of stock evidenced by this
certificate have not been the subject of a registration
statement filed under the Securities Act of 1933, as
amended (the "Act"), and declared effective by the
Securities and Exchange Commission. These shares may
not be sold, transferred or otherwise disposed of prior
to such time unless FBKP Bancorp, Inc. receives an
opinion of counsel acceptable to it stating that an
exemption from the registration provisions of the Act
is available for such transfer."

5. Adjustment Upon Changes in Capitalization. In the
event of any change in the Common Stock by reason of stock
dividends, split-ups, recapitalizations, combinations,
conversions, divisions, exchanges of shares or the like, then the
number and kind of Option Shares and the Option Price shall be
appropriately adjusted.

6. Filings and Consents. Each of PSB and FBKP will
use its reasonable best efforts to make all filings with, and to
obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions
contemplated by this Stock Option Agreement. Within 10 days from
the date hereof, PSB shall file a report of beneficial ownership
on Form 13D with the Securities and Exchange Commission under the
Exchange Act which discloses the rights of PSB hereunder.

7. Representations and Warranties of FBKP. FBKP
hereby represents and warrants to PSB as follows:

(a) Due Authorization. FBKP has full corporate
power and authority to execute, deliver and perform this Stock
Option Agreement and all corporate action necessary for
execution, delivery and performance of this Stock Option
Agreement has been duly taken by FBKP. This Stock Option
<PAGE D-8> Agreement constitutes a legal, valid and binding
obligation of FBKP, enforceable against FBKP in accordance with
its terms (except as may be limited by applicable bankruptcy,
insolvency, Reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles).

(b) Authorized Shares. FBKP has taken all
necessary corporate action to authorize and reserve for issuance
all shares of Common Stock that may be issued pursuant to any
exercise of the Option.

8. Representations and Warranties of PSB. PSB hereby
represents and warrants to FBKP that PSB has full corporate power
and authority to execute, deliver and perform this Stock Option
Agreement and all corporate action necessary for execution,
delivery and performance of this Stock Option Agreement has been
duly taken by PSB. This Stock Option Agreement constitutes a
legal, valid and binding obligation of PSB, enforceable against
PSB in accordance with its terms (except as may be limited by
applicable bankruptcy, insolvency, Reorganization, moratorium,
fraudulent transfer and similar laws of general applicability
relating to or affecting creditors' rights or by general equity
principles).

9. Specific Performance. The parties hereto
acknowledge that damages would be an inadequate remedy for a
breach of this Stock Option Agreement and that the obligations of
the parties hereto shall be specifically enforceable.

10. Entire Agreement. This Stock Option Agreement and
the Agreement constitute the entire agreement between the parties
with respect to the subject matter hereof and supersede all other
prior agreements and understandings, both written and oral, among
the parties or any of them with respect to the subject matter
hereof.

11. Assignment or Transfer. PSB may not sell, assign
or otherwise transfer its rights and obligations hereunder, in
whole or in part, to any person or group of persons other than to
a subsidiary of PSB. PSB represents that it is acquiring the
Option for PSB's own account and not with a view to, or for sale
in connection with, any distribution of the Option or the Option
Shares. PSB is aware that neither the Option nor the Option
Shares is the subject of a registration statement filed with, and
declared effective by, the Securities and Exchange Commission
pursuant to Section 5 of the Securities Act, but instead each is
being offered in reliance upon the exemption from the
registration requirement provided by Section 4(2) thereof and the
representations and warranties made by PSB in connection
therewith.

12. Amendment of Stock Option Agreement. By mutual
consent of the parties hereto, this Stock Option Agreement may be
amended in writing at any time, for the purpose of facilitating
<PAGE D-9> performance hereunder or to comply with any applicable
regulation of any governmental authority or any applicable order
of any court or for any other purpose.

13. Validity. The invalidity or unenforceability of
any provision of this Stock Option Agreement shall not affect the
validity or enforceability of any other provisions of this Stock
Option Agreement, which shall remain in full force and effect.

14. Notices. All notices, requests, consents and
other communications required or permitted hereunder shall be in
writing and shall be deemed to have been duly given when
delivered personally, by telegram or telecopy, or by registered
or certified mail (postage prepaid, return receipt requested) to
the respective parties as follows:

(i) If to PSB, to:

PSB Bancorp, Inc.
1835 Market Street
Eleven Penn Center - Suite 2601
Philadelphia, Pennsylvania 19103

Attention: Anthony DiSandro, President
and Chief Executive Officer

Telecopy No.: (215) 979-7979

with a copy to:

Stevens & Lee
One Glenhardie Corporate Center
1275 Drummers Lane
P.O. Box 236
Wayne, Pennsylvania 19087-0236

Attention: Jeffrey P. Waldron, Esquire

Telecopy No.: (610) 687-1384

(ii) If to FBKP, to:

First Bank of Philadelphia
1424 Walnut Street
Philadelphia, Pennsylvania 19102

Attention: Carl A. Lingle,
President and Chief Executive
Officer

Telecopy No.: (215) 790-5209

with copies to:

Pepper Hamilton, L.L.P. <PAGE D-10>
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, Pennsylvania 19103

Attention: L. Garrett Dutton, Jr., Esquire

Telecopy No.: (215) 981-4750

or to such other address as the person to whom notice is to be
given may have previously furnished to the others in writing in
the manner set forth above (provided that notice of any change of
address shall be effective only upon receipt thereof).

15. Governing Law. This Stock Option Agreement shall
be governed by and construed in accordance with the domestic
internal law (but not the law of conflicts of law) of the
Commonwealth of Pennsylvania.

16. Captions. The captions in this Stock Option
Agreement are inserted for convenience and reference purposes,
and shall not limit or otherwise affect any of the terms or
provisions hereof.

17. Waivers and Extensions. The parties hereto may,
by mutual consent, extend the time for performance of any of the
obligations or acts of either party hereto. Each party may waive
(i) compliance with any of the covenants of the other party
contained in this Stock Option Agreement and/or (ii) the other
party's performance of any of its obligations set forth in this
Stock Option Agreement.

18. Parties in Interest. This Stock Option Agreement
shall be binding upon and inure solely to the benefit of each
party hereto, and, nothing in this Stock Option Agreement,
express or implied, is intended to confer upon any other person
any rights or remedies of any nature whatsoever under or by
reason of this Stock Option Agreement.

19. Counterparts. This Stock Option Agreement may be
executed in two or more counterparts, each of which shall be
deemed to be an original, but all of which shall constitute one
and the same agreement.

20. Expenses. Except as otherwise provided herein,
all costs and expenses incurred by the parties hereto in
connection with the transactions contemplated by this Stock
Option Agreement or the Option shall be paid by the party
incurring such cost or expense.

21. Defined Terms. Capitalized terms which are used
but not defined herein shall have the meanings ascribed to such
terms in the Agreement.

IN WITNESS WHEREOF, each of the parties hereto,
pursuant to resolutions adopted by its Board of Directors, has
<PAGE D-11> caused this Stock Option Agreement to be executed by
its duly authorized officer and has caused its corporate seal to
be affixed hereunto and to be duly attested, all as of the day
and year first above written.

PSB BANCORP, INC.

By________________________________
Anthony DiSandro,
President and Chief
Executive Officer

FIRST BANK OF PHILADELPHIA

By_________________________________
Carl A. Lingle,
President and Chief
Executive
Officer
<PAGE D-12>
ANNEX E

Letter Agreement of First Bank Officers/Directors

<PAGE E-1>
Annex E

March 19, 1999

PSB Bancorp, Inc.
1835 Market Street
Eleven Penn Center
Philadelphia, Pennsylvania 19103

Ladies and Gentlemen:

PSB Bancorp, Inc. ("PSB") and First Bank of Philadelphia
("FBKP") desire to enter into an agreement dated March 19, 1999
("Agreement"), pursuant to which, subject to the terms and
conditions set forth therein, (a) Pennsylvania Savings Bank, a
wholly owned subsidiary of PSB, will merge with and into FBKP
with FBKP surviving the merger, and (b) shareholders of FBKP will
receive common stock of PSB outstanding on the closing date (the
foregoing, collectively, referred to herein as the "Merger").

PSB has required, as a condition to its execution and
delivery to FBKP of the Agreement, that the undersigned execute
and deliver to PSB this Letter Agreement.

In consideration of the foregoing, each of the undersigned
hereby irrevocably:

(a) Agrees to be present (in person or by proxy) at
all meetings of shareholders of FBKP called to vote for approval
of the Agreement and the Merger so that all shares of common
stock of FBKP then owned by the undersigned will be counted for
the purpose of determining the presence of a quorum at such
meetings and to vote or cause to be voted all such shares in
favor of approval and adoption of the Agreement and the
transactions contemplated thereby (including any amendments or
modifications of the terms thereof approved by the Board of
Directors of FBKP);

(b) Agrees not to vote or execute any written consent
to rescind or amend in any manner any prior vote or written
consent, as a shareholder of FBKP, to approve or adopt the
Agreement;

(d) Agrees not to offer, sell, transfer or otherwise
dispose of any shares of common stock of PSB received in the
Merger, except (i) at such time as a registration statement under
the Securities Act of 1933, as amended ("Securities Act")
<PAGE E-2> covering sales of such PSB common stock is effective
and a prospectus is made available under the Securities Act,
(ii) within the limits, and in accordance with the applicable
provisions of, Rule 145(d) under the Securities Act, or (iii) in
a transaction which, in the opinion of counsel satisfactory to
PSB or as described in a "no-action" or interpretive letter from
the staff of the Securities and Exchange Commission ("SEC"), is
not required to be registered under the Securities Act; and
acknowledges and agrees that PSB is under no obligation to
register the sale, transfer or other disposition of PSB common
stock by the undersigned or on behalf of the undersigned, or to
take any other action necessary to make an exemption from
registration available;

(e) Notwithstanding the foregoing, agrees not to sell,
or in any other way reduce the risk of the undersigned relative
to, any shares of common stock of FBKP or of common stock of PSB,
during the period commencing thirty days prior to the effective
date of the Merger and ending on the date on which financial
results covering at least thirty days of post-Merger combined
operations of PSB and FBKP have been published within the meaning
of Section 201.01 of the SEC's Codification of Financial
Reporting Policies;

(f) Agrees that neither FBKP nor PSB shall be bound by
any attempted sale of any shares of FBKP common stock or PSB
common stock, respectively, and FBKP's and PSB's transfer agents
shall be given appropriate stop transfer orders and shall not be
required to register any such attempted sale, unless the sale has
been effected in compliance with the terms of this Letter
Agreement; and further agrees that the certificate representing
shares of PSB common stock owned by the undersigned may be
endorsed with a restrictive legend consistent with the terms of
this Letter Agreement;

(g) Acknowledges and agrees that the provisions of
subparagraphs (d), (e) and (f) hereof also apply to shares of PSB
common stock and FBKP common stock owned by (i) his or her
spouse, (ii) any of his or her relatives or relatives of his or
her spouse occupying his or her home, (iii) any trust or estate
in which he or she, his or her spouse, or any such relative owns
at least a 10% beneficial interest or of which any of them serves
as trustee, executor or in any similar capacity, and (iv) any
corporation or other organization in which the undersigned, any
affiliate of the undersigned, his or her spouse, or any such
relative owns at least 10% of any class of equity securities or
of the equity interest;

(h) Represents that the undersigned has no plan or
intention to sell, exchange, or otherwise dispose of any shares
of common stock of PSB prior to expiration of the time period
referred to in subparagraph (e) hereof; and

(i) Represents that the undersigned has the capacity
to enter into this Letter Agreement and that it is a valid and
<PAGE E-3> binding obligation enforceable against the undersigned
in accordance with its terms, subject to bankruptcy, insolvency
and other laws affecting creditors' rights and general equitable
principles.
_________________________

It is understood and agreed that the provisions of this
Letter Agreement relate solely to the capacity of the undersigned
as a shareholder or other beneficial owner of shares of FBKP
Common Stock and is not in any way intended to affect the
exercise by the undersigned of the undersigned's responsibilities
as a director or officer of FBKP. It is further understood and
agreed that this Letter Agreement is not in any way intended to
affect the exercise by the undersigned of any fiduciary
responsibility which the undersigned may have in respect of any
shares of FBKP common stock held by the undersigned as of the
date hereof.

_________________________

This Letter Agreement may be executed in two or more
counterparts, each of which shall be deemed to constitute an
original, but all of which together shall constitute one and the
same Letter Agreement.

_________________________

This Letter Agreement shall terminate concurrently with any
termination of the Agreement in accordance with its terms.

_________________________

The undersigned intend to be legally bound hereby.

Sincerely,

___________________________________
Hal Jonathan Shaffer

___________________________________
Carl A. Lingle

___________________________________
Alvin B. Heller

___________________________________
Thomas J. Hessert, Jr.

___________________________________
Ronald H. Portnoy

___________________________________
James T. Schaeffer
<PAGE E-4>
ANNEX G

Pennsylvania Business Corporation Law
(Dissenter's Rights Sections)

<PAGE G-1>
ANNEX G

SECTION 1930 OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988

Section 1930. Dissenters rights.

(a) General rule.--If any shareholder of a domestic
business corporation that is to be a party to a merger or
consolidation pursuant to a plan of merger or consolidation
objects to the plan of merger or consolidation and complies with
the provisions of Subchapter D of Chapter 15 [FN 1] (relating to
dissenters rights), the shareholder shall be entitled to the
rights and remedies of dissenting shareholders therein provided,
if any. See also section 1906(c) (relating to dissenters rights
upon special treatment).

(b) Plans adopted by directors only.--Except as otherwise
provided pursuant to section 1571(c) (relating to grant of
optional dissenters rights), Subchapter D of Chapter 15 shall not
apply to any of the shares of a corporation that is a party to a
merger or consolidation pursuant to section 1924(b)(1)(i)
(relating to adoption by board of directors).

(c) Cross references.--See sections 1571(b) (relating to
exceptions) and 1904 (relating to de facto transaction doctrine
abolished).

____________________

1 15 Pa. C.S.A. Section 1571 et seq.
<PAGE G-2>
SUBCHAPTER D OF CHAPTER 15 OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988

Subchapter D.-Dissenters Rights

Section 1571. Application and effect of subchapter.

(a) General rule.--Except as otherwise provided in
subsection (b), any shareholder of a business corporation shall
have the right to dissent from, and to obtain payment of the fair
value of his shares in the event of, any corporate action, or to
otherwise obtain fair value for his shares, where this part
expressly provides that a shareholder shall have the rights and
remedies provided in this subchapter. See:

Section 1906(c) (relating to dissenters rights upon
special treatment).

Section 1930 (relating to dissenters rights).

Section 1931(d) (relating to dissenters rights in share
exchanges).

Section 1932(c) (relating to dissenters rights in asset
transfers).

Section 1952(d) (relating to dissenters rights in
division).

Section 1962(c) (relating to dissenters rights in
conversion).

Section 2104(b) (relating to procedure).

Section 2324 (relating to corporation option where a
restriction on transfer of a security is held invalid).

Section 2325(b) (relating to minimum vote requirement).

Section 2704(c) (relating to dissenters rights upon
election).

Section 2705(d) (relating to dissenters rights upon
renewal of election).

Section 2907(a) (relating to proceedings to terminate
breach of qualifying conditions).

Section 7104(b)(3) (relating to procedure).

(b) Exceptions.--

(1) Except as otherwise provided in paragraph (2), the
holders of the shares of any class or series of shares that, at
<PAGE G-3> the record date fixed to determine the shareholders
entitled to notice of and to vote at the meeting at which a plan
specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is
to be voted on, are either:

(i) listed on a national securities exchange; or

(ii) held of record by more than 2,000
shareholders;

shall not have the right to obtain payment of the fair value of
any such shares under this subchapter.

(2) Paragraph (1) shall not apply to and dissenters
rights shall be available without regard to the exception
provided in that paragraph in the case of:

(i) Shares converted by a plan if the shares are
not converted solely into shares of the acquiring,
surviving, new or other corporation or solely into such
shares and money in lieu of fractional shares.

(ii) Shares of any preferred or special class
unless the articles, the plan or the terms of the
transaction entitle all shareholders of the class to vote
thereon and require for the adoption of the plan or the
effectuation of the transaction the affirmative vote of a
majority of the votes cast by all shareholders of the class.

(iii) Shares entitled to dissenters rights under
section 1906(c) (relating to dissenters rights upon special
treatment).

(3) The shareholders of a corporation that acquires by
purchase, lease, exchange or other disposition all or
substantially all of the shares, property or assets of another
corporation by the issuance of shares, obligations or otherwise,
with or without assuming the liabilities of the other corporation
and with or without the intervention of another corporation or
other person, shall not be entitled to the rights and remedies of
dissenting shareholders provided in this subchapter regardless of
the fact, if it be the case, that the acquisition was
accomplished by the issuance of voting shares of the corporation
to be outstanding immediately after the acquisition sufficient to
elect a majority or more of the directors of the corporation.

(c) Grant of optional dissenters rights.--The bylaws or a
resolution of the board of directors may direct that all or a
part of the shareholders shall have dissenters rights in
connection with any corporate action or other transaction that
would otherwise not entitle such shareholders to dissenters
rights.

(d) Notice of dissenters rights.--Unless otherwise provided
by statute, if a proposed corporate action that would give rise
<PAGE G-4> to dissenters rights under this subpart is submitted
to a vote at a meeting of shareholders, there shall be included
in or enclosed with the notice of meeting:

(1) a statement of the proposed action and a statement
that the shareholders have a right to dissent and obtain
payment of the fair value of their shares by complying with
the terms of this subchapter; and

(2) a copy of this subchapter.

(e) Other statutes.--The procedures of this subchapter
shall also be applicable to any transaction described in any
statute other than this part that makes reference to this
subchapter for the purpose of granting dissenters rights.

(f) Certain provisions of articles ineffective.--This
subchapter may not be relaxed by any provision of the articles.

(g) Cross references.--See sections 1105 (relating to
restriction on equitable relief), 1904 (relating to de facto
transaction doctrine abolished) and 2512 (relating to dissenters
rights procedure).

Section 1572. Definitions.

The following words and phrases when used in this subchapter
shall have the meanings given to them in this section unless the
context clearly indicates otherwise:

"Corporation." The issuer of the shares held or owned
by the dissenter before the corporate action or the
successor by merger, consolidation, division, conversion or
otherwise of that issuer. A plan of division may designate
which of the resulting corporations is the successor
corporation for the purposes of this subchapter. The
successor corporation in a division shall have sole
responsibility for payments to dissenters and other
liabilities under this subchapter except as otherwise
provided in the plan of division.

"Dissenter." A shareholder or beneficial owner who is
entitled to and does assert dissenters rights under this
subchapter and who has performed every act required up to
the time involved for the assertion of those rights.

"Fair value." The fair value of shares immediately
before the effectuation of the corporate action to which the
dissenter objects taking into account all relevant factors,
but excluding any appreciation or depreciation in
anticipation of the corporate action.

"Interest." Interest from the effective date of the
corporate action until the date of payment at such rate as
is fair and equitable under all of the circumstances, taking
<PAGE G-5> into account all relevant factors including the
average rate currently paid by the corporation on its
principal bank loans.

Section 1573. Record and beneficial holders and owners.

(a) Record holders of shares.--A record holder of shares of
a business corporation may assert dissenters rights as to fewer
than all of the shares registered in his name only if he dissents
with respect to all the shares beneficially owned by any one
person and discloses the name and address of the person or
persons on whose behalf he dissents. In that event, his rights
shall be determined as if the shares as to which he has dissented
and his other shares were registered in the names of different
shareholders.

(b) Beneficial owners of shares.--A beneficial owner of
shares of a business corporation who is not the record holder may
assert dissenters rights with respect to shares held on his
behalf and shall be treated as a dissenting shareholder under the
terms of this subchapter if he submits to the corporation not
later than the time of the assertion of dissenters rights a
written consent of the record holder. A beneficial owner may not
dissent with respect to some but less than all shares of the same
class or series owned by the owner, whether or not the shares so
owned by him are registered in his name.

Section 1574. Notice of intention to dissent.

If the proposed corporate action is submitted to a vote at a
meeting of shareholders of a business corporation, any person who
wishes to dissent and obtain payment of the fair value of his
shares must file with the corporation, prior to the vote, a
written notice of intention to demand that he be paid the fair
value of his shares if the proposed action is effectuated, must
effect no change in the beneficial ownership of his shares from
the date of such filing continuously through the effective date
of the proposed action and must refrain from voting his shares in
approval of such action. A dissenter who fails in any respect
shall not acquire any right to payment of the fair value of his
shares under this subchapter. Neither a proxy nor a vote against
the proposed corporate action shall constitute the written notice
required by this section.

Section 1575. Notice to demand payment.

(a) General rule.--If the proposed corporate action is
approved by the required vote at a meeting of shareholders of a
business corporation, the corporation shall mail a further notice
to all dissenters who gave due notice of intention to demand
payment of the fair value of their shares and who refrained from
voting in favor of the proposed action. If the proposed
corporate action is to be taken without a vote of shareholders,
the corporation shall send to all shareholders who are entitled
to dissent and demand payment of the fair value of their shares a
<PAGE G-6> notice of the adoption of the plan or other corporate
action. In either case, the notice shall:

(1) State where and when a demand for payment must be
sent and certificates for certificated shares must be
deposited in order to obtain payment.

(2) Inform holders of uncertificated shares to what
extent transfer of shares will be restricted from the time
that demand for payment is received.

(3) Supply a form for demanding payment that includes
a request for certification of the date on which the
shareholder, or the person on whose beneficial shareholder
dissents, acquired beneficial ownership of the shares.

(4) Be accompanied by a copy of this subchapter.

(b) Time for receipt of demand for payment.--The time set
for receipt of the demand and deposit of certificated shares
shall be not less than 30 days from the mailing of the notice.

Section 1576. Failure to comply with notice to demand payment,
etc.

(a) Effect of failure of shareholder to act.--A shareholder
who fails to timely demand payment, or fails (in the case of
certificated shares) to timely deposit certificates, as required
by a notice pursuant to section 1575 (relating to notice to
demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.

(b) Restriction on uncertificated shares.--If the shares
are not represented by certificates, the business corporation may
restrict their transfer from the time of receipt of demand for
payment until effectuation of the proposed corporate action or
the release of restrictions under the terms of section 1577(a)
(relating to failure to effectuate corporate action).

(c) Rights retained by shareholder.--The dissenter shall
retain all other rights of a shareholder until those rights are
modified by effectuation of the proposed corporate action.

Section 1577. Release of restrictions or payment for shares.

(a) Failure to effectuate corporate action.--Within 60 days
after the date set for demanding payment and depositing
certificates, if the business corporation has not effectuated the
proposed corporate action, it shall return any certificates that
have been deposited and release uncertificated shares from any
transfer restrictions imposed by reason of the demand for
payment.

(b) Renewal of notice to demand payment.--When uncertified
shares have been released from transfer restrictions and
<PAGE G-7> deposited certificates have been returned, the
corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand
payment), with like effect.

(c) Payment of fair value of shares.--Promptly after
effectuation of the proposed corporate action, or upon timely
receipt of demand for payment if the corporate action has already
been effectuated, the corporation shall either remit to
dissenters who have made demand and (if their shares are
certificated) have deposited their certificates the amount that
the corporation estimates to be the fair value of the shares, or
give written notice that no remittance under this section will be
made. The remittance or notice shall be accompanied by:

(1) The closing balance sheet and statement of income
of the issuer of the shares held or owned by the dissenter
for a fiscal year ending not more than 16 months before the
date of remittance or notice together with the latest
available interim financial statements.

(2) A statement of the corporation's estimate of the
fair value of the shares.

(3) A notice of the right of the dissenter to demand
payment or supplemental payment, as the case may be,
accompanied by a copy of this subchapter.

(d) Failure to make payment.--If the corporation does not
remit the amount of its estimate of the fair value of the shares
as provided by subsection (c), it shall return any certificates
that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for
payment. The corporation may make a notation on any such
certificate or on the records of the corporation relating to any
such uncertificated shares that such demand has been made. If
shares with respect to which notation has been so made shall be
transferred, each new certificate issued therefor or the records
relating to any transferred uncertificated shares shall bear a
similar notation, together with the name of the original
dissenting holder or owner of such shares. A transferee of such
shares shall not acquire by such transfer any rights in the
corporation other than those which the original dissenter had
after making demand for payment of their fair value.

Section 1578. Estimate by dissenter of fair value of shares.

(a) General rule.--If the business corporation gives notice
of its estimate of the fair value of the shares, without
remitting such amount, or remits payment of its estimate of the
fair value of a dissenter's shares as permitted by
section 1577(c) (relating to payment of fair value of shares) and
the dissenter believes that the amount stated or remitted is less
than the fair value of his shares, he may send to the corporation
<PAGE G-8> his own estimate of the fair value of the shares,
which shall be deemed a demand for payment of the amount or the
deficiency.

(b) Effect of failure to file estimate.--Where the
dissenter does not file his own estimate under subsection (a)
within 30 days after the mailing by the corporation of its
remittance or notice, the dissenter shall be entitled to no more
than the amount stated in the notice or remitted to him by the
corporation.

Section 1579. Valuation proceedings generally.

(a) General rule.--Within 60 days after the latest of:

(1) effectuation of the proposed corporate action;

(2) timely receipt of any demands for payment under
section 1575 (relating to notice to demand payment); or

(3) timely receipt of any estimates pursuant to
section 1578 (relating to estimate by dissenter of fair
value of shares);

if any demands for payment remain unsettled, the business
corporation may file in court an application for relief
requesting that the fair value of the shares be determined by the
court.

(b) Mandatory joinder of dissenters.--All dissenters,
wherever residing, whose demands have not been settled shall be
made parties to the proceeding as in an action against their
shares. A copy of the application shall be served on each such
dissenter. If a dissenter is a nonresident, the copy may be
served on him in the manner provided or prescribed by or pursuant
to 42 Pa.C.S. Ch. 53 (relating to bases of jurisdiction and
interstate and international procedure).

(c) Jurisdiction of the court.--The jurisdiction of the
court shall be plenary and exclusive. The court may appoint an
appraiser to receive evidence and recommend a decision on the
issue of fair value. The appraiser shall have such power and
authority as may be specified in the order of appointment or in
any amendment thereof.

(d) Measure of recovery.--Each dissenter who is made a
party shall be entitled to recover the amount by which the fair
value of his shares is found to exceed the amount, if any,
previously remitted, plus interest.

(e) Effect of corporation's failure to file application.--
If the corporation fails to file an application as provided in
subsection (a), any dissenter who made a demand and who has not
already settled his claim against the corporation may do so in
the name of the corporation at any time within 30 days after the
<PAGE G-9> expiration of the 60-day period. If a dissenter does
not file an application within the 30-day period, each dissenter
entitled to file an application shall be paid the corporation's
estimate of the fair value of the shares and no more, and may
bring an action to recover any amount not previously remitted.

Section 1580. Costs and expenses of valuation proceedings.

(a) General rule.--The costs and expenses of any proceeding
under section 1579 (relating to valuation proceedings generally)
including the reasonable compensation and expenses of the
appraiser appointed by the court, shall be determined by the
court and assessed against the business corporation except that
any part of the costs and expenses may be apportioned and
assessed as the court deems appropriate against all or some of
the dissenters who are parties and whose action in demanding
supplemental payment under section 1578 (relating to estimate by
dissenter of fair value of shares) the court finds to be
dilatory, obdurate, arbitrary, vexatious or in bad faith.

(b) Assessment of counsel fees and expert fees where lack
of good faith appears.--Fees and expenses of counsel and of
experts for the respective parties may be assessed as the court
deems appropriate against the corporation and in favor of any or
all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed
against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the
fees and expenses arc assessed acted in bad faith or in a
dilatory, obdurate, arbitrary or vexatious manner in respect to
the rights provided by this subchapter.

(c) Award of fees for benefits to other dissenters.--If the
court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated and
should not be assessed against the corporation, it may award to
those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefitted.
<PAGE G-10>
ANNEX H

Additional Information With Respect to PSB
<PAGE H-1>
ANNEX H

ADDITIONAL INFORMATION WITH RESPECT TO PSB BANCORP, INC.

Page

Description of Business................................... H-2

Market Price of and Dividends on First Bank Common
Stock and Related Shareholder Matters................... H-

Legal Proceedings......................................... H-

Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... H-

Index to Financial Statements............................. H-
<PAGE H-2>
Business of PSB Bancorp, Inc.

On July 17, 1998, Pennsylvania Savings Bank and PSB
Mutual Holding Company completed a conversion and reorganization
from Mutual Holding Company to Stock Holding Company. Under the
plan of conversion, the newly formed holding company, PSB
Bancorp. Inc. 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.

PSB Bancorp, Inc. was organized as a Pennsylvania
business corporation on October 3, 1997 at the direction of
Pennsylvania Savings Bank for the purpose of becoming a holding
company for Pennsylvania Savings Bank upon completion of a
conversion and reorganization of the bank. The holding company
is subject to regulation by the Federal Reserve Board, and its
principal business is the ownership of Pennsylvania Savings Bank.
In the future, the holding company may acquire or organize other
operating subsidiaries.

Pennsylvania Savings Bank is a Pennsylvania-chartered
stock savings bank headquartered in Philadelphia, Pennsylvania.
The savings bank is a community-oriented institution offering
traditional deposit and loan products. The savings bank operates
four full-service offices in Philadelphia, Pennsylvania and one
full-service office in Glenside, Montgomery County, Pennsylvania.

At March 31, 1999, the savings bank had total assets of
$169.81 million, total deposits of $133.85 million and
shareholders' equity of $30.51 million.

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 of
the FDIC to the extent that such deposits were assumed from the
mutual savings bank in the reorganization. Deposits accepted by
the savings bank are insured by the FDIC's Bank Insurance Fund,
up to applicable limits.

Market Price of and Dividends on PSB common stock and Related
Shareholder Matters

The common stock of PSB Bancorp, Inc. is traded over-
the-counter and is quoted in the NASDAQ National Market System.
The NASDAQ symbol is PSBI. The following table sets forth the
high and low trading prices, as reported by NASDAQ. As the table
indicates, PSB has never declared cash dividends' however, in
<PAGE H-3> 1997, Pennsylvania Savings Bank declared a one time
cash dividend.

Cash
Dividend
High Low Declared
Year ended December 31, 1998

Quarter ended September 30, 1998 9.188 6.500 -
Quarter ended December 31, 1998 8.000 6.250 -

January 1, 1999 to Present

Quarter ended March 31, 1999 8.000 6.500 -
Quarter ended June 30, 1999
Quarter ended September 30, 1999
(through _________, 1999

Dividend payments by the savings bank are subject to
the restrictions of the Pennsylvania Banking Code. Under the
Banking Code, no dividends may be paid except from "accumulated
net earnings" (generally, undivided profits). Under the Federal
Deposit Insurance Act, no dividends may be paid by an insured
bank if the bank is in arrears in the payment of any insurance
assessment due to the FDIC. State and federal regulatory
authorities have adopted standards for the maintenance of
adequate levels of capital by banks. Adherence to such standards
further limits the ability of the savings bank to pay dividends.

Legal Proceedings

Periodically, there have been various claims and
lawsuits involving the Savings Bank, such as claims to enforce
liens, condemnation proceedings on properties in which the
savings bank holds security interests, claims involving the
making and servicing of real property loans and other issues
incident to the Savings Bank's business. The savings bank is not
a party to any pending legal proceedings that it believes would
have a material adverse effect on the financial condition or
operations of the savings bank.

Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Business Strategy of the Savings Bank

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
financial institution. 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
loans, commercial real estate loans, commercial business loans,
<PAGE H-4> 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. On March 19, 1999, PSB and the savings
bank signed a definitive agreement to acquire First Bank of
Philadelphia, a one branch bank located in Philadelphia with
$63.5 million in assets and $57.5 million in deposits.

The savings bank is also expanding the operations of
Transnational Mortgage Company, its mortgage banking subsidiary,
in an effort to increase its fee income. Retail mortgage
origination is being expanded through the use of 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 originations
through its existing office network and is increasing origination
of other loan products separate from Transnational Mortgage
Company such as commercial real estate loans, commercial business
loans, construction loans and consumer loans. During the year
ended December 31, 1998, loan originations other than residential
mortgage loans totalled $33.86 million or 58.73% of originations
during the period. This increased origination of loans other
than residential mortgage loans reflects management's effort to
diversify the savings bank's loan portfolio, achieve a higher net
interest margin and reduce interest rate risk through the
origination of higher yielding assets. This diversification
strategy represents a conscious effort by management to migrate
over time from the profile of a thrift institution to a profile
more typical of a commercial bank.

The savings bank expects this diversification trend to
continue and accelerate with the acquisition of First Bank and
the creation of a specialized lending group. In connection with
that transaction, the savings bank will merge into First Bank
which will be the surviving subsidiary of PSB. As a result PSB's
operating subsidiary will hold a commercial bank charter rather
than a savings bank charter.

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 through the metropolitan Philadelphia area and
the adjacent counties of Pennsylvania, New Jersey and Delaware,
<PAGE H-5> 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 For Period Ended March 31, 1998
Compared to December 31, 1998 - The bank's total assets increased
$5.8 million or 3.42% from $164.01 million at December 31, 1998
to $169.81 million at March 31, 1999. The increase in assets was
primarily the result of higher levels of cash and cash
equivalents, investment securities and net loans that were
partially offset by a decrease in loans held for sale.

Total loans increased to $75.86 million at March 31,
1999 from $73.62 million at December 31, 1998. The increase of
$2.24 million, or 2.95%, was primarily the result of increased
loan origination of other loan products such as commercial real
estate, construction loans and consumer loans as well as modest
growth in residential mortgage loans as illustrates by the
following loan composition table:

At March 31, At December 31,
1999 1998
Amount Percent Amount Percent Variance % Change
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family $51,406 67.76% $49,796 67.64% $1,610 3.13%
Construction loans 3,839 5.06 3,286 4.46 553 14.40%
Five or more family residence 1,404 1.85 1,576 2.14 (172) -12.25%
Nonresidential 15,092 19.90 14,722 20.00 370 2.45%

Commercial loans 2,859 3.77 3,074 4.17 (215) -7.52%
Consumer loans 1,260 1.66 1,168 1.59 92 7.30%
Total loans $75,860 100.00% $73,622 100.00% 2,238 2.95%
======= ====== ======= ====== ====== =====

Less:
Unearned fees and discounts $421 $431
Undisbursed loan proceeds 2 7
Allowance for loan losses 304 304
Net Loans $75,133 $72,880
======= =======
</TABLE>

Total investment securities(including mortgage-backed
securities) increased $4.24 million, or 8.73%, to $48.54 million
at March 31, 1999, from $44.30 million at December 31, 1998. The
increase occurred because the Savings Bank transferred cash and
cash equivalents and new deposit funds into higher yielding,
<PAGE H-6> greater than 15 year maturity mortgage-backed
securities for the three month period ended March 31, 1999. On
January 29, 1999, the Holding Company purchased 1,600,000 shares
of Series A Convertible Preferred Stock, $.01 par value per
share, of McGuire Performance Solutions, Inc. ("MPS"). The
Holding Company purchased the shares for $.78125 per share for a
total cost of $1,250,000. The Holding Company owns 100% of MPS's
Series A Convertible Preferred Stock. MPS is a nationally
recognized firm delivering cost-effective solutions for high
performance total balance sheet management to banks, thrifts,
credit unions and other financial institutions.

Cash and cash equivalents, including interest-bearing
deposits with banks, increased $580,000 to $35.54 million at
March 31, 1999, from $34.96 million at December 31, 1998. This
increase was the result of cash provided from new deposits,
maturities of investments and loan payments net of cash used for
the purchase of investments, and disbursements of loan proceeds.

Total liabilities increased from $133.61 million at
December 31, 1998 to $139.30 million at March 31, 1999. This
$5.69 million, or 4.08% increase, reflected an increase in the
bank's primary source of funds, saving deposits, which aggregated
$133.85 million at March 31, 1999, an increase of $5.69 million,
or 4.25% from $128.16 million at December 31, 1998.

Shareholders' equity increased by $120,000, or .39%,
from $30.39 million at December 31, 1998 to $30.51 million at
March 31, 1999. This increase reflects the bank's earnings for
the three months ended March 31, 1999 and the change in
unrealized gains (losses), net of taxes on investment and
mortgage-backed securities held in the bank's available for sale
portfolio.

Financial Condition for Period Ended December 31, 1998
Compared to December 31, 1997 - The savings bank's total assets
increased $34.67 million or 26.81% to $164.01 million at
December 31, 1998 from $129.34 million at December 31, 1997. The
increase in assets was primarily the result of higher levels of
cash and cash equivalents, net loans, loans held for sale and
mortgage-backed securities which were partially offset by a
decrease in investment securities and office properties and
equipment.

Net loans increased by $10.96 million to $72.88 million
at December 31, 1998 from $61.92 million at December 31, 1997.
The increase of 17.70% was primarily the result of increased loan
origination of other loan products such as commercial real
estate, commercial business loans, construction loans and
consumer loans as well as modest growth in residential mortgage
loans. Commercial real estate (nonresidential) increased by
$3.30 million to $14.72 million at December 31, 1998 from
$11.42 million at December 31, 1997. Commercial business loans
increased by $1.17 million to $3.07 million at December 31, 1998
from $1.91 million at December 31, 1997. Construction loans
<PAGE H-7> increased by $689,000 to $3.29 million at December 31,
1998 from $2.60 million at December 31, 1997.

Total investment securities (including mortgage-backed
securities) increased $16.68 million, or 60.39%, to
$44.30 million at December 31, 1998 from $27.62 million at
December 31, 1997. The increase occurred because the savings
bank transferred cash and cash equivalents and new deposit funds
into higher yielding, one to five year maturity investment
securities during the year ended December 31, 1998.

Cash and cash equivalents, including interest-bearing
deposits with banks, increased $7.07 million to $34.96 million at
December 31, 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.

Total liabilities increased to $133.61 million at
December 31, 1998 from $114.34 million at December 31, 1997.
This $19.27 million, or 16.85% increase reflected an increase in
the savings bank's primary source of funds, saving deposits,
which aggregated $128.16 million at December 31, 1998, an
increase of $19.43 million, or 17.87% from $108.73 million at
December 31, 1997.

Shareholder's equity increased by $15.39 million, or
102.6%, from $15.00 million at December 31, 1997 to
$30.39 million at December 31, 1998. This increase reflects the
sale of stock by PSB and the savings bank's earnings for the year
ended December 31, 1998 and a decrease of $14,000 in unrealized
gain (losses) (net of taxes) on investment and mortgage-backed
securities held in the savings bank's available for sale
portfolio as well as the release of uncommitted ESOP shares.

Average Balance Sheet. The following table provides an
analysis on a monthly basis of net interest income, setting forth
for the indicated periods (i) average assets, liabilities and
shareholders' equity, (ii) interest income earned on interest-
earning assets and interest expense paid on interest-bearing
liabilities, (iii) average yields earned on interest-earning
assets and average rates paid on interest-bearing liabilities,
and (iv) the savings bank's net interest margin (net interest
income as a percentage of average total interest-earning assets).

<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning deposits(1) $40,396 $1,895 4.69% $25,648 $1,210 4.72%
Investment securities 18,029 1,201 6.66 23,182 1,616 6.97
<PAGE H-8>
Mortgage-backed securities 6,326 327 5.17 5,696 374 6.57
Net loans(2) 75,571 6,674 8.83 62,213 5,540 8.90
Total interest-earning assets 140,322 $10,097 7.20% 116,739 $8,740 7.49%
Noninterest-earning assets 5,604 6,565
Total assets $145,926 $123,304
======== ========

LIABILITIES
Interest-bearing liabilities:
Savings deposits $41,474 1,196 2.88% $40,061 1,137 2.84%
Certificates 67,776 3,869 5.71 59,178 3,397 5.74
Total deposits 109,250 5,065 4.64 99,239 4,534 4.57
Borrowed money 2,737 25 0.91 2,621 31 1.18
Total interest-bearing liabilities 111,987 5,090 4.55% 101,860 4,565 4.48%
Non-interest-bearing liabilities 11,139 6,798
Total liabilities 123,126 108,658
Retained earnings or shareholders' equity 22,800 14,646
Total liabilities and retained
earnings or shareholders' equity $145,926 $123,304
======== ========
Net interest income $5,007 $4,175
====== ======
Interest rate spread(3) 2.65% 3.01%
Net yield on interest-earning assets(4) 3.57% 3.58%
Ratio of interest-earning assets to
interest-bearing liabilities 1.25 1.15

</TABLE>
<PAGE H-9>
<TABLE>
<CAPTION>
Period Ended March 31,
1999 1998
Average Yield/ Average Yield/
Balance Interest(5) Rate Balance Interest(5) Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning deposits(1) $ 34,610 $ 1,392 4.02% $ 28,766 $1,400 4.70%
Investment securities 8,498 1,248 13.14 19,649 1,348 8.88
Mortgage-backed securities 24,184 1,508 6.24 7,860 320 4.07
Net loans(2) 81,698 7,108 8.70 70,640 6,476 9.17
Total interest-earning assets 149,978 11,266 7.51% 127,906 9,644 7.46%
Noninterest-earning assets 18,669 3,805
Total assets $168,647 $131,811

LIABILITIES
Interest-bearing liabilities:
Savings deposits $ 42,811 $ 1,180 2.76% $ 40,704 $1,144 2.81%
Certificates 79,733 4,356 6.46 64,483 3,688 5.72
Total deposits 122,584 5,536 4.52 105,187 4,832 4.59
Borrowed money 2,728 20 0.73 3,037 28 0.92
Total interest-bearing Liabilities 126,312 5,558 4.43% 108,224 4,860 4.49%
Non-interest-bearing liabilities 12,678 8,359
Total liabilities 138,190 116,583
Retained earnings or shareholders' equity 30,457 15,228
Total liabilities and retained
earnings or shareholders' equity $168,647 $131,611

Net interest income $ 6,700 $4,684

Interest rate spread(3) 3.07% 2.97%
Net yield on interest-earning assets(4) 3.80% 3.66%
Ratio of interest-earning assets to
interest-bearing liabilities 1.20% 1.18%

</TABLE>

__________________

(1) Includes interest-earning deposits with the Federal Home
Loan Bank of Pittsburgh.

(2) Includes nonaccrual loans.

(3) Represents the difference between the average yield on
interest-earning assets and the average cost of interest-
bearing liabilities.

(4) Represents net interest earnings divided by average
interest-earning assets.

(5) Annualized. <PAGE H-10>
Results of Operations for the Period Ended March 31,
1998 and March 31, 1999 - The bank's net income is primarily
dependent on its net interest income, which is the difference
between interest income earned on its interest-earning assets
(such as investments and mortgage-backed securities, other
investment securities and loans, and its cost of funds
(consisting of interest paid on deposits). The savings 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 savings 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 savings 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 can be affected negatively, which in turn would be likely to
have a detrimental effect on the market value of any investment
in PSB's common stock.

Net Income. The Bank's net income totaled $328,000 and
$208,000 for the three months ended March 31, 1999 and 1998,
respectively. Holding Company earnings per share for the three
months ended March 31, 1999 was $.11. savings bank earnings per
share for the three months ended March 31, 1998 was $.18. The
decrease in earnings per share reflects the increased number of
shares outstanding as a result of the completion of the
conversion and reorganization.

Interest Income. Total interest income increased by
$420,000, or 14.95%, to $2.81 million for the three months ended
March 31, 1999, from $2.39 million for the three months ended
March 31, 1998. The increase in interest income resulted largely
from an increase of $158,000 in interest earned on loans and a
$272,000 increase in income earned on mortgage-backed and
investment securities. The increase in interest income generally
reflected management's strategy of pursuing diversification of
the savings bank's loan composition while maintaining adequate
margins over minimum required capital levels. The increase in
interest income also occurred due to the increased capital from
the conversion and reorganization which was completed in
July 1998.

Interest Expense. Total interest expense increased to
$1.39 million for the three months ended March 31, 1999, from
$1.21 million for the three months ended March 31, 1998,
representing an increase of $180,000 or 12.95%. The increase was
due primarily to an increase in deposits for the three months
ended March 31, 1999.
<PAGE H-11>
Provision for Loan Losses. The savings bank makes a
provision to its allowance for loan losses to protect the Bank
against possible but not yet identified losses inherent in the
savings bank's loan portfolio. This provision is recognized for
financial reporting purposes as a reduction of income. In making
such provision, management of the savings bank considers, among
other factors, the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrower's
ability to pay. During the three months ended March 31, 1999 and
1998, the Bank did not have any charge-offs against the allowance
for loan losses. During such periods, the Bank provided $-0- and
$50,000, respectively, for possible loan losses in order to
protect against possible future losses.

Net Interest Income After Provision for Loan Losses.
Net interest income after the provision for possible loan losses
for the three months ended March 31, 1999, increased to $1.42
million from $1.17 million for the three months ended March 31,
1998, an increase of $250,000, or 17.61%.

Noninterest Income. Noninterest income consists of
gain on sale of loans, loan fees, service charges, rental income
and other income. Noninterest income increased by $11,000, or
4.28%, to $257,000 for the three months ended March 31, 1999,
from $246,000 for the three months ended March 31, 1998. The
principal reasons for the increase in noninterest income was a
$26,000 increase in gain on sale of loans to $140,000 in 1999
from $114,000 in 1998 due to an increase in number of loans sold
by Transnational Mortgage Corp. in 1999 which was offset by a
$15,000 decrease in loan fees.

Noninterest Expense. Noninterest expense principally
consists of employees' compensation and benefits, deposit
insurance premiums and premises and occupancy costs. Noninterest
expense increased by $140,000, or 11.48%, to $1.22 million for
the three months ended March 31, 1999, from $1.08 million for the
three months ended March 31, 1998. The principal reasons for the
increase was a $62,000 increase in compensation and employee
benefits due to normal salary increases, a $16,000 increase in
premises and occupancy costs, a $13,000 increase in advertising,
a $23,000 increase in expenses of real estate owned, a $8,000
increase in stationery, printing and postage and a $10,000
increase in other expenses. Noninterest expense has increased
due to cost associated with the bank's expansion strategy.

Income Taxes. Income tax provisions for the three
months ended March 31, 1999 and 1998 of $133,000 and $75,000,
respectively, generally reflect the bank's pre-tax income at
rates then in effect.

Results of Operations for the Years Ended December 31, 1998 and
December 31,1997
<PAGE H-12>
General. The savings bank's net income is primarily
dependent on its net interest income, which is the difference
between interest income earned on its interest-earning assets
(such as investments and mortgage-backed securities, other
investment securities and loans), and its cost of funds
(consisting of interest paid on deposits). The savings 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 services 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 savings 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 savings bank. In particular, the
general level of market interest rates tends to be highly
cyclical. In periods of high interest rates, earnings of the
savings bank could be affected negatively, which in turn would be
likely to have a detrimental effect on the market value of any
investment in PSB's Common Stock.

Rate/Volume Analysis. Net interest income is affected
by changes in the mix of the volume and sales of interest-earning
assets and interest-earning liabilities. The following table
represents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-
bearing liabilities have affected the savings bank's interest
income and interest expense during the periods indicated.

<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 vs. 1997 1997 vs. 1996
Increase/(Decrease) Increase/(Decrease)
Volume Rate Total Volume Rate Total
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Investments(1) $348 ($78) $270 $198 $238 $436
Mortgage-backed securities 33 (80) (47) (52) (5) (57)
Loans(2) 1,109 25 1,134 549 (227) 322
Total interest earning assets 1,490 (133) 1,357 695 6 701

Interest bearing liabilities:
Deposits 532 (1) 531 380 72 452
Borrowings 1 (7) (6) (6) 1 (5)
Total interest bearing
liabilities 533 (8) 525 374 73 447
Net change in net interest income $957 ($125) $832 $321 ($67) $254
===== ===== ===== ==== ==== ====
</TABLE>

______________

(1) Includes interest-earning deposits and investment
securities.

(2) Includes non-accrual loans and loans held for sale.
<PAGE H-13>

Net Income. The savings bank's net income totaled
$912,000 and $708,000 for the year ended December 31, 1998 and
December 31, 1997, respectively. PSB earnings per share for the
year ended December 31, 1998 was $.31. Savings Bank earnings per
share for the year ended December 31, 1997 was $.61. The
decrease in earnings per share reflects the increased number of
shares outstanding as a result of the completion of the
conversion and reorganization.

Interest Income. Total interest income increased by
$1.36 million, or 15.56%, to $10.10 million for the year ended
December 31, 1998, from $8.74 million for the year ended
December 31, 1997. This reflected a $23.58 million, or 20.20%,
increase in average interest-earning assets. The increase in
average interest-earning assets was comprised of a $14.75 million
increase in average interest-earning deposits and a
$13.36 million increase in average net loans. The increase in
interest-earning assets generally reflected management's strategy
of pursuing diversification of the savings bank's loan
composition while maintaining adequate margins over minimum
required capital levels.

Interest Expense. Total interest expense increased to
$5.09 million for the year ended December 31, 1998, from
$4.56 million for the year ended December 31, 1997, representing
an increase of $530,000 or 11.62%. Higher interest expense
resulted from a $4.34 million increase in average-interest
bearing liabilities and a 7 basis point increase in the average
yield on interest-bearing liabilities. This increase in
interest-bearing liabilities was comprised of a $8.60 million
increase in higher yielding average certificates of deposit and
a $1.41 million increase in average savings deposits. The
savings bank attracts a significant portion of its deposits from
its passbook product. Management's experience is that its
customer base still finds the traditional passbook savings
account attractive even though higher yields may be available
from alternative deposit products. Accordingly, the savings bank
prices its passbook product above its large commercial savings
bank competitors. As a result, the savings bank has been able to
fund operations with a significant percentage of passbook savings
accounts and thereby achieve a comparatively low cost of funds.

Provision for Loan Losses. The savings bank makes a
provision to its allowance for loan losses to protect the savings
bank against possible but not yet identified losses inherent in
the savings bank's loan portfolio. This provision is recognized
for financial reporting purposes as a reduction of income. In
making such provision, management of the savings bank considers,
among other factors, the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrower's
ability to pay. Effective January 1, 1997, interest is <PAGE H-
14> discontinued on all loans that are contractually past due 3
months. Prior to January 1, 1997, interest was discontinued on
residential loans that were contractually past due 12 months,
unless the value of the mortgaged property well exceeded the loan
balance in which case interest continued to accrue until the loan
balance plus accrued interest equaled the fair market value of
the property securing the loan. Interest was discontinued on
commercial, consumer and unsecured loans that were contractually
past due 3 months. During the years ended December 31, 1998,
1997 and 1996, the savings bank had charge-offs against the
allowance for loan losses of $270,000, $29,000 and $133,000,
respectively, reflecting write-offs on several different loans in
both periods. During such periods, the savings bank provided
$283,000, $60,000 and $133,000, respectively, for loan losses in
order to protect against future losses. The provision for loan
losses was higher in 1998 compared to prior periods. This
occurred because of the planning and implementation of the loan
diversification strategy. Management expects the provision for
loan losses to increase in future periods as the savings bank
achieves its diversification strategy. In addition, the
provision for loan losses may increase in 1999 if management
determines that losses inherent in the existing portfolio of
nonaccrual loans exceeds anticipated recoveries.

Net Interest Income After Provision for Loan Losses.
Net interest income after the provision for loan losses for the
year ended December 31, 1998, increased to $4.72 million from
$4.12 million for the year ended December 31, 1997, an increase
of $600,000, or 14.56%.

Noninterest Income. Noninterest income consists of
gain on sale of loans, loan fees, service charges, rental income
and other income. Noninterest income increased by $250,000, or
23.36%, to $1.32 million for the year ended December 31, 1998
from $1.07 million for the year ended December 31, 1997. The
principal reasons for the increase in noninterest income was a
$307,000 increase in gain on sale of loans to $863,000 in 1998
from $556,000 in 1997 due to an increase in the number of loans
sold by Transnational Mortgage Company in 1998 and a $14,000
increase in service charges. This increase was offset by a
$55,000 decrease in loan fees and a $22,000 decrease in other
income.

Noninterest Expense. Noninterest expense principally
consists of employees' compensation and benefits, deposit
insurance premiums and premises and occupancy costs. Noninterest
expense increased by $500,000, or 12.11%, to $4.63 million for
the year ended December 31, 1998, from $4.13 million for the year
ended December 31, 1997. The principal reasons for the increase
was a $249,000 increase in compensation and employee benefits due
to normal salary increases, a $21,000 increase in data processing
costs, a $78,000 increase in expenses of real estate owned due to
a write-down of REO and a $109,000 increase in other expenses.
<PAGE H-15>
Income Taxes. Income tax provisions for the year ended
December 31, 1998 and 1997 of $502,000 and $345,000,
respectively, generally reflect the savings bank's pre-tax income
at rates then in effect, except that a $37,000 and $37,000
deferred tax expense as a result of timing differences in the
recognition of revenue and expenses for tax and financial
statement purposes was realized in the December 31, 1998 and 1997
period, respectively.

Liquidity and Capital Resources

The savings 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 savings bank, to be eligible for
liquidity. The savings 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 savings bank's liquidity ratio was 59.37% as of
March 31, 1999. The savings bank adjusts its liquidity levels in
order to meet funding needs of deposit outflows and loan
commitments. The savings bank also adjusts liquidity as
appropriate to meet its asset/liability management objectives.

The savings bank's primary source of funds are
deposits, the amortization and prepayment of loans and mortgage-
backed securities, maturities of investments securities, the sale
of mortgage loans as part of Transnational Mortgage Company's
mortgage banking business and earnings 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
savings bank manages the pricing of its deposits to maintain a
desired deposit balance. In addition, the savings bank invests
excess funds in short-term, interest-earning assets and other
assets that provide liquidity to meet lending requirements and
interest rate risk management objectives. Short-term, interest-
earning deposits with the FHLB of Pittsburgh amounted to
$33.87 million at March 31, 1999. At March 31, 1999, the savings
bank had unfunded loan commitments of $4.28 million and
certificates of deposit due to mature within one year of
$11.82 million. The savings bank believes it has sufficient
liquidity to meet these obligations.

On March 31, 1999 and December 31, 1998, the Bank was
in compliance with regulatory capital requirements as follows:

<TABLE>
<CAPTION> <PAGE H-16>
March 31,
1999
Required Actual
% Amount % Amount Excess
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Tangible Equity ratio >3.00% $4,180 23.04% $32,104 $27,924
Leverage capital ratio 6.00 8,361 23.04% 32,104 23,743
Total risk-based capital ratio 8.00 5,974 43.40% 32,408 26,434
Tier 1 risk-based capital ratio 4.00 2,987 42.99% 32,104 29,117

<CAPTION>
December 31,
1998
Required Actual
% Amount % Amount Excess
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Tangible Equity ratio >3.00% 4,021 22.67 30,382 26,361
Leverage capital ratio 6.00 8,042 22.67 30,382 22,340
Total risk-based capital ratio 8.00 5,720 42.89 30,667 24,947
Tier 1 risk-based capital ratio 4.00 2,860 42.49 30,382 27,522
</TABLE>

Asset/Liability Management and Interest Rate Sensitivity Analysis

Interest rate risk may be analyzed by examining the
extent to which an institution's assets and liabilities are
"interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said to
be interest rate sensitive within a specific time period if it
will mature or re-price within that time period. The interest
rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or re-pricing within a
specific time period and the amount of interest-bearing
liabilities maturing or re-pricing within that time period. A
gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net
interest income while a positive gap would tend to positively
affect net interest income. Conversely, during a period of
falling interest rates, a negative gap would tend to positively
affect net interest income while a positive gap would tend to
adversely affect net interest income.

The savings bank's portfolio of adjustable rate loans
constituted only 12.51% of the total loan portfolio at March 31,
1999. Accordingly, the savings bank's policy in recent years has
been to reduce its exposure to interest rate risk by maintaining
high asset liquidity through the purchase of short-term or
adjustable-rate investment securities and mortgage-backed
securities. Although this requires the savings bank to accept
lower yields on these assets, it permits the savings bank to
frequently reinvest proceeds of repayments and maturing
securities to take advantage of changing interest rates. As part
of its strategy to expand commercial, commercial real estate and
consumer lending, the savings bank has also experienced growth in
<PAGE H-17> short-term loans that re-price more frequently and
therefore more closely match market interest rates.

Of the savings bank's $133.85 million in deposits at
March 31, 1999, $53.63 million consisted of deposit accounts that
are immediately withdrawable. The savings bank nevertheless
believes that, based upon historical experience, a substantial
portion of these deposits represent inelastic deposits and are
not likely to be withdrawn because of changes in interest rates,
nor are they likely to re-price as rapidly as changes in market
interest rates.

The following table sets forth the amounts of interest-
earning assets and interest-bearing liabilities outstanding at
March 31, 1999, that are expected to re-price or mature, based
upon certain assumptions, in each of the future time periods
shown. Except as stated below, the amounts of assets and
liabilities shown that re-price or mature during a particular
period were determined in accordance with the earlier of the term
of re-pricing or the contractual term of the asset or liability.
Management believes that these assumptions approximate the
standards used in the savings industry and considers them
appropriate and reasonable.

<TABLE>
<CAPTION>
More than More Than More Than More Than
One Year Two Years Three Five Years
Within One To Two To Three Years To To Ten More Than
Year Years Years Five Years Years Ten Years Total
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest Earning Assets:
Loans(1)(2)
Mortgage loans:
Residential $ 2,283 $ 323 $ 282 $ 2,382 $ 5,474 $40,682 $ 51,406
Commercial 2,038 749 2,803 5,647 3,481 1,768 16,497
Land and construction
loans 3,840 3,840
Consumer loans 105 95 191 385 201 - 980
Other loans 1,139 3,139
Total loans 11,403 1,167 3,262 8,414 9.186 42,450 75,882
Mortgage-backed
securities(3) 5,373 4,307 3,458 9,865 4,519 - 27,622
Mortgage loans held for
sale 5,333 5,333
Investment securities(4) 2,482 - 4,468 4,996 5,474 17,420
Other interest earning
assets 33,876 33,876
Total interest-earning
assets $ 55,986 $ 7,956 $ 8,720 $ 22,747 $ 18,681 $47,924 $160,013

Interest Bearing Liabilities:
Transaction accounts $ 5,378 $ 5,378
Money Market accounts 9,054 9,054
Other Savings Accounts 1,134 1,134
Passbook accounts(5) 4,125 3,507 2,981 5,067 11,823 - 27,503
Certificate of deposit over
100,000- 12,281 2,149 339 457 - - 15,236
Certificate of deposit under
100,000- 51,782 9,789 1,616 1,743 443 - 65,373
Repurchase agreement 1,173 1,347 - - - - 2,520
Total interest-bearing
liabilities $ 84,938 $ 16,792 $ 4,936 $ 7,267 $ 12,286 $ - $126,199
<PAGE H-18>

Interest-bearing assets net of
interest-bearing liabilities $(28,953) $ (8,836) $ 1,784 $ 15,480 $ 6,415 $47,924 $ 33,814
Cumulative excess (deficiency)
interest-bearing assets over
interest-bearing liabilities. (28,953) (37,788) (38,005) (20,525) (14,110) 33,814
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities as a percentage
of total assets -17.05% -22.25% -21.20% -12.09% -8.31% 19.91%
</TABLE>
_________________

(1) Net of deferred loan fees and the allowance for loan losses.

(2) Adjustable-rate loans are included in the period in which
interest rates are next scheduled to adjust rather than in
the period in which they are contractually due to mature.
Fixed-rate loans are included in the period in which they
are contractually due to mature.

(3) Reflects the repricing of the underlying loans and/or the
expected average life of the mortgage-backed security.

(4) Reflects repricing or contractual maturity.

(5) For passbook accounts, which totalled $27.50 million, or
20.55% of total deposits at December 31, 1998, assumes an
attrition rate of 15% through the fifth year, based upon
historical trends.

Significant shortcomings are inherent in the analysis
presented by the foregoing table. For example, although certain
assets and liabilities may have similar maturities or periods to
re-pricing, they may react in different degrees to changes in
market interest rates. Also, interest rates on certain types of
assets and liabilities may fluctuate in advance of or lag behind
changes in market interest rates. Additionally, certain assets,
such as some adjustable rate loans, have features that restrict
changes in interest rates on a short term basis and over the life
of the asset. Moreover, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the
table.

Impact of Accounting Pronouncements and Regulatory Policies

Accounting for Employee Stock Ownership Plans. In
November 1993 the American Institute of Certified Public
Accountants issued SOP 93-6, which requires an employer to record
compensation expense in an amount equal to the fair value of
shares committed to be released to employees from an employee
stock ownership plan and to exclude unallocated shares from
earnings per share computations. The effect of SOP 93-6 on net
income and book value per share in future periods cannot be
<PAGE H-19> predicted due to the uncertainty of the fair value of
the shares at the time they will be committed to be released.

Disclosure of Information About Capital Structure.
SFAS No. 129, "Disclosure of Information About Capital
Structure," establishes standards for disclosing information
about an entity's capital structure and applies to all entities.
SFAS No. 129 continues the previous requirements to disclose
certain information about an entity's capital structure found in
APB Opinions No. 10, "Omnibus Opinion - 1966," and No. 15,
"Earnings Per Share," and SFAS No. 47, "Disclosure of Long-Term
Obligations," for entities that were subject to those standards.
SFAS No. 129 is effective for financial statements for periods
ending after December 15, 1997. SFAS No. 129 contains no change
in disclosure requirements for entities that were previously
subject to the requirements of APB Opinions Nos. 10 and 15 and
SFAS No. 47. The adoption of the provisions of SFAS No. 129 did
not have a material impact on the savings bank.

Disclosure About Comprehensive Income. SFAS No. 130,
"Reporting Comprehensive Income," issued in July 1997,
establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial
statements. It requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements.
SFAS No. 130 requires that companies (i) classify items of other
comprehensive income by their nature in a financial statement and
(ii) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial
condition. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comprehensive
purposes is required.

Statement on Accounting for Derivative Instruments and
Hedging Activities. In June 1998, the FASB issued SFAS No. 133.
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
imbedded in other contracts (collectively referred to as
"derivatives") and for hedging activities. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met,
a derivative may be specifically designated as (i) a hedge of the
exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (ii) a hedge of the
exposure of variable cash flows of a forecasted transaction, or
(iii) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-
currency-denominated forecasted transaction. The accounting for
<PAGE H-20> changes in the fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative
and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
PSB has no activity subject to SFAS 133.

Statement on Accounting for Mortgage-backed Securities
Retained after the securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise. In October 1998, the FASB
issued SFAS No. 134 which changes the way mortgage banking firms
account for certain securities and other interests they retain
after securitizing mortgage loans that were held for sale. A
bank that securitizes credit card receivables has a choice in how
it classifies any retained securities based on its intent and
ability to hold or sell those investments. SFAS No. 134 gives
mortgage banking firms the opportunity to apply the same intent-
based accounting that is applied by other companies. SFAS No.
134 is effective for the fiscal quarter beginning after
December 15, 1998. The adoption of SFAS No. 134 has not had a
material impact on PSB's financial condition or results of
operations.

Effect of Inflation and Changing Prices

The consolidated financial statements and related
financial data presented herein have been prepared in accordance
with GAAP, which require the measurement of financial position
and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money
over time due to inflation. The primary impact of inflation is
reflected in the increased cost of the savings bank's operations.
Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature.
As a result, interest rates generally have a more significant
impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in
the same direction or to the same extent as the prices of goods
and services.

Disclosure Regarding Year 2000 Compliance

PSB 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 PSB 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.
<PAGE H-21>
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 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.

PSB and the 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 outsource all major data processing
applications related to customers' banking transactions to
Intrieve, Incorporated. 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 March 31, 1999, Intrieve has completed their "awareness",
"assessment", "renovation" and "validation" phases. In
October 1998, Intrieve conducted internal testing of its data
processing system. Results of these tests were 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
has completed much of its Y2K testing but will continue testing
<PAGE H-22> and renovation throughout 1999. 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 does not expect any of its outside
vendors to be noncompliant; however the Savings Bank will
continue to monitor their progress.

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 has developed 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
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. Intrieve, Inc. has also
developed their own contingency plans.

The total costs associated with becoming Year 2000
compliant are expected to be less than $15,000 and are not
expected to have a material effect on the results of operations.
As of March 31, 1999, the Savings Bank had spent approximately
$7,000 to become Year 2000 compliant. Money to fund Year 2000
compliance will come from normal operating cash flow. Expenses
associated with Year 2000 compliance will directly reduce
otherwise reported net income of the Savings Bank in the period
incurred.

The costs of the project and the date on which the
Savings Bank plans to complete the Year 2000 modification are
based on management's best estimates, which are derived utilizing
numerous assumptions of future events including the continued
availability of certain resources, third party modifications
plans and other factors. However, there can be no assurances that
these estimates will be achieved and actual results could differ
from those plans.

Lending Activities

General. The savings bank historically focused its
lending activities primarily on the origination of loans secured
by first mortgages on owner-occupied, one-to four-family
residences for retention in the savings bank's portfolio. The
savings bank has expanded origination of one-to four-family
residential mortgage loans for resale in the secondary market
through expansion of its mortgage banking operations. As part of
a strategy to diversify its loan portfolio, achieve a higher net
interest margin and reduce interest rate risk, the savings bank
has increased its origination of construction loans, commercial
<PAGE H-23> real estate loans, commercial business loans, and
multifamily real estate loans which together totalled 30.58% of
the savings bank's total loans at March 31, 1999. To a lesser
extent, the savings bank and its subsidiaries also originate
consumer loans, including home equity, second mortgage, and other
consumer loans. The savings bank expects this diversification
trend to continue.

One-to-four-family residential mortgage loans
originated for resale in the secondary market are underwritten
according to standards that conform to FNMA and/or FHLMC
guidelines. One-to-four-family residential mortgage loans
originated and held in portfolio are generally underwritten to
conform to secondary market standards but from time to time the
savings bank originates non-conforming loans if, in the savings
bank's judgment, the borrower does not present an unreasonable
risk of default. The savings bank and Transnational Mortgage
Company, its mortgage banking subsidiary, have sold residential
mortgage loans in the secondary market. The savings bank has
begun to expand its mortgage banking capabilities through
Transnational Mortgage Company and anticipates that its
origination of loans for sale in the secondary market in
Southeastern Pennsylvania, Southern New Jersey and Northern
Delaware will increase significantly.

Analysis of Loan Portfolio. Set forth below is
selected data relating to the composition of the savings bank's
loan portfolio by type of loan as of the dates indicated,
including data regarding the portion of the savings bank's loans
that bear fixed and adjustable interest rates, respectively.
Transnational Mortgage Company has originated and sold mortgage
loans to third party investors within the savings bank's
financial reporting periods. Such mortgage loans are not
reflected in the financial tables and financial statements
pertaining to a particular period to the extent that such loans
were sold prior to any period end.

<TABLE>
<CAPTION>
At March 31, At December 31,
1999 1998 1998 1997
Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Real Estate Loans:
One-to-four family $52,406 67.53% $44,188 67.53% $49,796 67.64% $44,940 71.59%
Construction loans 3,839 5.20 3,400 5.20 3,286 4.46 2,597 4.14
Five or more
family residence 1,404 1.05 690 1.05 1,576 2.14 702 1.12
Nonresidential 15,092 19.95 13,053 19.95 14,722 20.00 11,421 18.20

Commercial loans 2,859 4.06 2,660 4.06 3,074 4.17 1,908 3.04
Consumer loans (1) 1,260 1.21 1,443 2.21 1,168 1.59 1,201 1.91
Total loans(2) $75,860 100.00% $65,434 100.00% $73,622 100.00% $62,769 100.00%
======= ======= ======= ======= ======= ====== ======= ======

Less:
Unearned fees and
discounts $421 $478 $431 $478
Undisbursed loan <PAGE H-24>
proceeds 2 - 7 138
Allowance for
loan losses 304 288 304 238
Net Loans $75,133 $64,668 $72,880 $61,915
======= ======= ======= =======

Total loans with:
Fixed rates $66,369 87.81% $59,352 90.71% $64,651 87.81% $55,289 88.08%
Adjustable rate 9,491 12.19 6,082 9.29 8,971 12.19 7,480 11.92
Total loans(2) 75,860 100.00% 65,434 100.00% 73,622 100.00% 62,769 100.00%
======= ====== ======= ====== ======= ====== ====== ======
_________________________
</TABLE>

(1) Consists of both secured and unsecured personal loans.

(2) Does not include loans originated and held for sale by
Transnational Mortgage Company, the savings bank's
subsidiary, which amounted to $6.94 million, $6.57 million
and $4.60 million, at December 31, 1998, 1997 and 1996,
$5.33 million and $5.81 million at March 31, 1999 and 1998,
respectively and $1.04 million and $185,000 at September 30,
1995 and 1994, respectively.

One-to Four-Family Residential Real Estate Loans. The
primary lending activity of the savings bank historically
consisted of the origination for retention in the savings bank's
portfolio of owner-occupied one-to four-family residential
mortgage loans secured by properties located in the savings
bank's market area. In 1998, consistent with the savings bank's
strategy regarding diversification of its loan portfolio,
origination of loans other than residential mortgages loans
totalled $33.86 million, or 58.73%, of originations in 1998.
However, at March 31, 1999, $51.41 million, or 67.76%, of the
savings bank's total loan portfolio still consisted of one-to
four-family residential mortgage loans.

The savings bank currently offers one- to four-family
residential mortgage loans with terms typically ranging from 10
to 30 years, with either adjustable or fixed interest rates.
Originations of fixed-rate mortgage loans versus adjustable-rate
mortgage loans are affected by such things as interest rate risk
policies, customer preferences and competition. In the savings
bank's market area borrowers strongly prefer fixed-rate mortgage
loans as opposed to adjustable-rate mortgage loans.

The savings bank's fixed-rate loans are generally
originated and underwritten according to standards that permit
sale in the secondary mortgage market. Secondary mortgage market
loans typically conform to FNMA and/or FHLMC guidelines. The
savings bank has, from time to time, originated loans that do not
conform to such secondary market standards. Such nonconforming
loans include loans exceeding the maximum loan amounts acceptable
to FNMA and FHLMC and loans as to which the savings bank's
underwriting indicates that the particular borrower does not
present an unreasonable risk of default in view of underwriting
criteria that differ from secondary mortgage market standards.
Whether the savings bank can or will sell fixed-rate loans in the
<PAGE H-25> secondary market, however, depends on a number of
factors including the yield and the term of the loan, market
conditions, and the savings bank's current interest rate risk
position. The savings bank has primarily been a portfolio
lender, and at any one time the savings bank holds only a nominal
amount of loans for immediate sale.

The savings bank's one-to four-family mortgage loans
are amortized on a monthly basis with principal and interest due
each month. One- to four-family residential real estate loans
often remain outstanding for significantly shorter periods than
their contractual terms because borrowers may refinance or prepay
loans at their option.

The savings bank currently offers adjustable-rate
mortgage loans with initial interest rate adjustment periods of
one and three years, based on changes in a designated market
index. After the initial interest rate adjustment, each
adjustable-rate mortgage loan adjusts either annually or every
third year within a periodic interest rate adjustment limit of
200 basis points and within a maximum interest rate adjustment
limit of 600 basis points above the initial rate. Adjustable-
rate mortgage loans are currently priced at a fixed margin above
the weekly average yield on United States Treasury securities
adjusted to a constant term to maturity of one year (or three
years in the case of loans with three year interest rate
adjustment periods), as published by the Federal Reserve. The
savings bank originates adjustable-rate mortgage loans with
initially discounted rates, which vary depending upon market
conditions and whether the initial rate adjustment period is one
or three years. Adjustable-rate loans represented 12.51% of the
savings bank's total loan portfolio at March 31, 1999 due to the
difficulty of originating adjustable-rate mortgage loans in the
savings bank's primary market. Traditionally, the savings bank's
older, low to moderate income residential customer base has not
been receptive to adjustable rate mortgage loans and this
tendency was exacerbated in recent years because of the
comparatively low interest rate environment for fixed rate
mortgage loans.

The savings bank's one- to four-family residential
first mortgage loans customarily include due-on-sale clauses,
which are provisions giving the savings bank the right to declare
a loan immediately due and payable in the event, among other
things, that the borrower sells or otherwise disposes of the
underlying real property serving as security for the loan. Due-
on-sale clauses are an important means of adjusting the rates on
the savings bank's fixed-rate mortgage loan portfolio, and the
savings bank has usually exercised its rights under these
clauses.

Regulations limit the amount that a savings bank may
lend relative to the appraised value of the real estate securing
the loan, as determined by an appraisal at the time of loan
origination. Appraisals are performed by appraisers approved by
<PAGE H-26> the savings bank's Board of Trustees. Such
regulations permit a maximum loan-to-value ratio of 95% for
residential property and 80% for all other real estate loans.
The savings bank's lending policies limit the maximum loan-to-
value ratio on both fixed-rate and adjustable-rate mortgage loans
without private mortgage insurance to 80% of the lesser of the
appraised value or the purchase price of the real estate that
serves as collateral for the loan. For one- to four-family real
estate loans with loan-to-value ratios in excess of 80%, the
savings bank requires the borrower to obtain private mortgage
insurance. The savings bank requires fire and casualty
insurance, as well as title insurance on all properties securing
real estate loans made by the savings bank.

Construction Loans. The savings bank's loan portfolio
included $3.84 million of construction loans at March 31, 1999,
which amounted to 5.06% of the savings bank's total loan
portfolio. The savings bank offers fixed and adjustable rate
residential construction loans primarily for the construction of
owner-occupied one-to four-family residences in the savings
bank's market area to builders or to owners who have a contract
for construction. The savings bank generally does not make a
construction loan to a builder unless the housing unit is under
an agreement of sale. Construction loans to owners are generally
structured to become permanent loans, and are originated with
terms up to 30 years with an allowance of up to one year for
construction. The savings bank's largest construction loan at
March 31, 1999 had a principal balance of approximately $489,000.
Construction loans at March 31, 1999 were located in Philadelphia
County, Montgomery County and Bucks County, Pennsylvania.

Construction lending generally involves a greater
degree of credit risk than other one- to four-family residential
mortgage lending. The repayment of the construction loan is
often dependent upon the successful completion of the
construction project. Construction delays or the inability of
the borrower to sell the property once construction is completed
may impair the borrower's ability to repay the loan.

Five or More Family Residential Real Estate Loans.
Loans secured by five or more family residential real estate
constituted approximately $1.40 million, or 1.85%, of the savings
bank's total loan portfolio at March 31, 1999. The savings
bank's five or more family residential real estate loans are
secured by residence buildings with over 4 family units, which
are generally rental properties. At December 31, 1998, all of the
savings bank's five or more family residential real estate loans
were secured by properties located within the savings bank's
market area. The savings bank's largest five or more family
residential real estate loan at March 31, 1999, had a principal
balance of approximately $614,000.

Five or more family residential real estate loans are
offered with both adjustable interest rates and fixed interest
rates. The terms of each five or more family residential real
<PAGE H-27> estate loan are negotiated on a case-by-case basis.
The savings bank generally makes five or more family residential
real estate loans up to 80% of the lesser of property cost or the
appraised value of the mortgaged property. Loans secured by five
or more family residential real estate generally involve a
greater degree of credit risk than one-to four-family residential
mortgage loans. This increased credit risk is a result of
several factors, including the concentration of larger balances
in a limited number of loans and borrowers, the effects of
general economic conditions on income producing properties, and
the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by five or
more family residential real estate is typically dependent upon
the successful operation of related real estate property. If the
cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired.

Nonresidential Real Estate Loans. Loans secured by
nonresidential real estate constituted approximately
$15.09 million, or 19.90%, of the savings bank's total loan
portfolio at March 31, 1999. The savings bank's nonresidential
real estate loans are secured by nonresidential properties such
as retail establishments, office buildings, and industrial
buildings. The savings bank also originates nonresidential real
estate loans through its subsidiary, PSA Financial Corp. See
"SUBSIDIARIES." A significant portion of the savings bank's
nonresidential real estate loans are secured by properties
located within the savings bank's market area. The savings bank's
largest nonresidential real estate loan, which is secured by a
business property in the savings bank's market area, had a
principal balance of approximately $1.09 million at March 31,
1999, and was performing in accordance with its terms.

Nonresidential real estate loans are offered with both
adjustable interest rates and fixed interest rates. The terms of
each nonresidential real estate loan are negotiated on a case-by-
case basis. The savings bank generally makes nonresidential real
estate loans up to 75% of the lesser of property cost or the
appraised value of the mortgaged property. As in the case of
five or more family loans, nonresidential real estate loans
generally involve a greater degree of credit risk than one-to
four-family residential mortgage loans and carry larger loan
balances. This increased credit risk results from the
concentration of principal in a more limited number of loans and
borrowers, the effects of general economic conditions on income
producing properties, and the increased difficulty of evaluating
and monitoring nonresidential loans. The repayment of loans
secured by nonresidential real estate is typically dependent upon
the success of the related business operation. If the cash flow
from the business is impaired, the borrower's ability to repay
the loan may also be impaired.

Commercial Loans. The savings bank currently offers
commercial loans to finance various activities in the
Philadelphia metropolitan area, some of which are secured in part
<PAGE H-28> by additional real estate collateral, such as
business property and/or personal residences. The savings bank
originates commercial loans through its subsidiary, PSA Financial
Corp. See "SUBSIDIARIES." At March 31, 1999, commercial loans
totalled approximately $2.86 million or 3.77% of the total loan
portfolio. Commercial loans are offered with either adjustable
or fixed interest rates. Adjustable rates are tied to the
savings bank's prime rate plus a margin.

Underwriting standards employed by the savings bank for
commercial loans include a determination of the applicant's
ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated by the applicant's
business. The financial strength of each applicant also is
assessed through a review of financial statements provided by the
applicant. Commercial loans generally bear higher interest rates
than residential loans, but they also may involve a higher risk
of default since their repayment is generally dependent on the
successful operation of the borrower's business. The savings
bank generally obtains personal guarantees from the borrower or a
third party as a condition to originating its commercial loans.

Consumer Loans. As of March 31, 1999, consumer loans
totalled $1.26 million, or 1.66%, of the savings bank's total
loan portfolio. The principal types of consumer loans offered by
the savings bank are home equity loans and lines of credit,
unsecured personal loans, and loans secured by deposit accounts.
The savings bank's subsidiary, PSA Consumer Discount Company,
offers secured and unsecured personal loans. See "SUBSIDIARIES."
Consumer loans are offered with maturities generally of less than
ten years. The savings bank's home equity loans and lines of
credit are secured by the borrower's principal residence with a
maximum loan-to-value ratio, including the principal balances of
both the first and second mortgage loans, of 80% in the case of
home equity loans and 70% in the case of lines of credit. Such
loans are offered on both a fixed-rate and an adjustable-rate
basis with terms of up to fifteen years.

The underwriting standards employed by the savings bank
for consumer loans include a determination of the applicant's
credit history and an assessment of ability to meet existing
obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification
of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration; however, the underwriting
process also includes a comparison of the value of the collateral
in relation to the proposed loan amount, and in the case of home
equity loans or lines of credit, the savings bank either obtains
title insurance or obtains a title search report, depending on
the particular loan.

Consumer loans entail greater credit risk than do
residential first mortgage loans, particularly in the case of
consumer loans that are unsecured or secured by assets that
<PAGE H-29> depreciate rapidly. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an
adequate source of repayment for the outstanding loan and the
remaining deficiency often does not warrant further substantial
collection efforts against the borrower. See "--Delinquencies
and Classified Assets -- Nonperforming Assets," "-- Loans Past
Due and Nonperforming Assets," and "-- Classification of Assets"
for information regarding the savings bank's loan loss experience
and reserve policy.

Mortgage Banking Operations

Through its subsidiary, Transnational Mortgage Company,
the savings bank has conducted a mortgage banking operation since
1989. Mortgage banking consists primarily of the origination,
purchase, sale and servicing of first mortgage loans secured by
one-to-four family homes. Such loans are sold either as
individual loans, as mortgage-backed securities, or as
participation certificates issued or guaranteed by FNMA or FHLMC.
Loans may be sold either on a servicing retained or servicing
released basis.

As of March 31, 1999, the savings bank's equity
investment in Transnational Mortgage Company totaled $74,000.
For the quarter ended March 31, 1999, Transnational Mortgage
Company's loan originations totaled $4.61 million and net income
totaled $23,000. For the year ended December 31, 1998, 1997 and
1996, Transnational Mortgage Company sold 98.30%, 89.10% and
81.79%, respectively, of the loans originated in that year.

The savings bank plans to expand into the Philadelphia
metropolitan market, including counties of New Jersey and
Delaware, because management believes this market is more
accustomed to obtaining mortgages from mortgage brokers as well
as directly from banks and thrifts. The savings bank has
implemented a strategy in this area to expand Transnational
Mortgage Company's operations in order to increase the
origination of loans for sale in the secondary market and for its
own portfolio and the expansion of its servicing portfolio.

The savings bank expects that it will serve as the
principal funding source for Transnational Mortgage Company
pursuant to a credit arrangement between the parties.
Transnational Mortgage Company originates loans in accordance
with FNMA and FHLMC underwriting criteria or the criteria of
private investors.

During 1998, the savings bank established loan
servicing capabilities. Loan servicing income provides a
predictable source of fee income and servicing values are
generally countercyclical to the origination side of the mortgage
banking business. At March 31, 1999, the savings bank mortgage
servicing portfolio consisted of $12.75 million in loans serviced
for FNMA.
<PAGE H-30>
Because mortgage originations fluctuate significantly
with economic conditions, mortgage banking revenues are very
cyclical. To the extent Transnational Mortgage Company revenues
and profits become, as expected, a significant component of the
savings bank's consolidated revenues and net income, earnings of
the savings bank could fluctuate materially.

Loan Maturity and Re-pricing Schedule. The following
table set forth the maturity or period of re-pricing of the
savings bank's loan portfolio at March 31, 1999. Demand loans
and loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less. Adjustable and
floating-rate loans are included in the period in which interest
rates are next scheduled to adjust rather than the period in
which they contractually mature, and fixed-rate loans are
included in the period in which the final contractual repayment
is due.

<TABLE>
<CAPTION>
Amounts At March 31, 1999
Multi-Family Consumer
and and
One to Four Commercial Commercial
Family Real Estate Construction Business Total Loans
<S> <C> <C> <C> <C> <C>
Amounts due:
Non-accrual $ 1,044 386 - - $ 1,430

Within one year 1,238 1,848 3,840 3,243 9,970

After one year:
1-3 years 585 3,555 - 289 4,429
3 to 5 years 2,382 5,847 - 385 8,414
5 to 10 years 5,474 3,491 - 201 9,166
Over 10 years 40,683 1,766 - - 42,451

Total due after
one year 49,124 14,461 - 175 64,460

Total amounts due $51,406 $18,496 $3,840 $4,118 $75,860

</TABLE>

Loan Origination, Purchase and Sale Schedule. The
following table shows total loans originated, purchased, sold and
repaid during the periods indicated for the savings bank and its
subsidiaries.

For the Quarter Ended
March 31,
1999 1998
Loans receivable,
net and loans
held for sale at
beginning of period $79,818 $68,490

Originations
1-4 Family Residential Real Estate 8,598 5,774
<PAGE H-31>
Other Real Estate 2,023 3,090
Consumer and commercial business loans 500 2,075
Total loan originations 11,121 10,939

Loans purchased 0 0

Transfer to REO 0 0
Principal repayments (4,086) (4,912)
Sales of loans (6,382) (3,954)

Increase(decrease) in loans in process (5) (138)
Increase(decrease) in allowance
for loan losses 0 50
Net increase(decrease) in loans 648 1,985

Loans receivable,net and loans
held for sale at end of period $80,466 $70,475

<TABLE>
<CAPTION>
For the Year Ended For the Years Ended
December 31, September 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans receivable,
net and loans
held for sale at
beginning of period $68,490 $57,183 $54,318 $51,097 $52,816

Originations
1-4 Family
Residential Real
Estate 45,237 28,318 20,038 4,447 14,041
Other Real Estate 5,649 5,377 24 4,214 0
Consumer and commercial
business loans 6,761 3,248 1,033 961 398
Total loan originations 57,647 36,943 21,095 9,622 14,439

Loans purchased 0 0 0 0 0

Transfer to REO (443)
Principal repayments (25,171) (9,648) (8,821) (5,996) (11,526)
Sales of loans (21,083) (16,152) (9,378) (2,451) (4,667)

Increase(decrease) in loans
in process (131) 133 (31) (19) 14
Increase(decrease) in allowance
for loan losses 66 31 0 0 21

Net increase(decrease) in loans 11,328 11,307 2,865 1,156 (1,719)

Loans receivable,net and loans
held for sale at end of
period $79,818 $68,490 $57,183 $52,253 $51,097
======= ======= ======= ======= =======
</TABLE>

Loans-to-One Borrower. Savings banks are subject to
the same loans-to-one borrower limits as those applicable to
national banks, which under current regulations restrict loans to
one borrower to an amount equal to 15% of unimpaired capital and
unimpaired surplus on an unsecured basis, and an additional
<PAGE H-32> amount equal to 10% of unimpaired capital and
unimpaired surplus if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not
real estate). As of March 31, 1999, the savings bank's largest
loan to one borrower consisted of three loans to one borrower.
Of the three loans, two loans were five or more family loans
which had an aggregate outstanding balance of $431,000 and one
loan was construction loan with an aggregate outstanding balance
of $2.11 million at March 31, 1999 and each of these loans is
performing according to its terms.

Delinquencies and Classified Assets

Asset Quality. The following table sets forth non-
performing assets as of March 31, 1999, and December 31, 1998 and
December 31, 1997 (Dollars in thousands):

At March 31, At December 31, At December 31,
1999 1998 1997

<S> <C> <C> <C>
Loans past due 90 days or more
as to interest or principal
and accruing interest $ 0 $ 0 $ 200
Nonaccrual loans 1,430 1,609 1,894
Loans restructured to provided
a reduction or deferral
of interest or principal 0 0 ______
Total nonperforming loans 1,430 1,609 2,094
Real estate owned (REO) 534 629 457
Total nonperforming assets $1,964 $2,238 $2,551
====== ====== ======

Nonperforming loans to total loans 1.89 % 2.19 % 3.34%
Nonperforming assets to total assets 1.16 1.36 1.97
Allowance for loan losses to total loans 0.40 0.41 .38
Allowance for loan losses to nonperforming loans 21.26 18.89 11.37
Allowance for loan losses to nonperforming assets 15.48 13.58 9.33
Net charge-offs as a percentage of total loans 0.00 0.37 .05

</TABLE>

Collection Procedures. The savings bank's collection
procedures provide that when a mortgage loan is unpaid within its grace
period (either ten or fifteen days depending on the loan), a late
notice will be sent to the borrower requesting payment. If delinquency
continues for approximately fifteen days, then a second notice may be
sent and contact efforts are attempted to strengthen the collection
process and obtain reasons for the delinquency. Plans to arrange a
repayment plan may be made. If a loan becomes two months delinquent,
the property is inspected in anticipation of foreclosure, a collection
letter is sent, personal contact may be attempted, and the loan becomes
subject to possible legal action if suitable arrangements to repay have
not been made. In addition, the borrower is given information
regarding consumer counseling services, to the extent required by
regulations of the PDOB, or the Pennsylvania Department of Housing and
Urban Development. When a loan continues in a delinquent status for 60
to 90 days and a repayment schedule has not been made or kept by the
<PAGE H-33> borrower, generally a notice of intent to foreclose is sent
to the borrower, giving 30 days to cure the delinquency. If the
default is not cured, foreclosure proceedings are initiated.

Nonperforming Assets. All loans, including residential
mortgage loans, are placed on nonaccrual status when past due 90 days
or more unless the loan is in the process of collection and the value
of the collateral well exceeds the loan balance. Prior to 1997,
residential mortgage loans were not placed on nonaccrual status unless
the loan was delinquent for 12 months and the value of the mortgaged
property did not exceed the loan balance. Consumer and unsecured loans
are placed on nonaccrual upon becoming three months delinquent.
Although the savings bank viewed its nonaccrual policy as justified
based on historical experience, in 1997 it adopted a more conservative
nonaccrual policy that it believes is more consistent with peer bank
practice. No adjustment is made for interest accrued and unpaid at the
time a loan is placed on nonaccrual status. Interest is discontinued
and income is subsequently recognized only to the extent that cash
payments are received, or until in management's judgment, the
borrower's ability to make periodic interest and principal payments is
back to normal, in which case the loan is returned to accrual status.

Real estate acquired by the savings bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as REO
until such time as it is sold. When real estate is acquired through
foreclosure or by deed in lieu of foreclosure, it is recorded at its
fair value, less estimated costs of disposal. If the value of the
property is less than the loan, less any related specific loan loss
provisions, the difference is charged against the allowance for loan
losses. Any subsequent write-down of REO is charged against earnings.
At March 31, 1999, the savings bank had approximately $534,000 of
property acquired as a result of foreclosure.

At March 31, 1999, the savings bank had nonperforming loans
of $1.43 million, and a ratio of nonperforming loans to total loans of
1.89%. Of the total nonperforming loans, $1.14 million are single-
family residential mortgage loans. At March 31, 1999, the savings bank
had nonperforming assets of $1.96 million and a ratio of nonperforming
assets to total assets of 1.16%. From 1994 to 1996 the savings bank's
ratio of nonperforming loans to total loans exceeded 4%. This was due
in large part to ineffective implementation of the savings bank's
stated collection practices by savings bank personnel and outside
counsel. New collection personnel were hired in 1997, resulting in the
decline in the ratios of nonperforming loans to total loans and
nonperforming assets to total assets.

Loans Past Due and Nonperforming Assets. The following table
sets forth information regarding the savings bank's loans 90 days or
more past due, loans 90 days or more past due and accruing interest,
and real estate acquired or deemed acquired by foreclosure at the dates
indicated. For all the dates indicated, the savings bank did not have
any material restructured loans within the meaning of SFAS No. 15.

<TABLE>
<CAPTION> <PAGE H-34>
At March 31, At December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>

Loans past due 90 days or more
as to interest or principal
and accruing interest $124 $2,101 $0 $200
Nonaccrual loans(1) 1,894 761 1,609 1,894
Loans restructured to provide a
reduction or deferral of
interest or principal 0 0 0 0
Total nonperforming loans 2,018 2,862 1,609 2,094
Real estate owned (REO) 451 465 629 457
Total nonperforming assets $2,469 $3,327 $2,238 $2,551
====== ====== ====== ======

Nonperforming loans to total loans 3.08% 5.24% 2.19% 3.34%
Nonperforming assets to total assets 1.85 2.76 1.36 1.97
Allowance for loan losses to total
loans .44 .38 0.41 0.38
Allowance for loan losses to
nonperforming loans 14.27 7.23 18.89 11.37
Allowance for loan losses to
nonperforming assets 11.66 6.22 13.58 9.33
Net charge-offs as a percentage of
total loans -- -- 0.37 0.05

</TABLE>
__________________

(1) The savings bank classifies as nonaccrual all loans three
months or more delinquent. Prior to 1997, residential
mortgage loans were classified as nonaccrual when the loan
was delinquent 12 months and the value of the mortgaged
property did not significantly exceed the loan balance.

For the years ended December 31, 1998, 1997 and 1996,
gross interest income of approximately $41,019, $49,696, and
$157,000, respectively, and for the quarter ended March 31, 1997
and 1998, gross interest income of approximately $51,727 and
$44,250, respectively, would have been recorded on loans
accounted for on a nonaccrual basis if the loans had been current
throughout the related periods. No interest income on nonaccrual
loans was included in income during such periods.

In May 1993, the FASB issued SFAS No. 114 "Accounting
by Creditors for Impairment of a Loan." SFAS No. 114 requires
that certain impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. In October 1994,
the FASB issued SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosure," that
amends SFAS No. 114 and eliminates its provision regarding how a
creditor should report income on an impaired loan. Originally,
SFAS No. 114 would have required creditors to apply one of two
allowable methods. As a result of the amendment, creditors may
now continue to use existing methods for recognizing income on
impaired loans, including methods that are required by certain
industry regulators. SFAS No. 114 and SFAS No. 118 were adopted
<PAGE H-35> by savings bank beginning January 1, 1996. At
March 31, 1999, the Bank's impaired loans consisted of three
commercial real estate loans with a total recorded balance of
$341,000 for which specific allowances of $17,050 have been
established. At December 31, 1997, the savings bank's impaired
loans consisted of two commercial real estate loans with a total
balance of $321,052 for which specific allowances of $16,053 has
been established. At December 31, 1996, the savings bank's
impaired loans consisted of smaller balance residential mortgage
loans.

Classification of Assets. The savings bank's policies,
consistent with regulatory guidelines, provide for the
classification of loans and other assets such as debt and equity
securities, considered to be of lesser quality as "substandard,"
"doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or by the collateral
pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the savings
institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard" with the
added characteristic that the weaknesses present make "collection
or liquidation in full," on the basis of currently existing
facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is
not warranted. Assets that do not expose the savings institution
to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are
required to be designated "special mention" by management. At
March 31, 1999, the savings bank had $626,000 of substandard
loans and $975,000 of "special mention" loans.

When a savings bank classifies problem assets as either
substandard or doubtful, it is required to establish general
valuation allowances or "loss reserves" in an amount deemed
prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent
risk associated with lending activities, but which, unlike
specific allowances, have not been allocated to particular
problem assets. When a savings bank classifies problem assets as
"loss," it is required either to establish a specific allowance
for losses equal to 100% of the amount of the assets so
classified, or to charge off such amount. A savings bank's
determination as to the classification of its assets and the
amount of its valuation allowance is subject to review by its
regulatory agencies, which can order the establishment of
additional general or specific loss allowances. The savings bank
regularly reviews its asset portfolio to determine whether any
assets require classification in accordance with applicable
regulations.
<PAGE H-36>
At March 31, 1999, the savings bank had no foreign
loans and no loan concentrations exceeding 10% of total loans in
the table "Analysis of Loan Portfolio." Loan concentrations are
considered to exist when there are amounts loaned to a multiple
number of borrowers engaged in similar activities that would
cause them to be similarly impacted by economic or other
conditions.

Potential problem loans consist of loans that are
included in performing loans, but for which potential credit
problems of the borrowers have caused management to have serious
doubts as to the ability of such borrowers to continue to comply
with present repayment terms. At March 31, 1999, loans past due
between 30 and 89 days that are not included in the preceding
table totalled $414,000.

Allowance for Loan Losses. The allowance for loan
losses is established through a provision for loan losses based
on management's evaluation of the known and inherent risks in its
loan portfolio and current economic conditions. Accordingly, the
savings bank consistently applies a methodology to determine both
the adequacy of the allowance for loan losses and the necessary
provision for loan losses to be charged against earnings. This
methodology includes:

-- a detailed review of all classified assets to
determine if any specific reserve allocations
(which includes impaired loans) are required on an
individual loan basis.

-- the application of reserve allocations to all
criticized and classified assets, based upon
allocation percentages, with an "olem" (other
loans especially mentioned), substandard or
doubtful rating.

-- the application of reserve allocations to
installment and mortgage loans based upon
historical charge-off experience for those loan
types. The application of reserve allocations to
all performing loans based upon historical actual
losses incurred from all loan review categories.

The savings bank provided $283,000, $60,000 and
$132,000 to its allowance for loan losses for the years ended
December 31, 1998, 1997 and 1996, respectively and $0, $50,00,
and $0 for the quarters ended March 31, 1999, 1998, and 1997,
respectively. At March 31, 1999, the total allowance for loan
losses was $304,000, which amounted to 13.58% of nonperforming
assets. The savings bank will continue to monitor and modify the
level of its allowance for loan losses in order to maintain it at
a level that management considers adequate to provide for
potential loan losses. As the savings bank continues to
diversify its loan portfolio into commercial, commercial real
estate and construction lending, the savings bank expects to
<PAGE H-37> increase its provisions for loan losses in future
periods in order to increase the allowance for loan losses. For
the years ended December 31, 1998, 1997 and 1996, respectively,
the savings bank had $270,000, $29,000 and $133,000 in
charge-offs against this allowance. For the quarters ended
March 31, 1999, 1998, 1997 and 1996, respectively, the savings
bank had no charge-offs against this allowance.

Analysis of the Allowance For Loan Losses. The
following table sets forth the analysis of the allowance for loan
losses for the periods indicated.
Quarter Ended Year Ended
March 31, December 31,
1999 1998 1998 1997
Allowance, beginning of
period $304 $238 $238 $207
Charge-offs:
Real Estate:
One-to-four-family 270 29
Consumer

Total charge-offs 0 0 270 29
Total recoveries 0 0 53 0
Net charge-offs (recoveries) 0 0 217 29
Provision charged to operations 0 0 283 60
Allowance, end of period $304 $288 $304 $238

Allocation of Allowance for Loan Losses. The following
table sets forth the allocation of allowance for loan losses by
loan category for the periods indicated.
At March 31,
1999 1998
Amount Percent Amount Percent
Residential including
multifamily real
estate $107 69.61% $204 68.58%
Commercial real estate
and commercial
business 91 28.73 79 29.21
Consumer 4 1.66 5 2.21
Unallocated 102
Total $304 100.00% $288 100.00%

Ratio of net charge-offs during the period to average
loans outstanding during the period.

At December 31,
1998 1997
Amount Percent(1) Amount Percent(1)
Residential including
multifamily real
estate $109 69.78% $166 72.71%
Commercial real estate
and commercial
business 88 28.63 67 25.38
<PAGE H-38>
Consumer 4 1.59 5 1.91
Unallocated 103 0
Total $304 100.00% $238 100.00%
_______________

(1) Represents percentage in each category to total loans.

Investment Activities

The savings bank's investment portfolio is comprised of
mortgage-backed securities, investment securities, and cash and
cash equivalents. The carrying value of the savings bank's
investment securities and mortgage-backed securities portfolio
totalled $48.54 million at March 31, 1999 compared to $20.92
million at March 31, 1998. The savings bank's cash and cash
equivalents, consisting of cash and due from banks, and interest-
earning deposits with other financial institutions, totalled
$35.54 million at March 31, 1999 compared to $37.07 million at
March 31, 1998, a decrease of $1.53 million or 4.13%. The
majority of the savings bank's mortgage-backed securities are
issued or guaranteed by the United States Government or agencies
thereof. At March 31, 1999, mortgage-backed securities totalled
$27.52 million. The majority of this amount represents
securities that were issued or guaranteed by either FNMA, FHLMC
or the Government National Mortgage Association ("GNMA"). The
savings bank historically maintains high levels of interest-
earning deposits as part of its strategy for meeting liquidity
requirements and improving interest sensitivity.

The savings bank is required under federal regulations
to maintain a minimum amount of liquid assets that may be
invested in specified short term securities and certain other
investments. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources." The savings bank generally has maintained a
portfolio of liquid assets that exceeds regulatory requirements.
Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment
as to the attractiveness of the yields then available in relation
to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's
projections as to the short-term demand for funds to be used in
the savings bank's loan origination and other activities.

Pursuant to SFAS No. 115, which the savings bank
adopted in 1994, the savings bank classifies its investment
securities and mortgage-backed securities as either held-to-
maturity, available for sale or trading. Available for sale and
trading securities are carried at market value, while held-to-
maturity securities are carried at amortized cost. At March 31,
1999, $5.19 million of the savings bank's investment securities
<PAGE H-39> and mortgaged-backed securities were classified held-
to-maturity and $43.35 million of the savings bank's investment
securities and mortgaged-backed securities were classified
available for sale. The savings bank did not carry any trading
securities at March 31, 1999.

The savings bank's Board of Trustees has also adopted
an investment policy which identifies acceptable types of
investments for the savings bank and establishes criteria to
guide management in classifying investments as prescribed by SFAS
No. 115. The policy also authorizes the savings bank's
investment officer to make single investments of up to
$1 million. Under the investment policy the savings bank may
invest in certain AAA rated derivative securities. As of
December 31, 1998, the savings bank had no collateralized
mortgage obligations. The savings bank may not invest in high-
risk collateralized mortgage obligations ("CMOs") and the savings
bank's investment officer must periodically analyze the risk of
any CMO held by the savings bank to determine that such
securities are not within the high-risk category.

On January 29, 1999, the Holding Company purchased
1,600,000 shares of Series A Convertible Preferred Stock, $.01
par value per share, of McGuire Performance Solutions, Inc.
("MPS"). The Holding Company purchased the shares for $.78125
per share for a total cost of $1,250,000. The Holding Company
owns 100% of MPS's Series A Convertible Preferred Stock. MPS is
a nationally recognized firm delivering cost-effective solutions
for high performance total balance sheet management to banks,
thrifts, credit unions and other financial institutions.

Carrying and Market Value of Investment and Mortgage-
Backed Securities. The following table sets forth certain
information regarding the carrying and market values of the
savings bank's investment securities and mortgage-backed
securities in the savings bank's held-to-maturity portfolio for
the periods indicated.

Held to Maturity
At March 31,
1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FNMA $1,000 $ 1 $ - $1,001
FHLMC 2,999 2 - 3,001
Total Debt Securities held
to maturity 3,999 3 - 4,002
Mortgage-backed securities:
GNMA 1,134 75 - 1,209
FHLMC 57 - 2 55
<PAGE H-40>
Total mortgage-backed
securities held to
maturity 1,191 75 - 1,264
Total securities held to
maturity $5,190 $78 $ - $5,266
====== === ====== ======
<CAPTION>

Held to Maturity
At March 31,
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FNMA $1,000 $ 4 $ - $1,004
FHLMC 4,719 20 4,700
Total Debt Securities held
to maturity 5,719 20 5,704
Mortgage-backed securities:
GNMA 1,883 79 - 1,982
FHLMC 70 6 - 76
Total mortgage-backed
securities held to
maturity 1,953 85 - 2,058
Total securities held to
maturity $7,672 89 $ - $7,762
====== ==== ===== ======
</TABLE>

The following table presents the estimated fair value
of investment securities and mortgage-backed securities available
for sale and the net unrealized gain or loss at the periods
indicated:

<TABLE>
<CAPTION>
Available for Sale
At March 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Equity:
Investments in mutual funds $ 2,354 $ 9 $ - $2,363
Total Equity securities
available for sale 2,354 2,363
Debt:
FHLB Notes 3,998 26 4,024
SLMA 1,000 3 997
Federal Farm Credit 2,000 10 2,010
FNMA 998 14 1,012
7,996 50 3 8,043
Total Investment Securities
Available for sale 10,360 50 3 10,406
Mortgage-backed securities:
FNMA 2,215 - 60 2,155
<PAGE H-41>
FHLMC 685 2 683
Total mortgage-backed
securities available
for sale 2,900 - 62 2,838
Total available-for-sale
securities $13,250 $ 60 $ 65 $13,244
======= ======== ====== =======

<CAPTION>
Available for Sale
At March 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Equity:
Investment in McGuire
Performance Solutions $ 1,250 $ 1,250
Investments in mutual funds 2,354 $ - $ 5 2,349
Total Equity securitites
available for sale 3,604 5 3,599
Debt:
FHLB Notes 6,498 - 51 6,447
Municipal Tax-exempt 3,535 - 36 3,499
FNMA 3,500 - 25 3,475
13,533 - 112 13,421
Total investment Securities
Available for sale 17,137 - 117 17,020
Mortgage-backed securities:
FNMA 16,679 - 205 16,474
GNMA 9,944 87 9,857

Total mortgage-backed
securities available
for sale 26,623 - 292 26,331

Total available-for-sale
securities $3,760 $ 0 $409 $43,351
====== ======= ==== =======

Held to Maturity
At December 31,
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FNMA $ 1,000 $ 1 $- $ 1,001
FHLMC 2,996 8 - 3,004
Total Debt Securities held
to maturity 3,996 9 - 4,005
Mortgage-backed securities:
GNMA 1,269 74 1,343
FHLMC 58 4 - 62
Total mortgage-backed
securities held to <PAGE H-42>
maturity 1,327 78 - 1,405
Total securities held to
maturity $ 5,323 $ 87 $- $ 5,410

Held to Maturity
At December 31,
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FNMA $ 7,219 $ 8 $- $ 7,227
FHLMC 1,000 8 - 1,008
Total Debt Securities held
to maturity 8,219 16 - 8,235
Mortgage-backed securities:
GNMA 1,980 105 - 2,085
FHLMC 88 9 - 97
Total mortgage-backed
securities held to
maturity 2,068 114 - 2,182
Total securities held to
maturity $10,287 $130 $- $10,417

</TABLE>

The following table presents the estimated fair value
of investment securities and mortgage-backed securities available
for sale and the net unrealized gain or loss at the periods
indicated:

<TABLE>
<CAPTION>
Available for Sale
At December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Equity:
Investments in mutual funds $ 2,354 $ - $1 $ 2,353
Debt:
FNMA Notes 3,500 11 - 3,511
Municipal Tax-exempt 3,544 - - 3,544
FHLB Notes 6,498 - - 6,498
SLMA 1,000 1 - 1,001
Total Debt Securities held
to maturity 14,542 12 - 14,554
Mortgage-backed securities:
FNMA 11,884 - 6 11,878
GNMA 10,195 - - 10,195
Total mortgage-backed
securities available
for sale 22,079 - 6 22,073
Total available-for-sale
securities $38,975 $12 $7 $38,980
<PAGE H-43>

<CAPTION>
Available for Sale
At December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Equity:
Investments in mutual funds $ 2,354 $12 $ - $ 2,366
Debt:
FHLB Notes 7,995 23 - 8,018
Federal Farm Credit 2,000 12 - 2,012
FNMA 998 13 - 1,011
SLMA 1,000 - 6 994
Total Debt Securities
available for sale 11,993 48 6 12,035
Mortgage-backed securities:
FNMA 2,227 - 65 2,162
FHLMC 778 - 6 772
Total mortgage-backed
securities available
for sale 3,005 - 71 2,934
Total available-for-sale
securities $17,352 $60 $77 $17,335
</TABLE>

Investment Portfolio Maturities. The following table
sets forth the scheduled maturities, carrying values, and
weighted average yields for the savings bank's investment
securities and mortgage-backed securities portfolios classified
as being held to maturity and available for sale at March 31,
1999. Adjustable-rate, mortgage-backed securities are included
in the period in which interest rates are next scheduled to
adjust.

<TABLE>
<CAPTION>
At March 31, 1999
In one year After one year After five years
or less to five years to ten years Over ten years
No Stated
Carrying Average Carrying Average Carrying Average Carrying Average Maturity
Value Yield Value Yield Value Yield Value Yield or Rate Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
Investment Securities $ - - $2,000 6.37% $ 999 6.50% $ 1,000 7.09% $ - $ 3,999

Mortgage-backed
securities - - - - - - 1,181 8.50% - 1,191
Total held to
maturity $ - - $2,000 8.37% $ 999 0 $2,191 15.59% $ - $ 5,190
====== ===== ====== ==== ====== ===== ====== ===== ======= =======

Available for sale:
Investment Securities $ 2,482 5.32% $2,467 6.00% $3,998 6.80% $ 4,474 5.28% $3,599 $17,020
Mortgage-backed securities - 1,601 5.50% - - 24,730 6.67% - 26,331

Total available for sale $ 2,482 5.32% $4,088 11.50% $3,998 6.80% $29,204 11.95% $3,599 $43,351
======= ==== ====== ===== ====== ==== ======= ===== ====== =======

</TABLE>

Sources of Funds
<PAGE H-44>

General. Deposits are the major source of the savings
bank's funds for lending and other investment purposes. In
addition to deposits, the savings bank derives funds from the
amortization and prepayment of loans and mortgage-backed
securities, the maturity of investment securities, operations
and, if needed, advances from the FHLB. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources or on
a longer term basis for general business purposes.

Deposits. Consumer and commercial deposits are
attracted principally from within the savings bank's market area
through the offering of a broad selection of deposit instruments
including checking accounts, passbook savings accounts, statement
savings accounts, money market deposit accounts, term certificate
accounts and individual retirement accounts. Deposit account
terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the
interest rate, among other factors. The savings bank regularly
evaluates its internal cost of funds, surveys rates offered by
competing institutions, reviews the savings bank's cash flow
requirements for lending and liquidity, and executes rate changes
when deemed appropriate. The savings bank does not obtain
deposits through brokers, nor does it solicit funds outside its
market area.

The savings bank's deposit pricing strategy seeks to
retain passbook savings deposit accounts as an important funding
source. Management's experience is that its customer base finds
the traditional passbook savings account attractive even though
higher yields may be available from alternative deposit products.
Accordingly, the savings bank typically prices its passbook
product above its large commercial bank competitors whose pricing
strategy is designed for a larger and more diverse market.

The following table sets forth the savings account
activities for the savings bank for the periods indicated.

Quarter Ended Year Ended
March 31, December 31,
1999 1998 1998 1997
Increase before
Interest credited $4,872 $3,782 $15,003 $4,249
Interest credited $ 814 1,006 4,424 3,911
Net deposit
increase $5,686 $4,788 $19,427 $8,160

The following tables set forth the composition of savings
deposits in the various types of savings accounts offered by the
savings bank between the dates indicated.
<PAGE H-45>
<TABLE>
<CAPTION>
At December 31,
1998
Weighted
Average
% of Nominal
Balance Deposits Rate
<S> <C> <C> <C>
Savings deposit accounts $ 28,952 22.59% 2.50%
NOW Accounts 13,016 10.16 0.38
Money market accounts 8,705 6.79 3.53
Retail certificate of deposit 72,096 56.25 5.42
Jumbo certificates of deposit(1) 5,391 4.21 5.58
Total deposits $128,160 100.00%

<CAPTION>
At December 31,
1997
Weighted
Average
% of Nominal
Balance Deposits Rate
<S> <C> <C> <C>
Savings deposit accounts $ 29,694 27.31% 2.50%
NOW Accounts 8,535 7.85 0.90
Money market accounts 7,201 6.62 3.57
Retail certificate of deposit 57,536 52.91 5.57
Jumbo certificates of
deposit(1) 5,768 5.31 5.81
Total deposits $108,734 100.00%
</TABLE>

_______________________
(1) Includes only certificates of deposit of $100,000 or more
bearing negotiated rates.
<TABLE>
<CAPTION>
At March 31,
1999
Weighted
Average
% of Nominal
Balance Deposits Rate
<S> <C> <C> <C>
Savings deposit accounts $ 31,146 23.27% 2.50%
NOW Accounts 13,434 10.04 0.37
Money market accounts 9,054 6.76 3.53
Retail certificate of deposit 74,433 55.61 5.26
Jumbo certificates of deposit(1) 5,780 4.32 5.38
Total deposits $133,847 100.00%

<CAPTION>
At March 31,
1998
Weighted
Average
% of Nominal
Balance Deposits Rate
<S> <C> <C> <C>
Savings deposit accounts $ 31,022 27.33% 2.50%
NOW Accounts 9,783 8.62 0.75
Money market accounts 7,847 6.91 6.62
Retail certificate of deposit 59,779 52.66 5.56 <PAGE H-46>
Jumbo certificates of
deposit(1) 5,091 4.48 5.80
Total deposits $113,522 100.00%
</TABLE>

Time Deposit Maturities. The following table sets
forth the amount and maturities of time deposits at December 31,
1998.

Period to Maturity from March 31, 1999
Within One to
One Year Three Years Thereafter Total
(In Thousands)

Less than 4.00% $ 1,022 $ 276 $ 239 $ 1,537
4.001% - 6.000% 61,018 13,326 1,965 76,309
6.001% - 8.000% 1,305 338 677 2,320
8.001% - 10.000% 43 4 - 47
over 10.000% - - - -
Total $63,388 $ 13,944 $ 2,881 $ 80,213
======== ======== ======= ========

Large Certificates of Deposit Maturities. The
following table indicates the amount of the savings bank's
certificates of deposit of $100,000 or more by time remaining
until maturity at March 31, 1999.
Certificates
Maturity Period of Deposit
(In thousands)

One year or less $ 12,291
Over one year though two years 2,149
Over two years through three years 339
Over three years through five years 457
Over five years through ten years -
Over ten years -
$ 15,236
========

Borrowings

Savings deposits are the primary source of funds for
the savings bank's lending and investment activities and for its
general business purposes. If the need arises, the savings bank
may rely upon advances from the FHLB to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. At
March 31, 1999, the savings bank had no FHLB advances
outstanding.

Market Area and Competition

The savings bank's market area includes the
Philadelphia and metropolitan area and all counties contiguous
thereto as well as counties of New Jersey and Delaware. This
area has a large concentration of financial institutions, many of
<PAGE H-47> which are significantly larger and have greater
financial resources than the savings bank, and all of which are
competitors of the savings bank to varying degrees. As a result,
the savings bank encounters strong competition both in attracting
deposits and in originating real estate and other loans. Its
most direct competition for deposits has come historically from
commercial banks, brokerage houses, other savings associations
and credit unions in its market area, and the savings bank
expects continued strong competition from such financial
institutions in the foreseeable future. The savings bank's
market area includes branches of several commercial banks that
are substantially larger than the savings bank. The savings bank
competes for savings deposits by offering depositors a high level
of personal service.

The competition for real estate and other loans comes
principally from commercial banks, mortgage banking companies and
other savings institutions. This competition for loans has
increased substantially in recent years as a result of the large
number of institutions competing in the savings bank's market
area, as well as the increased efforts by commercial banks to
expand mortgage loan originations.

The savings bank competes for loans primarily through
the interest rates and loan fees it charges and the efficiency
and quality of services it provides borrowers, real estate
brokers and builders. Factors that affect competition include
general and local economic conditions, interest rate levels and
volatility of the mortgage markets.

Subsidiaries

The savings bank owns three direct subsidiaries and one
indirect subsidiary. See "Business of PSB -- Mortgage Banking
Activities." Transnational Mortgage Company is engaged in a
mortgage banking business. PSA Service Corp. conducts real
estate appraisals, processes credit applications and provides
other services in connection with the origination of loans. PSA
Financial Corp. primarily originates business loans and
commercial real estate loans. Its subsidiary, PSA Consumer
Discount Company, primarily originates consumer loans.

Personnel

As of March 31, 1999, the savings bank had 48 full-time
and no part-time employees. None of the savings bank's employees
are represented by a collective bargaining group. The savings
bank believes its relationship with its employees to be good.

Environmental Matters

Environmental hazards are a source of substantial risk
and potential liability in the loan portfolios of financial
institutions. If a property securing one or more of an
institutions loans is environmentally contaminated, the <PAGE H-
48> institution may be adversely affected in several different
ways. The value of the collateral could be impaired,
environmental clean-up costs may impair the borrower's repayment
ability, liens held by the institution against the contaminated
property may be subordinated to state and/or federal liens
securing clean-up costs, and the institution against the
contaminated property may be subordinated to state and/or federal
liens securing clean-up costs in it has foreclosed on the
property or if it is deemed to have become involved in management
of the borrower. To minimize these risks, the savings bank may
require an environmental examination of the property of any
borrower or prospective borrower if consideration of the
potential loss to the savings bank in relation to the burdens to
the borrower. The costs of such examinations and reports are
generally the responsibility of the borrower. These costs may be
substantial and may deter a prospective borrower from entering
into a loan transaction with the savings bank. The savings bank
is not aware of any borrower who is currently subject to any
environmental investigation or clean-up proceeding which is
likely to have a material adverse impact on the financial
condition or results of operations of the savings bank.

REGULATION

General. The Holding Company is a bank holding company
subject to supervision and regulation by the Federal Reserve
under the Bank Holding Company Act of 1956, as amended. As a
bank holding company, PSB's activities and those of its
subsidiary are limited to the business of banking and activities
closely related or incidental to banking, and PSB may not
directly or indirectly acquire the ownership or control or more
than 5% of any class of voting shares or substantially all of the
assets of any company, including the savings bank, without prior
approval of the Federal Reserve.

The savings bank is subject to supervision and
examination by applicable federal and state banking agencies.
The savings bank is also a Pennsylvania-chartered bank subject to
supervision and regulation by the Pennsylvania Department of
Banking. In addition, because the deposits of the savings bank
are insured by the FDIC, the savings bank is subject to
regulation by the FDIC. The savings bank is also subject to
requirements and restrictions under federal and state law,
including requirements to maintain reserves against deposits,
restrictions on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and
regulations also affect the operations of the savings bank. In
addition to the impact of regulation, commercial banks are
affected significantly by the actions of the Federal Reserve in
attempting to control the money supply and credit availability in
order to influence the economy.

PSB Bancorp, Inc. Structure. The savings bank is
subject to restrictions under federal law which limit its ability
to transfer funds to PSB, in the form of loans, other extensions
<PAGE H-49> of credit, investments and asset purchases. Such
transfers by the savings bank to PSB are generally limited in
amount to 10% of the savings bank's capital and surplus.
Furthermore, such loans and extensions of credit are required to
be secured in specific amounts, and all transactions are required
to be on an arm's length basis. The savings bank has never made
any loan or extension of credit to PSB nor has it purchased any
assets from PSB.

Under Federal Reserve policy, a bank holding company is
expected to act as a source of financial strength to the savings
bank and to commit resources to support the savings bank, i.e.,
to downstream funds to the savings bank. This support may be
required at times when, absent such policy, the bank holding
company might not otherwise provide such support. Any capital
loans by a bank holding company to the savings bank are
subordinate in right of payment to deposits and to certain other
indebtedness of the savings bank. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company
to a federal bank regulatory agency to maintain the capital of
the savings bank will be assumed by the bankruptcy trustee and
entitled to a priority of payment.

Regulation of the Savings Bank

Pennsylvania Savings Bank Law. The savings bank is
incorporated under the Pennsylvania Banking Code of 1965, as
amended (the "Banking Code"). The Banking Code contains detailed
provisions governing the Bank's organization, the location of its
offices, the rights and responsibilities of its trustees,
officers, employees, depositors and shareholders, and its
savings, investment and other operations. The Banking Code
delegates extensive rulemaking power and administrative
discretion to the Pennsylvania Department of Banking ("PDOB").

The PDOB generally examines each savings bank not less
frequently than once every two years. Although the PDOB may
accept the examinations and reports of the FDIC in lieu of the
PDOB's examination, the current practice is for the PDOB to
conduct individual examinations. The PDOB may order any savings
bank to discontinue any violation of law or unsafe or unsound
business practice and may direct any trustee, officer, employee
or attorney of a savings bank engaged in an objectionable
activity, after the PDOB has ordered the activity to be
terminated, to show cause at a hearing before the PDOB why such
person should not be removed.

Capital Maintenance. FDIC regulations require FDIC-
insured state-chartered savings banks, such as the savings bank,
to maintain minimum levels of capital. The regulations establish
a minimum leverage capital requirement of not less than 3% Tier 1
capital to total assets for institutions in the strongest
financial and managerial condition, with a CAMEL rating of "1"
(the highest rating of the FDIC for banks). For all other banks,
the minimum leverage ratio is at least 4% to 5%. Tier I capital
<PAGE H-50> consists principally of common shareholders' equity
(including retained earnings), noncumulative perpetual preferred
stock and related surplus, and minority interests in consolidated
subsidiaries, minus all intangible assets other than certain
supervisory goodwill, purchased mortgage servicing rights and
purchased credit card relationships.

The FDIC also requires that savings banks meet a risk-
based capital standard. The risk-based capital standard for
savings banks requires the maintenance of total capital (which is
defined as Tier 1 capital plus supplementary (Tier 2) capital) to
risk- weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk weight of 0% to 100%, based on
the risks the FDIC believes are inherent in the type of asset or
item.

Tier 2 capital includes certain perpetual preferred
stock, hybrid capital instruments, including certain mandatory
convertible securities, certain subordinated debt and
intermediate preferred stock and a limited amount of the general
allowance for loan and lease losses. The amount of the allowance
for loan and lease losses includable in Tier 2 capital is limited
to a maximum of 1.25% of risk-weighted assets and 100% of Tier 1
capital. Overall, the amount of capital counted toward Tier 2
capital cannot exceed 100% of Tier 1 capital. At March 31, 1999,
the savings bank met its capital requirements.

FDICIA requires the Federal banking agencies to revise
their risk-based capital guidelines to, among other things, take
adequate account of interest rate risk, concentration of credit
risk, and risks of nontraditional activities. The agencies have
adopted a specific rule applicable to institutions whose
investment portfolio trading activity exceeds 10% of total assets
or $1 billion. The savings bank is not subject to this rule.
The agencies have stated that they will also consider the effects
of market and credit risk and nontraditional activities on a
case-by-case basis, and could impose higher capital requirements
on any institution.

Virtually identical capital requirements are imposed on
PSB and enforced by the Federal Reserve Board. The savings bank
is also subject to PDOB capital guidelines. Although not adopted
in regulation form, the PDOB utilizes capital standards requiring
a minimum of 6% leverage capital and 10% risk-based capital. The
components of leverage and risk-based capital are substantially
the same as those defined by the FDIC.

Insurance of Deposit Accounts. The FDIC has
implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of
premiums based on capital and supervisory measures. Under the
risk-related premium schedule, the FDIC assigns, on a semiannual
basis, each institution to one of three capital groups (well-
capitalized, adequately capitalized or undercapitalized) and
<PAGE H-51> further assigns such institution to one of three
subgroups within a capital group. The institution's subgroup
assignment is based upon the FDIC's judgment of the institution's
strength in light of supervisory evaluations, including
examination reports, statistical analyses and other information
relevant to measuring the risk posed by the institution. Only
institutions with a total capital to risk-adjusted assets ratio
of 10.00% or greater, a Tier 1 capital to risk-based assets ratio
of 6% or greater, and a Tier 1 leverage ratio of 5.0% or greater,
are assigned to the well-capitalized group. As of December 31,
1998, the savings bank was well capitalized for purposes of
calculating insurance assessments.

While the savings bank presently pays no premium for
deposit insurance, it is subject to assessments to pay the
interest on Financing Corporation ("FICO") bonds. FICO was
created by Congress in 1989 to issue bonds to finance the
resolution of failed thrift institutions. Prior to 1997, only
thrift institutions were subject to assessments to raise funds to
pay the FICO bonds. The Omnibus Budget Act also provided that
the Bank Insurance Fund deposits would be subject to 1/5 of the
assessment to which SAIF deposits are subject for FICO bond
payments through 1999. Beginning in 2000, Bank Insurance Fund
and SAIF deposits will be subject to the same assessment for FICO
bonds. The FICO assessment for the savings bank for 1998 is
$.012 for each $100 of Bank Insurance Fund deposits and $.0588
for each $100 of SAIF deposits.

The savings bank was chartered as a Bank Insurance
Fund-insured institution; however, it will continue to pay
premiums to the SAIF at SAIF rates with respect to the deposits
that it assumed in the reorganization. Therefore, a substantial
portion of the savings bank's deposits are assessed at SAIF
rates.

Restrictions on Dividends. Dividend payments by the
savings bank are subject to the Banking Code. Under the Banking
Code, no dividends may be paid except from "accumulated net
earnings" (generally, undivided profits). Under the FDI Act, no
dividends may be paid by an insured bank if the bank is in
arrears in the payment of any insurance assessment due to the
FDIC.

State and federal regulatory authorities have adopted
standards for the maintenance of adequate levels of capital by
banks. Adherence to such standards further limits the ability of
the savings bank to pay dividends.

Federal Reserve System. Under Federal Reserve
regulations, the savings bank is required to maintain
noninterest-earning reserves against its transaction accounts
(primarily NOW and regular checking accounts). The Federal
Reserve regulations generally require that reserves of 3% must be
maintained against net transaction accounts of $47.8 million or
less (subject to adjustment by the Federal Reserve) and <PAGE H-
52> $1.43 million plus 10% of net transaction accounts in excess
of $47.8 million. The savings bank is in compliance with the
foregoing requirements. Because required reserves must be
maintained in the form of either vault cash, a noninterest-
bearing account at a Federal Reserve Bank or a pass-through
account as defined by the Federal Reserve, the effect of this
reserve requirement is to reduce the savings bank's interest-
earning assets.

Federal Home Loan Bank System. The savings bank is
required to retain its membership in the FHLB System, which
consists of 12 regional FHLBs. The FHLB provides a central
credit facility primarily for member institutions. The savings
bank, as a member of the FHLB of Pittsburgh, is required to
acquire and hold shares of capital stock in that FHLB in an
amount at least equal to 1% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at
the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB of Pittsburgh, whichever is greater. The savings
bank is in compliance with this requirement, with an investment
in FHLB of Pittsburgh stock at December 31, 1998 of $572,200.
FHLB advances must be secured by specified types of collateral
and may only be obtained for the purpose of providing funds for
residential housing finance.

The FHLBs are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for
affordable housing programs. These requirements could reduce the
amount of dividends that the FHLBs pay to their members and could
also result in the FHLBs imposing a higher rate of interest on
advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the savings bank's
net interest income would likely also be reduced.
<PAGE H-53>
PSB BANCORP, INC. AND SUBSIDIARY

CONTENTS

Page

Quarterly Statements for the Three Month Period ended
March 31, 1999.......................................... H-

Consolidated Statement of Financial Condition as of
March 31, 1999(Unaudited) and December 31, 1998......... H-

Consolidated Statement of Income (Unaudited) for the
Three Month Periods Ended March 31, 1999 and 1998....... H-

Consolidated Statement of Comprehensive Income
(Unaudited) for the Three Month Periods Ended
March 31, 1999 and 1998................................. H-

Consolidated Statement of Shareholders' Equity
(Unaudited) for the Three Month Periods Ended
March 31, 1999 and 1998................................. H-

Consolidated Statement of Cash Flows (Unaudited) for
the Three Month Periods Ended March 31, 1999 and
1998.................................................... H-

Note to Consolidated Financial Statements

Financial Statements for the years ended December 31,
1999 and 1998.......................................... H-

Independent Auditors' Report.............................. H-

Financial Statements:

Consolidated Statement of Financial Condition
December 31, 1998 and 1997............................ H-

Consolidated Statement of Income for the Years Ended
December 31, 1998, 1997, and 1996..................... H-

Consolidated Statement of Shareholders' Equity for
the Years Ended December 31, 1998, 1997, and 1996..... H-

Consolidated Statement of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996............... H-

Consolidated Statement of Comprehensive Income for
the Years Ended December 31, 1998, 1997 and 1996...... H-

Notes to Consolidated Financial Statements................ H-
<PAGE H-54>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
At March 31, At December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents:
Cash and due from banks $1,669,236 $1,413,249
Interest bearing deposits in other financial institutions 33,866,346 33,543,499
Investments:
Investment securities available-for-sale, at fair value 17,020,164 16,907,350
Mortgage-backed securities available-for-sale, at fair value 26,330,923 22,073,453
Mortgage-backed securities held-to-maturity (fair
value of $1,263,827 and $1,404,753) 1,191,135 1,326,737
Investment securities held-to-maturity (fair value
of $4,001,103 and $4,005,600) 3,999,413 3,996,118
Loans receivable, net 75,132,831 72,880,160
Loans Held for Sale 5,333,166 6,938,160
Real Estate:
Acquired in settlement of loans 533,910 629,263
Office properties and equipment, net of accumulated
depreciation 960,942 990,071
Federal Home Loan Bank stock, at cost 572,200 572,200
(Restricted investment required by law)
Accrued interest receivable 1,453,256 1,288,666
Investment in data center, common stock, at cost 15,000 15,000
Prepaid corporate taxes 514,527 448,317
Excess of acquisition cost over fair value of assets
acquired, net of accumulated amortization 6,000 6,250
Net Deferred Taxes 68,112 0
Prepaid expenses and other assets 1,143,334 978,789
Total Assets $169,810,495 $164,007,282
============ ============
LIABILITIES:
Deposits 133,847,398 128,160,510
Securities purchased under agreements to resell 2,519,641 2,495,030
Advances from borrowers for taxes 658,797 1,096,339
Income taxes payable 598,108 465,108
Net Deferred Taxes 0 97,100
Accrued pension cost 138,815 138,815
Accrued interest payable on savings accounts 311,156 320,896
Accrued expenses and other liabilities 1,004,427 606,413
Employee Stock Ownership Debt 218,944 234,226
Total Liabilities $139,297,286 $133,614,437

SHAREHOLDERS' EQUITY:
Common stock, no par value, 15,000,000 shares
authorized; 3,101,140 shares
issued and outstanding 0 0
Additional paid-in capital 30,105,124 30,128,052
Employee Stock Ownership Plan (1,379,676) (1,442,886)
Retained earnings 2,032,336 1,704,436
Unrealized loss, investments available for sale (244,575) 3,243
Total Shareholders' Equity 30,513,209 30,392,845
Total Liabilities and Shareholders' equity $169,810,495 $164,007,282
============ ============
</TABLE>
<PAGE H-55>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
(unaudited)
<S> <C> <C>
Interest Income:
Interest on loans $1,776,946 $1,618,825
Mortgage-backed securities 377,117 80,291
Investment securities
Taxable Interest 244,867 201,583
Taxable Dividends 31,268 135,001
Tax-exempt interest 35,648 0
Interest-earning deposits 347,745 349,944

Total interest income 2,813,591 2,385,644

Interest expense:
Interest on deposits 1,384,455 1,207,363
Interest - other 5,187 6,757
Total interest expense 1,389,642 1,214,120

Net interest income 1,423,949 1,171,524

Provision for loan losses 0 50,000

Net interest income after provision
for loan losses 1,423,949 1,121,524

Noninterest income:
Gain on sale of loans 139,503 113,523
Loan fees 7,254 22,349
Service charges 94,157 91,371
Rental income 10,937 9,237
Other income 4,917 9,362
Total noninterest income 256,768 245,842

Noninterest Expenses:
Compensation and employee benefits 657,118 595,037
Premises and occupancy costs 181,934 166,316
Federal Insurance premiums 19,641 16,571
Data processing 38,894 36,780
Advertising 28,245 14,870
Directors' Fees 53,500 54,900
Stationery, printing and postage 35,063 26,971
Expenses of real estate owned 27,453 4,781
Other 177,969 168,333
Total noninterest expenses 1,219,817 1,084,559

Income before provision for income taxes 460,900 282,807

Provision for federal and state income taxes:
Current 133,000 75,000
Deferred tax (benefit)
Total income tax provision 133,000 75,000
Net Income $327,900 $207,807
Earnings per share - basic $0.11 $0.18
Earnings per share - diluted $0.11 $0.18
</TABLE>
<PAGE H-56>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
(unaudited)
<S> <C> <C>
Net Income $327,900 $207,807

Other comprehensive income, net of tax:

Unrealized loss, investments available for sale (247,818) 6,384

Other comprehensive income (247,818) 6,384

Comprehensive Income $80,082 $214,191

</TABLE>

<PAGE H-57>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)

Employee Accumulated
Additional Stock Other
Common Paid-in Ownership Retained Comprehensive Comprehensive
Stock Capital Plan Earnings Income Total Income
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $1,194,640 $13,563,087 ($295,355) $545,743 ($10,291) $14,997,824

Net Income for the three months ended
March 31, 1998 207,807 207,807 207,807

Employee Stock Ownership Plan:
Shares released 15,282 15,282

Other comprehensive income, net of tax:
Change in unrealized loss on
investment and mortgage-backed
securities available-for-sale, net
of taxes 6,384 6,384 6,384
__________ ___________ _________ ________ _______ ___________ ________
BALANCE, MARCH 31, 1998 (UNAUDITED) $1,194,640 $13,563,087 ($280,073) $753,550 ($3,907) $15,227,297 $214,191
========== =========== ========= ======== ======= =========== ========
BALANCE, DECEMBER 31, 1998 $0 $30,128,052 ($1,442,886) $1,704,436 $3,243 $30,392,845

Net Income for the three months ended
March 31, 1999 327,900 327,900 327,900

Employee Stock Ownership Plan:
Shares released (22,928) 63,210 40,282

Other comprehensive income, net of tax:
Change in unrealized loss on
investment and mortgage-backed
securities available-for-sale, net
of taxes (247,818) (247,818) ($247,818)
__________ ___________ ___________ __________ _________ ___________ _________
BALANCE, MARCH 31, 1999 (UNAUDITED) $0 $30,105,124 ($1,379,676) $2,032,336 ($244,575) $30,513,209 $80,082
========== =========== =========== ========== ======== =========== =========

</TABLE>
<PAGE H-58>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

Three Months Ended
March 31,
1999 1998
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $327,900 $207,807
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of premium/discount on
mortgage-backed securities 1,794 (4,243)
Depreciation and amortization 29,379 36,285
Write-down and expenses of real estate owned 26,836 5,000
Gain on sale of loans (139,503) (140,920)
Compensation expense-Employee Stock Ownership Plan 25,000
Change in assets and liabilities:
Decrease in loans held for sale 1,744,497 908,985
(Increase) decrease in accrued interest receivable (164,590) 195,628
Increase in prepaid expenses (164,545) (56,115)
(Increase) decrease in prepaid corporate taxes (66,210) 326,775
Increase(decrease) in corporate taxes payable 133,000 (233,000)
Decrease in accrued interest payable (9,740) (6,016)
Increase in accrued expenses 398,014 46,221

Total Adjustments 1,813,932 1,078,600

Net cash provided by operating activities 2,141,832 1,286,407

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage-backed securities, available for (4,994,780) 0
Purchase of investment securities, held-to-maturity 0 (2,000,000)
Purchase of investment securities, available-for-sale (1,250,000)
Maturities of investment securities, available-for-sale 1,000,000 4,000,000
Maturities of investment securities, held-to-maturity 0 4,500,000
Mortgage-backed security maturities and
principal repayments 591,979 221,273
Increased in capitalized conversion costs (21,118)
Proceeds from sale of real estate owned net of
improvements 227,471
Capital expenditures (15,563)
Increase in total loans receivable, net (2,411,625) (2,752,551)

Net cash used in investing activities (6,836,955) 3,932,041

</TABLE>
<PAGE H-59>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
(unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net $5,686,888 $4,787,494
Change in advances for borrowers' taxes and
insurance (437,542) (449,867)
Change in securities purchased under agreements to res 24,611 (372,020)

Net cash provided by financing activities 5,273,957 3,965,607

NET INCREASE IN CASH AND CASH EQUIVALENTS 578,834 9,184,055

Cash and Cash equivalents, beginning of period 34,956,748 27,888,650

CASH AND CASH EQUIVALENTS, END OF PERIOD $35,535,582 $37,072,705
=========== ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:

Interest on deposits and borrowings $1,399,382 $1,220,136
=========== ===========

Income taxes $72,000 $40,000
=========== ===========
Noncash activities

Loans transferred to real estate owned $158,954 $0
=========== ===========
</TABLE>
<PAGE H-60>
PSB BANCORP, INC. AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(UNAUDITED)

BASIS OF PRESENTATION:

The consolidated financial statements include the
accounts of PSB Bancorp, Inc. and its wholly-owned subsidiary,
Pennsylvania Savings Bank. 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 three months ended
March 31, 1999 are not necessarily indicative of the results that
may be expected for any fiscal year.

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
PSB Bancorp, Inc.
Eleven Penn Center
1835 Market Street
Philadelphia, Pennsylvania 19103-2986

We have audited the accompanying consolidated statement of
financial condition of PSB Bancorp, Inc. and Subsidiary as of
December 31, 1998 and 1997 and the related consolidated
statements of income, shareholders' equity, cash flows and
comprehensive income for each of the three years ended
December 31, 1998, 1997 and 1996. These consolidated financial
statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
<PAGE H-61>
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial condition of PSB Bancorp, Inc. and Subsidiary at
December 31, 1998 and 1997, the results of their operations and
their cash flows for each of the three years ended December 31,
1998, 1997 and 1996 in conformity with generally accepted
accounting principles.

/s/ Stockton Bates, LLP
Certified Public Accountants
Philadelphia, Pennsylvania

March 10, 1999
<PAGE H-62>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

ASSETS

December 31,
1998 1997
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 1,413,249 $ 1,193,195
Interest bearing deposits in
other financial institutions 33,543,499 26,695,455

INVESTMENTS:
Investment securities available-
for-sale, at fair value 16,907,350 14,401,388
Mortgage-backed securities
available-for-sale at fair
value 22,073,453 2,933,804
Investment securities held-to-
maturity (fair value of
$4,005,600 and $8,234,639) 3,996,118 8,219,223
Mortgage-backed securities held-
to-maturity (fair value of
$1,404,753 and $2,182,322) 1,326,737 2,068,059

LOANS RECEIVABLE, net 72,880,160 61,915,068

LOANS HELD FOR SALE 6,938,160 6,574,585

REAL ESTATE:
Acquired in settlement of loans 629,263 456,528

OFFICE PROPERTIES AND EQUIPMENT,
net of accumulated depreciation 990,071 1,329,145

FEDERAL HOME LOAN BANK STOCK, at cost 572,200 559,900
(Restricted investment required by
law)

ACCRUED INTEREST RECEIVABLE 1,288,666 1,285,102

INVESTMENT IN DATA CENTER, common
stock, at cost 15,000 15,000

PREPAID CORPORATE TAXES 448,317 445,092

EXCESS OF ACQUISITION COST OVER FAIR
VALUE OF ASSETS ACQUIRED, net of
accumulated amortization 6,250 7,250

NET DEFERRED TAXES

CAPITALIZED CONVERSION COSTS 155,292
PREPAID EXPENSES AND OTHER ASSETS 978,789 1,083,865
TOTAL ASSETS $164,007,282 $129,337,951
<PAGE H-63>

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
Deposits $128,160,510 $108,734,107
Securities purchased under
agreements to resell 2,495,030 2,841,733
Advances from borrowers for taxes 1,096,339 999,611
Income taxes payable 465,108 308,000
Net Deferred Taxes 97,100 51,158
Accrued pension cost 138,815 145,843
Accrued interest payable on
savings accounts 320,896 260,363
Employee Stock Ownership Plan debt 234,226 295,355
Accrued expenses and other
liabilities 606,413 703,957

Total liabilities 133,614,437 114,340,127

SHAREHOLDERS' EQUITY:
Common Stock, $1 par value,
10,000,000 shares authorized;
1,194,640 shares issued and
outstanding for December 31,
1997 1,194,640
Common Stock, no par value,
15,000,000 shares authorized;
3,101,140 shares issued and
outstanding for December 31,
1998
Additional paid-in capital 30,128,052 13,563,087
Employee Stock Ownership Plan (1,442,886) (295,355)
Retained earnings (accumulated
deficit) 1,704,436 545,743
Unrealized loss, investments
available-for-sale 3,243 (10,291)

Total Shareholders' equity 30,392,845 14,997,824

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $164,007,282 $129,337,951

The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE H-64>
CONSOLIDATED STATEMENT OF INCOME

Year Ended December 31,
1998 1997 1996

INTEREST AND DIVIDEND INCOME:
Interest on loans $ 6,673,774 $5,539,747 5,217,737
Mortgage-backed securities 326,738 373,900 430,798
Investment securities:
Taxable interest 1,060,169 1,424,915 1,063,520
Taxable dividends 135,001 191,364 119,290
Tax-exempt interest 6,419
Interest-earning deposits 1,894,883 1,210,030 1,207,302

Total interest income 10,096,984 8,739,956 8,038,647

INTEREST EXPENSE:
Interest on deposits 5,065,107 4,533,646 4,082,377
Interest - other 25,142 30,607 36,099

Total interest expense 5,090,249 4,564,253 4,118,476

Net interest income 5,006,735 4,175,703 3,920,171

Provision for loan losses 283,066 60,000 132,633

Net interest income
after provision for
loan losses 4,723,669 4,115,703 3,787,538

NONINTEREST INCOME:
Gain on sale of loans 863,407 555,987 335,736
Loan fees 26,297 81,180 27,485
Service charges 362,234 347,792 371,210
Rental income 37,721 38,767 44,286
Other income 25,511 47,368 136,712

Total noninterest
income 1,315,170 1,071,094 915,429

NONINTEREST EXPENSES:
Compensation and employee
benefits 2,532,303 2,283,110 1,938,979
Premises and occupancy
costs 688,006 684,098 455,652
Federal insurance premiums 68,768 64,167 735,530
Data Processing 147,528 126,700 120,782
Advertising 111,111 81,400 62,121
Directors Fees 223,900 232,300 237,200
Stationary, printing and
postage 107,420 103,040 113,460
Expenses of real estate
owned 86,463 8,244 143,177
<PAGE H-65>
Loss on sale of real
estate held for
investment 2,465
Other 659,501 550,592 553,379

Total noninterest
expenses 4,625,000 4,133,651 4,362,745

INCOME BEFORE PROVISION FOR
INCOME TAXES 1,413,839 1,053,146 340,222

Provision for federal and
state income taxes:
Current 465,108 308,000 142,000
Deferred 36,920 36,669 59,465

Total income tax
provision 502,028 344,669 201,465

NET INCOME $ 911,811 $ 708,477 $ 138,757

BASIC EARNINGS PER SHARE $ .31 $ .61 $ .12

DILUTED EARNINGS PER SHARE $ .31 $ .61 $ .12

The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE H-66>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accum-
ulated
Employee Other
Additional Stock Retained Compre- Compre-
Common Paid-in Ownership Earnings hensive hensive
Stock Capital Plan (Deficit) Income Total Income
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 1,173,250 $13,330,472 $ (417,612) $ (257,494) $(13,715) $13,814,901
Net income for the year ended
December 31, 1996 138,757 138,757 138,757

Issuance of common stock to
Management Recognition Plan 21,390 232,615 254,005
Dividends paid (43,997) (43,997)
Other comprehensive income, net
of tax:
Change in unrealized loss on
investment and mortgage-
backed securities available-
for-sale (56,253) (56,253) (56,253)
Employee Stock Ownership Plan:
Shares Released 61,129 61,129

BALANCE, DECEMBER 31, 1996 $ 1,194,640 $13,563,087 $ (356,483) $ (162,734) $(69,968) $14,168,542 $ 82,504
========
Net income for the year ended
December 31, 1997 708,477 708,477 708,477
Other comprehensive income, net
of tax:
Change in unrealized loss on
investment and mortgage-backed
securities available-for-sale 59,677 59,677 59,677
Employee Stock Ownership Plan: 61,128 61,128
Shares Released
BALANCE, DECEMBER 31, 1997 $ 1,194,640 $13,563,087 $ (295,355) $ 545,743 $(10,291) $14,997,824 $768,154
========
Net income for the year ended
December 31, 1998 911,811 911,811 911,811
Other comprehensive income,
net of tax:
Change in unrealized loss on
investment and mortgage-backed
securities available-for-sale 13,534 13,534 13,534
Cash of PSB Mutual Holding
Company from merger of PSB
Mutual Holding Company and
Pennsylvania Savings Bank
upon completion of Conversion
and Reorganization 246,882 246,882
Employee Stock Ownership Plan:
Shares Released (18,862) 141,009 122,147
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 Inc. common stock upon
completion of Conversion and
Reorganization (1,194,640) 1,194,640 0
Issuance of common stock upon
completion of Conversion and
Reorganization 16,107,320 16,107,320
Expenses relating to stock
offering (718,133) (718,133)
BALANCE, DECEMBER 31, 1998 $ 0 $30,128,052 $(1,442,886) $1,704,436 $ 3,243 $30,392,845 $925,345
</TABLE> <PAGE H-67>

The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE H-68>
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents

Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 911,811 $ 708,477 $ 138,757
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Amortization of premium/discount
on mortgage-backed securities (7,045) 1,784 (4,824)
Depreciation and amortization 145,740 122,037 90,943
Write-down and expenses of real
estate owned 95,599 8,123
Gain (loss) on sale of real estate (36,882) 2,465
Gain (loss) on sale of property &
equipment 9,446 (977)
Gain on sale of loans (863,407) (555,987) (335,736)
Provision for losses on loans 283,066 60,000 132,633
Deferred taxes 36,920 36,669 59,467
Compensation expense-Employee Stock
Ownership Plan 61,017
Change in assets and liabilities:
(Increase)decrease in loans held-
for-sale 499,832 (1,420,898) (1,752,764)
Increase in accrued interest
receivable (3,564) (68,145) (137,214)
(Increase) decrease in prepaid
expenses 105,076 (298,621) (491,183)
(Increase) decrease in prepaid
corporate taxes (3,225) (54,121) 65,494
Increase (decrease) in corporate
taxes payable 157,108 166,000 (236,000)
Increase (decrease) in accrued
pension cost (7,028) (3,301) 5,768
Increase in accrued interest
payable 60,533 76,562 25,468
Increase (decrease) in accrued
expenses (90,193) 310,649 210,608

Total adjustments 442,993 (1,619,249) (2,365,852)
Net cash provided by (used in)
operating activities 1,354,804 (910,772) (2,227,095)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities,
available-for-sale (11,543,781) (9,042,458) (5,000,000)
Purchase of investment securities,
held-to-maturity (12,000,000) (11,714,219) (10,999,687)
Purchase of mortgage-backed securities,
available-for-sale (20,307,890)
Mortgage-backed security maturities and
principal repayments 1,980,089 991,525 864,783
Maturities of investment securities,
available-for-sale 8,720,000 1,000,000 3,000,000
Maturities of investment securities,
held-to-maturity 16,500,000 16,155,737 8,842,857
<PAGE H-69>
CASH FLOWS FROM INVESTING ACTIVITIES: (Continued)
Acquisition costs of, and proceeds
from the sale of, Federal Home Loan
Bank stock (12,300) (26,300) (32,600)
Increase in total loans receivable, net (11,698,839) (9,389,519) (988,164)
Purchase and improvement of real estate
for investment (500)
Proceeds from sale of real estate owned
net of improvements 211,878 140,921
(Increase) decrease in capitalized
conversion costs 155,292 (155,292)
Proceeds from sale of property &
equipment 220,464 5,300
Capital expenditures (35,575) (176,734) (613,361)

Net cash used in investing
activities (27,810,662) (12,357,260) (4,708,451)

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net $ 19,426,403 $ 8,159,731 $ 4,097,882
Change in securities purchased under
agreements to resell (346,703) 1,305,545 69,451
Net proceeds from stock offering 14,100,647
Proceeds received from merger with
PSB Mutual Holding Company 246,881
Proceeds from issuance of stock to
Management Recognition Plan 254,005
Dividends Paid (43,997)
Change in advances for borrowers'
taxes and insurance 96,728 68,941 (215,594)

Net cash provided by financing
activities 33,523,956 9,534,217 4,161,747

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 7,068,098 (3,733,815) (2,845,799)
Cash and cash equivalents, beginning
of year 27,888,650 31,622,465 34,468,264

CASH AND CASH EQUIVALENTS, END OF YEAR $ 34,956,748 $ 27,888,650 $31,662, 465

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest on deposits and borrowings $ 5,029,716 $ 4,457,084 $ 4,056,909

Income taxes $ 400,000 $ 280,000 $ 267,788

Noncash activities:
Loans transferred to real estate owned $ 443,330 $ -0- $ 79,156

Unrealized gain (loss)
on investment mortgage-backed
securities available-for-sale,
net of taxes $ 13,534 $ 59,677 $ (56,253)

</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE H-70>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year Ended
December 31,
1998 1997 1996

Net Income $911,811 $708,477 $138,757

Other Comprehensive Income,
net of tax:
Unrealized Gain (Loss),
Investments Available
for Sale 13,534 59,677 (56,253)

Other Comprehensive income 13,534 59,677 (56,253)

Comprehensive Income $925,345 $768,154 $ 82,504

The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE H-71>
PSB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

1. DESCRIPTION OF ORGANIZATION:

PSB Bancorp, Inc. (the "Holding Company") was organized
as Pennsylvania business corporation on October 3, 1997 at the
direction of Pennsylvania Savings Bank (the "Savings Bank") for
the purposes of becoming a holding company for the savings bank
upon 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 acquire or organize other operating
subsidiaries, although there are no current plans, arrangements
or understandings, written or oral, to do so.

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. (the "Holding Company") issued
1,610,732 shares of common stock, no par value, at a price of
$10.00 per share in a direct and syndicated offering.
Furthermore, based on an independent appraisal, existing
shareholders of Pennsylvania Savings Bank, other than the MHC,
exchanged their shares (579,390 shares) for 2.572374 shares of
PSB Bancorp, Inc. and the Mutual Holding Company merged with and
into the savings bank. The common stock of PSB Bancorp, Inc.
began trading on the Nasdaq National Market under the symbol
"PSBi" on July 17, 1998.

Pennsylvania Savings Bank, through its six branch
offices, makes residential and consumer loans to customers and
provides community banking services principally within,
Southeastern Pennsylvania and Southern New Jersey. Transnational
Mortgage Corporation, a wholly owned subsidiary, originates
residential loans. PSA Financial Corporation, a wholly owned
subsidiary, originates residential and consumer loans. PSA
Consumer Discount, a wholly owned subsidiary of PSA Financial,
originates consumer loans. All loan origination are to customers
principally within, but not limited to, the County of
Philadelphia, Pennsylvania. PSA Service Corporation, a wholly
owned subsidiary, processes all loans for Pennsylvania Savings
Bank and the other subsidiaries.

The Bank competes with other banking and financial
institutions in its primary markets. Commercial banks, savings
banks, savings and loan associations, mortgage bankers and
brokers, credit unions and money market funds actively compete
for deposits and loans in the Bank's market area. Such
institutions, as well as consumer finance, mutual funds,
insurance companies, and brokerage and investment banking firms,
<PAGE H-72> may be considered competitors of the Bank with
respect to one or more of the services it renders.

The Bank is subject to regulations of certain state and
federal agencies and, accordingly, it is periodically examined by
those regulatory authorities. As a consequence of the extensive
regulation of commercial banking activities, the Bank's business
is particularly susceptible to being affected by state and
federal legislation and regulations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation:

The consolidated financial statements for the periods
prior to July 17, 1998 are those of Pennsylvania Savings Bank
(the "Savings Bank:) and its wholly-owned subsidiaries, PSA
Service Corporation, Transnational Mortgage Corporation 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 for the period subsequent to July 17, 1998 also
include the accounts of the Holding Company 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 balances
and transactions have been eliminated.

Year 2000 Issue:

Year 2000 issues result from the inability of many
computer programs or computerized equipment to accurately
calculate, store or use a date after December 31, 1999 (the "Y2K
Issue"). The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is interpreted as the
year 1900. Correctly identifying the year 2000 as a leap year
may also be an issue. These misidentifications could result in a
system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability
to process transactions, track important customer account
information, provide convenient access to this information or
engage in normal business operations.

The Holding Company and savings bank's Board of
Directors and management have addressed the 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
<PAGE H-73> such system, a 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 Bank's 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 December 31, 1998, Intrieve has
completed its "awareness," "assessment" and "renovation" and
"validation" phases. In October 1998, Intrieve conducted
internal testing of its data processing system. Results of these
tests were distributed to their customers in November 1998. In
March 1999, Intrieve will conduct additional internal testing.
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 has completed much of its Y2K
testing but will continue testing and renovation throughout 1999.
The savings bank will be obligated to incur only the hardware
costs associated with implementing the charges required by
Intrieve; however, hardware costs are not expected to be
material.

The savings Bank expects that all other outside vendors
will be Y2K compliant by March 31, 1999. If any vendor is not
compliant by this date the savings bank will consider contracting
with alternative vendors.

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 has developed 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
could be re-established. The savings bank does not anticipate
the potential use of short-term manual systems would have a
material impact upon the operations of the savings bank.
Intrieve, Inc. has also developed their own contingency plan.

To the extent the savings bank's systems are not fully
Year 2000 compliant, there can be no assurance that potential
system interruptions would not have a materially adverse effect
on the Bank's business, financial condition, results of
operations and business prospects. Further, any Year 2000
failure on the part of the savings bank customers or vendors
could result in additional expense or loss to the savings bank.
<PAGE H-74>

Reporting Comprehensive Income - New Pronouncement:

In 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net
income or shareholders' equity. SFAS No. 130 requires the
Company's unrealized holding gains and losses to be included in
other comprehensive income. Prior year's financial statements
have been reclassified to conform to these requirements.

Cash and Cash Equivalents:

Cash and cash equivalents include unrestricted cash on
hand, demand deposits maintained in depository institutions and
other readily convertible investments with original contractual
terms to maturity of three months or less.

Investment in Debt and Marketable Equity Securities:

Gains and losses realized on sales of investment
securities represent differences between net proceeds and
carrying values determined by the specific identification method.
Premiums paid and discounts received at the time of purchase are
deferred and amortized over the remaining life of the securities
using a method which approximates a level yield. Mortgage-backed
security amortization rates are periodically adjusted to reflect
changes in the prepayment speeds of the underlying mortgages.

Loans and Allowance for Loan Losses:

Loans that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are
stated at the amount of unpaid principal and reduced by an
allowance for loan losses. Interest on loans is accrued and
credited to operations based upon the principal amounts
outstanding. Loan origination fees and discounts on mortgage
loans are amortized to income using the interest method over the
remaining period to contractual maturity, adjusted for actual
prepayments. The allowance for loan losses is established
through a provision for possible loan losses charged to expenses.
Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes
will be adequate to absorb possible loan losses on existing loans
that may become uncollectible based on evaluations of the
collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans and current economic
conditions that may affect the borrower's ability to pay.
<PAGE H-75>

Effective January 1, 1997, interest is discontinued on
all loans that are contractually past due 3 months. Prior to
January 1, 1997, interest was discontinued on residential loans
that were contractually past due 12 months. unless the value of
the mortgaged property well exceeded the loan balance in which
case interest continued to accrue until the loan balance plus
accrued interest equalled the fair market value of the property
securing the loan. The bank has recorded interest income, net of
taxes, of $80,341 ended December 31, 1996 on loans that were
contractually past due for more than three months. The effect on
net income per share would have been a reduction of $.06 for the
year ended December 31, 1996 if this interest had not been
accrued. Interest was discontinued on commercial, consumer and
unsecured loans that were contractually past due 3 months. No
adjustment is made for interest previously accrued. Income is
subsequently recognized only to the extent that cash payments are
received, or until in management's judgment, the borrower's
ability to make periodic interest and principal payments is back
to normal, in which case the loan is returned to accrual status.

Loan Origination and Commitment Fees:

Loan fees and certain direct loan origination costs are
deferred and the net fee or cost is recognized as an adjustment
of the loan yield over the contractual life of the loan using the
interest method. When a loan is sold, unamortized fees are
recognized as income. Other loan fees and charges representing
service costs for the prepayment of loans, for delinquent
payments or for miscellaneous loan services are recognized when
collected. Commitment fees and costs relating to commitments
whose likelihood of exercise is remote are recognized over the
commitment period on a straight-line basis. If the commitment is
subsequently exercised during the commitment period, the
remaining unamortized commitment fee at the time of exercise is
recognized over the life of the loan as an adjustment of yield.

Loans Held for Sale:

Included in loans held for sale are any loans which the
Bank believes may be involved in interest rate risk management or
other decisions which might reasonably result in such loans not
being held until maturity. Any such conforming loans are
transferred to loans held for sale and valued at the lower of
aggregate cost or market, including considering of forward
commitments to sell, until ultimate disposition.

Effective January 1, 1997, the savings bank adopted the
provision of Statement of Financial Accounting Standards No. 125
- - "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). The adoption
of SFAS No. 125 had no significant impact on the earnings or
financial condition of the Bank. The Bank carries any retained
<PAGE H-76> interest in a transferred asset on the statement of
condition as a servicing asset. The servicing assets represent
the fair value of the servicing contracts associated with
purchase or origination and subsequent securitization of the
mortgage loans. Servicing assets are amortized in proportion to
and over the period of estimated net servicing income. Servicing
assets are evaluated periodically for impairment based on their
fair value and impairment, if any, is recognized through a
valuation allowance and a charge to operations.

Real Estate Owned:

Real estate owned consists of properties acquired
through foreclosure. Real estate owned is stated at the lower of
cost or estimated fair value minus estimated costs to sell.
Write-downs of real estate owned which occur after the initial
transfer from the loan portfolio are recorded as expenses of real
estate owned. Costs of holding foreclosed property are charged
to expense in the current period, except for significant property
improvements which are capitalized to the extent that carrying
value does not exceed estimated fair value. Real estate held for
investment is carried at the lower of cost, including cost of
improvements and amenities incurred subsequent to acquisition, or
net realizable value.

Income Taxes:

The savings bank records deferred tax assets and
liabilities for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.

Office Properties and Equipment:

Land is carried at cost. Office properties and
equipment are recorded at cost less accumulated depreciation.
Depreciation is computed based on cost using the straight-line
method over estimated useful lives of 25-50 years for buildings,
10-25 years for land improvements and 3-10 years for office
equipment. Maintenance and repair of property and equipment are
charged to operations. Major improvements are capitalized.

Excess of Acquisition Cost Over Fair Value of Assets
Acquired:

Excess of acquisition cost over fair value of assets
acquired is recognized at cost, net of amortization. The asset
is being amortized over 19 years using the straight-line method.
<PAGE H-77>
Financial Statement Presentation:

Certain items in prior year financial statements have
been reclassified to conform to the 1998 presentation.

Advertising:

Advertising costs are charged to operations when
incurred and amounted to $111,111, $81,400 and $62,121 for the
years ended December 31, 1998, 1997 and 1996, respectively.

Use of Estimates:

The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

The principal estimate that is susceptible to
significant change in the near term relates to the allowance for
loan losses. The evaluation of the adequacy of the allowance for
loan losses includes an analysis of the individual loans and
overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and
market condition, the capability of specific borrowers to pay
specific loan obligations, as well as current loan collateral
values. However, actual losses on specific loans, which also are
encompassed in the analysis, may vary from estimated losses.

Per Share Information:

Earnings per share have been calculated based on the
weighted average common shares outstanding for the respective
periods less the uncommitted ESOP shares. The number of shares
used in the computation of earnings per share for the years ended
December 31, 1998, 1997 and 1996 was 2,956,851, 1,165,105 and
1,152,328 for basic earnings per share, and 2,988,037, 1,179,678
and 1,152,328 for diluted earnings per share, respectively.
Earnings per share for the year ended December 31, 1998 reflect
the shares issued and outstanding due to the Conversion and
Reorganization effective July 17, 1998. As a result, earnings
per share are not comparable to prior years.

In February 1997, the FASB issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 establishes standards for
computing and presenting earnings per share (EPS) and applies to
entities with publicly held common stock or potential common
stock. This statement simplifies the standards for computing EPS
previously found in Accounting Principles Board (APB) Opinion
No. 15, "Earnings per share," and makes them comparable to
international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and
<PAGE H-78> requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.

Cash deposited in Financial Institutions:

The Bank maintains cash balances at other financial
institutions in the Philadelphia regional area. Accounts at
these financial institutions are insured by the Federal Deposit
Insurance Corporation up to $100,000. In the normal course of
business, the Bank may have deposits that exceed the insured
balance.

3. INVESTMENTS AND MORTGAGE-BACKED SECURITIES:

The following is a summary of the Bank's investment in
available-for-sale and held-to-maturity securities:
<TABLE>
<CAPTION>
Available-for-Sale
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Investment Securities:

Equity:

Investment in mutual
funds $ 2,354,210 $ (1,242) $ 2,352,968

Debt:

FNMA 3,500,000 11,300 3,511,300
Municipal Tax-exempt 3,543,782 3,543,782
SLMA 1,000,000 1,100 1,001,100
FHLB Notes 6,497,991 209 6,498,200

14,541,773 12,609 14,554,382

16,895,983 12,609 (1,242) 16,907,350

<CAPTION>
Available-for-Sale
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Mortgage-backed Securities:

FNMA $11,884,026 $ - $ (5,963) $11,878,063
GNMA 10,195,390 10,195,390

22,079,416 (5,963) 22,073,453
Total Available-for-
Sale Securities 38,975,399 12,609 (7,205) 38,980,803

<CAPTION>
Held-to-Maturity
December 31, 1998
<PAGE H-79>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Investment Securities:

Debt:

FNMA $ 1,000,000 $ 1,100 $ - $ 1,001,100
FHLMC 2,996,118 8,382 3,004,500

3,996,118 9,482 4,005,600

Mortgage-backed Securities:

GNMA 1,269,163 73,583 1,342,746
FHLMC 57,574 4,433 62,007

1,326,737 78,016 1,404,753

Total Held-to-Maturity
Securities 5,322,855 87,498 5,410,353

TOTAL INVESTMENTS
AND MORTGAGE-
BACKED
SECURITIES $44,298,254 $100,107 $ (7,205) $44,391,156

</TABLE>

The following is a summary of the Bank's
investment in available-for-sale and held-to-maturity
securities:

<TABLE>
<CAPTION>
Available-for-Sale
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Investment Securities:

Equity:

Investment in mutual
funds $ 2,354,210 $ 11,884 $ - $ 2,366,094

Debt:

FNMA 998,186 12,876 1,011,062
Federal Farm Credit 2,000,000 11,642 2,011,642
SLMA 1,000,000 (5,843) 994,157
FHLB Notes 7,995,161 23,272 8,018,433

11,993,347 47,790 (5,843) 12,035,294

14,347,557 59,674 (5,843) 14,401,388

<CAPTION>
Available-for-Sale <PAGE H-80>
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Mortgage-backed Securities:

FNMA $ 2,227,373 $ - $(64,963) $ 2,162,410
FHLMC 777,413 (6,019) 771,394
3,004,786 (70,982) 2,933,804
Total Available-for-
Sale Securities 17,352,343 59,674 (76,825) 17,335,192

<CAPTION>
Held-to-Maturity
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Investment Securities:

Debt:
FNMA $ 1,000,000 $ 7,306 $ - $ 1,007,306
FHLB Notes 7,219,223 8,110 7,227,333

8,219,223 15,416 8,234,639

Mortgage-backed Securities:

GNMA 1,979,474 105,576 2,085,050
FHLMC 88,585 8,687 97,272

2,068,059 114,263 2,182,322
Total Held-to-Maturity
Securities 10,287,282 129,679 10,416,961

TOTAL INVESTMENTS
AND MORTGAGE-
BACKED
SECURITIES $27,639,625 $189,353 $ (76,825) $27,752,153

</TABLE>

Assets, principally securities, carried at
approximately $2,495,030 and $2,841,107 at December 31, 1998 and
1997, respectively were pledged to secure deposits as required or
permitted by law.

The amortized cost and estimated market values of
securities at December 31, 1998 and 1997 by contractual
maturities, are as follows:

<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
December 31, 1998:
Due after one year through five years $ 7,996,456 $8,006,200
Due after five years through fifteen years 6,997,653 7,010,000 <PAGE H-
81>
Due after fifteen years 3,543,781 3,543,782
18,537,890 18,559,982
Mutual Funds 2,354,210 2,352,968
Mortgage-backed securities 23,406,154 23,478,206

$44,298,254 $44,391,156
December 31, 1997:

Due less than one year $18,214,444 $18,249,608
Due after one year through five years 1,998,125 2,020,325
20,212,570 20,269,933
Mutual Funds 2,354,210 2,366,094
Mortgage-backed securities 5,072,845 5,116,126

$27,639,625 $27,752,153

</TABLE>

Proceeds from maturities of investment securities
available-for-sale during the years ended December 31, 1998,
1997 and 1996 totaled $9,000,000 and $1,000,000 and $3,000,000,
respectively. The proceeds for all periods were the result of
security call options which were exercised and no gains or losses
were realized on those sales.

4. LOANS RECEIVABLE:

Loans receivable consist of the following:

December 31,
1998 1997
Real Estate Loans:
One-to-four family $49,796,287 $44,940,010
Five or more family residence 1,575,767 702,055
Construction loans 3,286,280 2,597,061
Nonresidential 14,722,269 11,420,738
69,380,603 59,659,864
Consumer loans 1,167,376 1,201,351
Commercial loans 3,073,768 1,907,393
73,621,747 62,768,608
Less:
Unearned fees and discounts (430,338) (477,979)
Undisbursed loan proceeds (7,351) (137,677)
Allowance for loan losses (303,898) (237,884)

$72,880,160 $61,915,068

Loans receivable at December 31, 1998 and 1997 includes
$64,650,536 and $55,289,037 of fixed rate loans and $8,971,211
and $7,479,571 of adjustable rate loans, respectively.
<PAGE H-82>
A summary of loan maturities at December 31, 1998 is as
follows:

Multi-Family
and Consumer
Commercial and
One to Four Real Construc- Commercial Total
Family Estate tion Business Loans
<S> <C> <C> <C> <C> <C>
Amounts due:
Non-accrual $ 1,238,907 $ 369,863 $ - $ - $ 1,608,770

Within one year 1,738,970 1,816,841 3,286,280 3,360,516 10,202,607

After one year:
1 to 3 years 578,375 3,260,900 309,234 4,148,509
3 to 5 years 2,268,930 5,877,093 347,664 8,493,687
5 to 10 years 5,287,964 3,201,033 223,730 8,712,727
Over 10 years 38,683,141 1,772,306 40,455,447

Total due after
one year 46,818,410 14,111,332 880,628 61,810,370

TOTAL AMOUNTS DUE $49,796,287 $16,298,036 $3,286,280 $4,241,144 $73,621,747

</TABLE>

A summary of changes in the allowance for loan losses
is as follows:

<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
BALANCE, BEGINNING OF YEAR $237,884 $206,884 $207,589
Provision charged to operation 283,066 60,000 132,633
Recoveries of loans previously
charged-off 53,200
Charged-off (270,252) (29,000) (133,338)

BALANCE, END OF YEAR $303,898 $237,884 $206,884

</TABLE>

The provision for loan losses charged to expense is
based upon past loan and loss experience and an evaluation of
potential losses in the current loan portfolio, including the
evaluation of impaired loans under SFAS Nos. 114 and 118. A loan
is considered to be impaired when, based upon current information
and events, it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the
loan. As of December 31, 1998 and 1997, 100% of the impaired
loan balance was measured for impairment based on the fair value
of the loans' collateral. Impairment losses are included in the
provision for loan losses. SFAS Nos. 114 and 118 do not apply to
large groups of smaller balance homogeneous loans that are
<PAGE H-83> collectively evaluated for impairment, except for
those loans restructured under a trouble debt restructuring.
Loans collectively evaluated for impairment include consumer
loans and residential real estate loans. At December 31, 1998,
the Bank's impaired loans consisted of two commercial real estate
loans with a total recorded balance of $325,537 for which
specific allowances of $16,227 has been established. At December
31, 1997, the Bank's impaired loans consisted of two commercial
real estate loans with a total recorded balance of $321,052 for
which specific allowances of $16,053 has been established. The
average investment in impaired loans for the year ended December
31, 1998 and 1997 was $339,946 and $332,507, respectively. At
December 31, 1996 and for the year then ended, the Bank's
impaired loans consisted of smaller balance residential mortgage
loans.

Loans on which the accrual of interest has been
discontinued amounted to $1,608,770, and $1,893,712 at December
31, 1998 and 1997, respectively. If interest on those loans had
been accrued, accrued interest would have increased by $41,019
and $49,696 at December 31, 1998 and 1997, respectively.

Certain directors and officers of the Bank have loans
with the Bank. Such loans were made in the ordinary course of
business and do not represent more than a normal risk of
collection. Loans to officers and directors amounted to
$1,571,832 and $1,177,541 at December 31, 1998 and 1997,
respectively. During the years ended December 31, 1998 and 1997
loans of $668,495 and $1,045,000, respectively, were disbursed to
executive officers and trustees, while principal repayments of
$274,205 and $191,637 were received in those years, respectively.

5. LOANS HELD FOR SALE:

Loans held for sale are as follows:
<TABLE>
<CAPTION>

December 31, 1998
Gross un- Gross un- Fair
realized realized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Residential mortgage loans $6,938,160 $ - $ - $6,938,160

<CAPTION>
December 31, 1997
Gross un- Gross un- Fair
realized realized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Residential mortgage loans $6,574,585 $ - $ - $6,574,585

</TABLE>
<PAGE H-84>
6. ACCRUED INTEREST RECEIVABLE:

A summary of accrued interest receivable is as follows:

December 31,
1998 1997
Loans $ 748,325 $ 687,128
FHLB Overnight 181,773 105,533
Mortgage-backed securities 128,150 28,571
Investment securities 230,418 463,870
$1,288,666 $1,285,102

7. OFFICE PROPERTIES AND EQUIPMENT:

Office properties and equipment are summarized by major
classification as follows:

December 31,
1998 1997
Land, buildings and improvements $ 1,388,068 $ 1,856,499
Furniture, fixtures and equipment 1,358,962 1,329,386
2,747,030 3,185,885
Less accumulated depreciation $(1,756,959) (1,856,740)

$ 990,071 $ 1,329,145

Depreciation expense was $144,740, $121,037, and
$89,943 for the years ended December 31, 1998, 1997 and 1996,
respectively.

8. REAL ESTATE OWNED - ACQUIRED THROUGH SETTLEMENT OF LOANS:

Real estate owned consists of the following:

December 31,
1998 1997
Real estate acquired through
settlement of loans $ 629,263 $ 456,528

9. FEDERAL HOME LOAN BANK STOCK:

The Bank is a member of the Federal Home Loan Bank
System. As a member, the Bank maintains an investment in the
capital stock of the Federal Home Loan Bank of Pittsburgh in an
amount not less than 1% of its outstanding home loans or 1/20 of
its outstanding notes payable, if any, to the Federal Home Loan
Bank of Pittsburgh, whichever is greater, as calculated
December 31 of each year.

10. DEPOSITS:
<PAGE H-85>
Deposits at December 31, 1998 and 1997 are summarized
as follows:

<TABLE>
<CAPTION>
Weighted Average 1998 1997
Interest Rate Amount % Amount %
<S> <C> <C> <C> <C> <C>
Types of Deposits:

Noninterest bearing
accounts:
1998 $ 8,835,928 6.90
1997 $ 6,454,066 5.93%
Passbook accounts:
1998 3.00% 27,311,565 21.31
1997 3.00 26,146,377 24.05
Statement savings
accounts:
1998 2.50 276,940 .22
1997 2.49 63,088 .06
Club accounts:
1998 2.00 183,060 .14
1997 2.00 191,810 .18
Now accounts:
1998 .38 5,360,948 4.18
1997 .90 5,373,905 4.94
Money Market:
1998 3.53 8,705,147 6.79
1997 3.57 7,201,284 6.62

50,673,588 39.54 45,430,530 41.78
Certificate of deposit:
Less than 4.00%
1998 3.00 296,372 .23
1997 3.00 293,168 .27
4.00 - 5.00%
1998 4.58 1,644,136 1.28
1997 4.40 1,188,515 1.09
5.01 - 6.00%
1998 5.42 74,460,160 58.10
1997 5.53 60,737,995 55.86
6.01 - 7.00%
1998 6.64 1,051,066 .82
1997 6.77 1,050,766 .97
7.01 - 8.00%
1998 7.85 35,188 .03
1997 7.85 33,133 .03

Total of certificates
of deposit 77,486,922 60.46 63,303,577 58.22

TOTAL DEPOSITS $128,160,510 100.00% $108,734,107 100.00%
</TABLE>

Certificates of deposit have scheduled maturities as
follows:

December 31,
1998 1997

Within one year $65,674,320 $45,450,499
One year through two years 8,160,362 14,167,969
<PAGE H-86>
Two years through three years 1,196,369 1,571,762
Three years through five years 2,043,473 1,707,871
Five years through ten years 412,398 405,476
Over ten years

$77,486,922 $63,303,577

Interest expense on deposits is comprised of the
following:

<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
NOW Accounts $ 78,191 $ 90,827 $ 93,641
Savings Accounts 822,550 786,897 829,578
Money Market Accounts 295,089 258,951 199,467
Certificates of Deposit 3,885,914 3,424,647 2,977,210
5,081,744 4,561,322 4,099,896
Early Withdrawal Penalties (16,637) (27,676) (17,519)

$5,065,107 $4,533,646 $ 4,082,377

</TABLE>

The aggregate amount of certificates of deposit
accounts with a minimum denomination of $100,000 was
approximately $13,992,726 and $10,791,394 at December 31, 1998
and 1997, respectively.

The aggregate amount of demand deposits that have been
re-classified as loan balances at December 31, 1998 and 1997 was
$41,735 and $88,129,respectively.

11. INCOME TAX MATTERS:

The Bank and its wholly owned subsidiary file a
consolidated federal income tax return and separate state and
local income tax returns on a calendar year end basis.

The provision for income taxes consists of the
following:

Year Ended
December 31,

1998 1997 1996
Currently payable:
Federal $453,108 $292,000 $122,000
State 12,000 16,000 20,000
465,108 308,000 142,000
Deferred 36,920 36,669 59,465

TOTAL $502,028 $344,669 $201,465
<PAGE H-87>

The reconciliation between the actual provision for
federal and state income taxes and the amount of income taxes
which would have been provided at statutory rates is as follows:

Year Ended
December 31,
1998 1997 1996

Expected Income Tax Expense
at Federal tax rate $480,705 $358,070 $115,675
Travel and Entertainment 20,083 15,937 25,162
State Tax net of Federal benefit 7,920 10,560 13,200
Other differences, net (6,680) (39,898) (47,428)

$502,028 $344,669 $201,465

Deferred taxes are included in the accompanying
statements of financial condition as of December 31, 1998 and
1997 for the estimated future tax effects of differences between
the financial statement and federal income tax bases of assets
and liabilities given the provisions of currently enacted tax
laws.

The net deferred tax asset (liability) consist of the
following components:

December 31,
1998 1997
Deferred Tax Asset:
Unrealized loss on available-for-
sale securities $ - $ 6,860
Deferred income 79,898 99,873
79,898 106,733
Deferred Tax Liability:
Unrealized gain on
available-for-sale securities (2,162)
Allowance for Loan Losses (152,754) (140,754)
Property and equipment (22,082) (17,137)

NET DEFERRED TAX LIABILITY $ (97,100) $ (51,158)

Prior to January 1, 1996, the Bank was allowed a
special bad debt deduction for tax purposes based on a percentage
of taxable income (8%) or on specified experience formulas,
subject to certain limitations based upon aggregate loan balances
at the end of the year. If the above amounts deducted were used
for purposes other than for loan losses, such as in a
distribution in liquidation, or if the Bank would cease to be a
qualified thrift lender under the tax law, or otherwise, the
amounts deducted would be subject to federal income tax at the
then current corporate tax rate.
<PAGE H-88>
The special bad debt method of accounting for bad debts
for tax purposes utilized by qualified thrift institutions was
repealed effective for tax years beginning January 1, 1996.
Thrift institutions must now use either the direct write-off or
experience method of accounting for bad debts and must treat this
change as a change in accounting method. Any adjustment that is
required to be taken into account because of the change will be
determined solely with respect to the applicable excess reserves
of the thrift which will be taken into income over a six-year
period for tax purposes. Pennsylvania Savings Bank qualifies as
a small bank. The Banks applicable excess reserves will be the
excess of the balance of its reserves as of the close of its last
tax year beginning before January 1, 1996 over the greater of (a)
its pre-1988 reserves, or (b) what the thrift's reserves would
have been at the close of its last tax year beginning before
January 1, 1996, had the thrift used the experience method. If a
Bank meets the residential loan requirement, the income to be
recognized may be deferred. A Bank meets the residential loan
requirement if, for the tax year, the principal amount of
residential loans made by the Bank during the year is not less
than its base amount. The "base amount" generally is the average
of the principal amounts of the residential loans made by the
Bank during the six most recent tax years beginning before
January 1, 1996. For the year ended December 31, 1996, the Bank
meets the residential loan requirement and has elected to
deferred recognition of the income.

Prior to January 1, 1988, the Bank was not required and
did not record deferred income taxes on the difference between
the allowance for loan losses reported for financial reporting
purposes and the special bad debt deduction for income tax
purposes.

Retained earnings at December 31, 1998 and 1997
includes $2,450,099 for which no deferred federal income tax
liability has been recognized.

Subsequent to December 31, 1987, the base year, and
prior to January 1, 1996, the Bank was required to record a
deferred tax asset related to the allowance for loan losses
reported for financial reporting purposes and a deferred tax
liability for special bad debt deduction. However, if it is more
likely than not that some portion or all of the deferred tax
asset will not be realized, the deferred tax asset should be
reduced by a valuation allowance. The valuation allowance should
be sufficient to reduce the deferred tax asset to the amount that
is more likely than not to be realized.

As required by SFAS No. 109 "Accounting for Income
Taxes," the Bank determined that no valuation reserve was
necessary for the net deferred tax asset since it is more likely
than not that the deferred tax asset will be realized through
carryforwards to taxable income in future years and future
reversals of existing temporary differences. The Bank will
<PAGE H-89> continue to review the criteria related to the
recognition of deferred tax assets on a quarterly basis.

The Bank has made additions to the special bad debt
deduction allowance since December 31, 1987 and, therefore, a
deferred tax liability for the special bad debt deduction has
been recorded in the amount of $152,754 and $140,754 for years
ended December 31, 1998 and 1997, respectively.

Deferred tax expense results from timing differences in
the recognition of revenue and expense for tax and financial
statement purposes. The sources of these differences are as
follows:

Year Ended
December 31,
1998 1997 1996

Bad debts $ 12,000 $(12,000) $ 31,035
Depreciation 4,945 28,694 8,455
Deferred loan fees 19,975 19,975 19,975

DEFERRED TAX EXPENSE $ 36,920 $36,669 $ 59,465

12. DIVIDENDS PAID:

On June 30, 1996, the Bank paid a cash dividend of
$.0375 per share to shareholders of record as of June 15, 1996.
This dividend was paid from accumulated net earnings as of
June 30, 1996. Subsequently, in September 1996, the Savings
Association Insurance Fund (SAIF) assessed and collected from the
Bank a one time special assessment of $567,000. This assessment
eliminated the Bank's prior earnings and resulted in the bank
reporting both significantly lower net income for the year ended
December 31, 1996 and an accumulated deficit as of December 31,
1996.

13. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF
1991 (FDICIA):

FDICIA was signed into law on December 19, 1991 and
includes significant changes to the legal and regulatory
environment for insured depository institutions, including
reductions in insurance coverage for certain kinds of deposits,
increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and
new regulations concerning internal controls, accounting and
operations.

The regulations require institutions to have a minimum
4% leverage capital ratio, a minimum 4% tier 1 risk-based capital
ratio and a minimum 8% total risk-based capital ratio to be
considered "adequately capitalized". An institution is deemed to
be "critically undercapitalized" if it has a tangible equity
ratio of 2% or less. <PAGE H-90>

The following table sets out the Bank's various
regulatory capital categories:

<TABLE>
<CAPTION>
December 31,
1998
Required Actual
(Dollars in thousands) % Amount % Amount Excess
<S> <C> <C> <C> <C> <C>
Tangible equity ratio >2.0% $2,681 22.67% $30,382 $27,701
Leverage capital ratio 6.0 8,042 22.67 30,382 22,340
Total risk-based
capital ratio 8.0 5,720 42.89 30,667 24,947
Tier 1 risk-based
capital ratio 4.0 2,860 42.49 30,382 27,522

<CAPTION>
December 31,
1997
Required Actual
% Amount % Amount Excess
<S> <C> <C> <C> <C> <C>
Tangible equity ratio >2.0% $2,246 13.36% $15,001 $12,755
Leverage capital ratio 6.0 6,739 13.36 15,001 8,262
Total risk-based
capital ratio 8.0 4,865 25.06 15,239 10,374
Tier 1 risk-based
capital ratio 4.0 2,432 24.67 15,001 12,569

</TABLE>

14. DIFFERENCES BETWEEN FEDERAL DEPOSITORY INSURANCE CORPORATION
CALL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS:

An adjustment has been made to the accounts which is
reflected in the consolidated financial statements but is not
reflected in the Bank's December Federal Depository Insurance
Corporation Call Reports. The adjustment and its effect on
retained earnings are as follows:

December 31,
1998 1997

Retained earnings per the Bank's
December Federal Depository
Insurance Corporation Call Report $1,765,453 $682,271
PSB Bancorp, Inc. Net Income for the
period ended December 31, 1998
not reflected on Call Report (61,017)
Increase in federal and
state income tax provision (117,601)
Adjustments made to financial
statement, subsequently
recorded by Bank (18,927)

RETAINED EARNINGS PER ACCOMPANYING
FINANCIAL STATEMENTS $1,704,436 $545,743
<PAGE H-91>

15. LEASE COMMITMENTS:

On October 12, 1995, the Bank signed a lease agreement
for office and branch space in center city Philadelphia. The
lease commenced on July 1, 1996 and extends for 11 years. Lease
expense for this lease for the years ended December 31, 1998,
1997 and 1996 was $281,698, $265,118 and $79,908, respectively.

The Bank was obligated under various other leases.
Lease expense for these leases for the year ended December 31,
1998, 1997 and 1996 was $34,567, $37,203, and $37,437,
respectively.

Minimum annual rentals are as follows:

1998 $380,179
1999 368,874
2000 367,796
2001 374,686
2002 385,465
Thereafter 1,375,945

16. RETIREMENT PLANS:

The Bank sponsors the following retirement plans:

A. Defined Benefit Pension Plan:

Covers employees who were at least 21 years of age,
with 12 months of service with the Bank and have accumulated
1,000 hours of service during the Plan year. The Plan calls for
benefits to be paid to eligible employees at retirement based
upon years of service with the Bank and compensation rates near
retirement. Contributions to the Plan reflect benefits attributed
to employees' service. Plan assets consist of common stock,
investment grade corporate bonds and U.S. Government obligations.
The Retirement Plan was "frozen" as of September 30, 1994 and
benefits no longer accrue thereunder. No new employees will be
eligible for participation.

The following table sets forth the Plan's required
disclosures with SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits."

1998 1997
Change in benefit obligation:
Benefit obligation at prior year end $643,774 $723,936
Service cost
Interest cost 48,252 47,172
Actuarial (gain) loss 21,256 ( 29,418)
Benefits paid ( 42,592) ( 97,916)

Benefit obligation at current year-end $670,690 $643,774

Change in plan assets: <PAGE H-92>
Fair value of plan assets at
prior year-end $739,135 $703,874
Actual return on plan assets 77,771 133,177
Employer contributions
Benefits paid ( 42,592) ( 97,916)

Fair value of plan assets at
current year-end $774,314 $739,195

Funded status $103,624 $ 95,361
Unrecognized actuarial gain ( 296,083) ( 299,351)
Unrecognized prior service cost ( 45,129) ( 46,800)
Unrecognized transition obligation
(asset) 98,773 104,947

Accrued benefit cost ($138,815) ($145,843)

Amount recognized in the statement of
financial position - accrued
benefit cost ($138,815) ($145,843)

Net pension cost included the following components:

December 31,
1998 1997 1996
<S> <C> <C> <C>

Service cost $ - $ - $ -
Interest cost 48,252 47,172 53,315
Expected return on plan assets ( 50,248) ( 48,274) ( 48,677)
Amortization of transition amount 6,174 6,174 6,174
Amortization of prior service cost ( 1,671) ( 1,671) ( 1,671)
Amortization of gain ( 9,535) ( 6,703) ( 3,373)

NET PERIODIC PENSION COST (CREDIT) ($ 7,028) ($ 3,302) ($ 5,768)

</TABLE>
The significant actuarial assumptions used in
calculating the above information is as follows:

December 31,
1998 1997 1996

Weighted average discount rate 7% 8% 8%

Weighted average rate of compensation N/A N/A N/A
Weighted average expected long-term
rate of return on Plan Assets 7% 8% 8%

Pension contributions were $-0- and $-0- and $51,102
for the years ended December 31, 1998, 1997 and 1996,
respectively.

The following three employee benefit plans cover all
eligible employees, those with two years of service, (a year of
<PAGE H-93> service defined as having at least 1,000 hours of
service) and being at least 21 years of age on the first day of
the plan year.

B. Cash or Deferred Profit-Sharing Plan:

Contributions to this Plan are determined by the
participant's written election to reduce their compensation by no
more than 15% of eligible compensation and also not to exceed
code section 401(k) and other limitations as set by the plan
documents.

The Bank may also make discretionary contributions made
out of net income.

Bank contributions to the Plan for the years ended
December 31, 1998, 1997 AND 1996 amounted to $-0-, $-0- and
$18,190, respectively.

C. Profit-Sharing Plan:

Contributions to the Plan are determined annually by
the Board of Trustees based upon net income. Allocation of the
contributions to participants is based upon annual compensation.

Contributions to the Plan for the years ended
December 31, 1998, 1997 and 1996 were $-0- and $-0 and $74,984,
respectively.

D. Employee Stock Ownership Plan ("ESOP"):

Effective October 23, 1995, the Bank has established an
ESOP for eligible employees. The ESOP is a tax-qualified plan
subject to the requirements of ERISA and the Code. Employees
with a 12-month period of employment with the Bank during which
they worked at least 1,000 hours and who have attained age 21 are
eligible to participate. The ESOP borrowed funds from an
unrelated third party lender and used the funds to purchase
42,780 shares of common stock. Due to the Conversion and
Reorganization, the savings bank common stock held by the ESOP
was converted into 110,046 shares of PSB Bancorp, Inc. Stock.
The ESOP borrowed $1,288,540 from the Holding Company to purchase
an additional 128,854 shares of PSB Bancorp, Inc. Stock.

The common stock purchased by the ESOP serves as
collateral for the ESOP loans. The loans will be repaid
principally from the Bank's contributions to the ESOP over a
period of up to seven years. Shares purchased by the ESOP will
be held in a suspense account for allocation among participants
as the loans are repaid. Shares released from the suspense
account in an amount proportional to the repayment of the ESOP
loans will be allocated among participants on the basis of
compensation in the year of allocation, up to an annual adjusted
maximum level of compensation (currently $150,000).
<PAGE H-94>
Benefits under the ESOP generally become 100% vested
after the third year of service or upon normal retirement (as
defined in the ESOP), disability or death of the participant. If
a participant terminates employment for any other reason prior to
fully vesting, his nonvested account balance will be forfeited.
Forfeitures will be reallocated among remaining participating
employees in the same proportion as contributions. Benefits may
be payable upon death, retirement, early retirement disability or
separation from service. The Bank's contributions to the ESOP
will not be fixed, so benefits payable under the ESOP cannot be
estimated. The Bank's contributions to the ESOP recorded as
compensation expense for the years ended December 31, 1998, 1997
and 1996 were $147,290, $91,736 and $97,228, respectively.

Information with respect to the ESOP is as follows:

December 31, September 30,
1998 1997 1996

Allocated shares 238,900 42,780 42,780

Committed shares 57,782 13,245 7,132

Uncommitted shares 181,118 29,535 35,648

Fair value of uncommitted
ESOP shares $1,381,025 $856,515 $454,512

Interest expense incurred $25,142 $30,607 $6,099

Dividends received N/A N/A $1,604

E. Management Recognition Plan:

The Bank's Board of Trustees has also adopted a
Management Recognition Plan (the "MRP") effective October 20,
1995, as a method of providing certain senior executive officers
of the Bank with a propriety interest in the Bank, to such
officers for their service and to encourage such persons to
remain in the service of the Bank. Benefits may be granted at
the sole discretion of the Compensation Committee of the Bank's
Board of Trustees. The MRP is managed by trustees who are
directors of the Bank and who have responsibility to invest all
funds contributed by the Bank to the trust created for the MRP.
The Bank contributed $254,005 to the MRP trust in 1996 which
enabled the MRP to purchase 21,390 shares of common stock. Due
to the Conversion and Reorganization, the savings bank common
stock held by the MRP was converted into 55,023 shares of PSB
Bancorp, Inc. Stock. Unless the Compensation Committee of the
Board specifies otherwise, shares granted to MRP participants
will be in the form of restricted stock which vest over a five-
year period at the rate of 20% of such shares per year.
Compensation expense in the amount of the fair market value of
the common stock at the date of the grant to the employee will be
recognized pro rata over the five years during which the shares
<PAGE H-95> are vested. As of December 31, 1998 55,023 shares
have been allocated to individual employees. For the years ended
December 31, 1998, 1997 and 1996, the Bank recorded compensation
expense of $50,799, $50,801 and $18,624, respectively for the
Management Recognition Plan.

F. Stock Option Plan:

The Bank's Board of Trustees adopted the Pennsylvania
Savings Bank Stock Option Plan (the "Option Plan") approved by a
majority of shareholders on April 30, 1996. The Option Plan
provides for the grant of (i) options to purchase common stock
intended to qualify as incentive stock options ("Incentive Stock
Option") under Section 422 of the Code, and (ii) options that do
not so qualify ("Nonqualified Stock Options"). Pursuant to the
Option Plan, up to 53,475 shares of common stock (subject to
adjustment) will be reserved for issuance by the Bank upon
exercise of stock options to be granted to certain officers and
employees of the Bank from time to time under the Option Plan.
The purpose of the Option Plan is to give certain officers and
employees an opportunity to acquire common stock and thereby help
the Bank attract, retain and motivate key employees and officers.

At April 30, 1996, 29,409 shares of common stock were
granted at the market price of $11.87 and on December 31, 1996,
6,450 were granted at the market price of $13.25. No options
were granted in 1998 or 1997. The shares granted on April 30,
1996 and December 31, 1996 were converted to 75,651 and 16,592
shares of PSC Bancorp, Inc. Stock, respectively, due to the
Conversion and Reorganization.

If the bank had elected to adopt the accounting
provision of SFAS 123 then compensation cost would have reduced
net income and earnings per share by $241,232 and $.21 in 1996.

The weighted average fair value at date of grants for
options granted in 1996 were $6.59 for options granted at
April 30 and $7.35 for options granted at December 31, 1996. The
fair value of options at date of grant was estimated using the
Black-Scholes Option Pricing Model with the following
assumptions: expected life 10 years, interest rate 8.00%,
volatility 17.00% and dividend yield of 0.00%. All options
expire in 2006. All of the options remained outstanding at
December 31, 1998 and 1997.

17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:

The Bank is a party to financial instruments with off-
balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit generally consisting of
residential purchase money mortgage commitments, or the unfunded
portion of construction loans in process and standby letter of
credit.
<PAGE H-96>
Commitments to extend credit are agreements to lend to
a customer as long as there is no violation of any condition
established in the loan agreement. These commitments are
comprised of the undisbursed portion of construction loans and
residential loan origination. The Bank's exposure to credit loss
from nonperformance by the other party to the financial
instruments for commitments to extend credit is represented by
the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Generally, collateral, usually in the form of real estate, is
required to support financial instruments with credit risk.

18. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK:

The Bank grants mortgage, consumer and construction
loans primarily to customers in Southeastern Pennsylvania and
Southern New Jersey. Although the Bank has a diversified loan
portfolio, a substantial portion of its customers' ability to
honor their contracts is dependent upon the local economy. The
Bank's net investment in loans is subject to a significant
concentration of credit risk given that the investment is
primarily within a specific geographic area.

As of December 31, 1998 and 1997, the Bank had a net
investment of $72,880,160 and $61,915,068, respectively, in loans
receivable. These loans possess an inherent credit risk given
the uncertainty regarding the borrower's compliance with the
terms of the loan agreement. To reduce credit risk, the loans
are secured by varying forms of collateral, including first
mortgages on real estate, liens on personal property, savings
accounts, etc. It is generally Bank policy to file liens on
titled property taken as collateral on loans. In the event of
default, the Bank's policy is to foreclose or repossess
collateral on which it has filed liens.

In the event that any borrower completely failed to
comply with the terms of the loan agreement and the related
collateral proved worthless, the Bank would incur a loss equal to
the loan balance.

19. COMMITMENTS:

In the normal course of business the Bank makes various
commitments and is exposed to certain contingent liabilities
which are not reflected in the accompanying financial statements.
These commitments and contingent liabilities include open-end
credit available. At December 31, 1998 and 1997, the Bank's
customers had unused lines of credit available of $1,478,807 and
$1,134,820, respectively.

Outstanding commitments to originate loans are as
follows:

December 31,
<PAGE H-97>
1998 1997
First mortgage loans:
Fixed rates $ 290,000 $ 521,095
Variable rates 1,939,632 2,468,000

$2,229,632 $2,989,095

Commitments under standby letters of credit totaled
approximately $193,797 and $387,694 at December 31, 1998 and
1997, respectively.

20. FAIR VALUE OF FINANCIAL INSTRUMENTS:

Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments," requires
the disclosure of the fair value of financial instruments, both
assets and liabilities recognized and not recognized in the
statement of financial position.

A financial instrument is defined as cash, evidence of
an ownership interest in equity, or a contract that both imposed
on one entity a contractual obligation to deliver cash or another
financial instrument to a second entity or to exchange other
financial instruments on potentially unfavorable terms with the
second entity, conveys to that second entity a contractual right
to receive cash or another financial instrument from the first
entity or the exchange of other financial instruments on
potentially favorable terms with the first entity.

The fair value of a financial instrument is the amount
at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale
or liquidation. Quoted market prices should be used when
available, if not available management's best estimate of fair
value may be based on quoted market price of financial
instruments with similar characteristics or on valuation
techniques, such as using the present value of estimated future
cash flows using a discount rate commensurate with the
corresponding risk associated with those cash flows. These
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows
and future economic conditions. In that regard, the fair value
estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate
settlement of the instrument. In addition, these estimates are
only indicative of individual financial instruments' values and
should not be considered an indication of the fair value of the
Bank taken as a whole. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements.
<PAGE H-98>
The following tables represents the carrying value and
fair market value of financial instruments as of December 31,
1998:

Carrying Fair
Amount Value
Assets:
Cash and cash equivalents $34,586,998 $34,586,998
Investments securities
available-for-sale 16,907,350 16,907,350
Mortgage-backed securities
available-for-sale 22,073,453 22,073,453
Investment securities held-
to-maturity 3,996,118 4,005,600
Mortgage-backed securities
held-to-maturity 1,326,737 1,404,753
Loans receivable - net 72,887,511 72,887,511
Loans Held for Sale 7,307,910 7,307,910
Federal Home Loan Bank stock 572,200 572,200
Liabilities:
NOW, MMDA and Passbook accounts 50,673,588 50,673,588
Certificate of Deposits 77,486,922 77,486,922

The following tables represents the carrying value and
fair market value of financial instruments as of December 31,
1997:

Carrying Fair
Amount Value
Assets:
Cash and cash equivalents $27,888,650 $27,888,650
Investments securities available-
for-sale 14,401,388 14,401,388
Mortgage-backed securities
available-for-sale 2,933,804 2,933,804
Investment securities held-to-
maturity 8,219,223 8,234,639
Mortgage-backed securities held-
to-maturity 2,068,059 2,182,322
Loans receivable - net 61,915,068 61,915,068
Loans Held for Sale 6,574,585 6,574,585
Federal Home Loan Bank stock 559,900 559,900
Liabilities:
NOW, MMDA and Passbook accounts 45,430,530 45,430,530
Certificate of Deposits 63,303,577 63,303,577

The following methods and assumptions, where practical
to implement as noted, were used by the Bank in estimating its
fair value for those assets.

Cash and Cash Equivalents:

The carrying amounts reported in the statement of
financial condition for cash and cash equivalents approximate the
fair value for those assets. <PAGE H-99>

Investments Securities:

The fair value for investments are based on quoted
market prices.

Mortgage-backed Securities:

The fair value of mortgage-backed securities issued by
quasi-governmental agencies is based on quoted market prices.

Loans Receivable:

The Bank estimates that the fair value of its real
estate, consumer and commercial loans approximates the carrying
amount. The carrying amount is adjusted for the estimated future
possible loan losses through a valuation allowance. The Bank's
real estate loan portfolio was $69,380,603 and $59,659,864 at
December 31, 1998 and 1997, respectively with rates ranging from
6.00% to 18.00% and maturities through 30 years. The Bank's
consumer loan portfolio was $1,167,376 and $1,201,351 at
December 31, 1998 and 1997, respectively with rates ranging from
5.00% to 22.53% with maturities through 18 years. The Bank's
commercial loan portfolio was $3,073,768 and $1,907,393 at
December 31, 1998 and 1997, respectively with rates ranging from
8.25% to 10.25% with maturities through one year and monthly
repayment terms.

Deposits:

The fair value of deposits with no stated maturity,
such as non-interest bearing demand deposits, NOW accounts,
savings accounts and money market accounts, is equal to the
amount payable on demand as of December 31, 1998 and 1997. The
Bank has not determined the fair values of its time deposits
(e.g. certificates of deposit) due to it not being practical to
make such estimates based on varying interest rates and
maturities involved and the excessive cost that would be
incurred. Time deposits were $77,486,922 and $63,303,577
$56,211,356 at December 31, 1998 and 1997, respectively with
rates ranging from 3.00% to 8.00%.

Commitments to Extend Credit and Letters to Credit:

The majority of the Bank's commitments to extend credit
and letters of credit carry current market interest rates if
converted to loans. Because commitments to extend credit and
letters of credit are generally unassignable by either the Bank
or the borrower, they only have value to the Bank and the
borrower. The Bank is unable to estimate the fair value of the
recorded deferred fee amounts.

21. EARNINGS PER SHARE:

December 31, 1998
Per
<PAGE H-100>
Income Shares Share
Numerator Denominator Amount
Basic EPS:
Income available to Common
Shareholders $911,811 2,956,851 $.31

Effect of Dilutive Securities:
Stock options - 31,186

Diluted EPS
Income available to common
shareholders and assumed
conversions $911,811 2,988,037 $.31

December 31, 1997
Per
Income Shares Share
Numerator Denominator Amount
Basic EPS:
Income available to Common
Shareholders $708,477 1,165,105 $.61

Effect of Dilutive Securities:
Stock options - 14,573

Diluted EPS
Income available to common
shareholders and assumed
conversions $708,477 1,179,678 $.61

December 31, 1996
Per
Income Shares Share
Numerator Denominator Amount
Basic EPS:
Income available to Common
Shareholders $138,757 1,152,328 $.12

Effect of Dilutive Securities:
Stock options - -

Diluted EPS
Income available to common
shareholders and assumed
conversions $138,757 1,152,328 $.12

22. OTHER COMPREHENSIVE INCOME:

In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS
No. 130 establishes requirements for the disclosure of
comprehensive income in financial statements. Comprehensive
<PAGE H-101> income is defined as net income plus transactions
and other occurrences which are the result of nonowner changes in
equity. For financial statement presented for the savings bank,
nonowner equity changes are only comprised of unrealized gains or
losses on available for sale debt securities that will be
accumulated with net income in operations and is effective for
years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. Adoption of this standard did not have an
impact on the savings bank's results of operations. Changes in
the balance of Accumulated Other Comprehensive Income in the
Consolidated Statement of Shareholders' Equity are the direct
result of changes in the unrealized gains (losses) on available
for sale debt securities.

23. NEW PRONOUNCEMENTS:

In June 1998, the Financial Accounting standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). The Statement becomes effective
for fiscal years beginning after June 15, 1999 and will not be
applied retroactively. The statement establishes accounting and
reporting standards for derivative instruments and hedging
activity. Under the standard, all derivatives must be measured
at fair value and recognized as either assets or liabilities in
the financial statements.

The accounting for changes in fair value (gains and
losses) of a derivative is dependent on the intended use of the
derivative and its designation. Derivatives may be sued to:
1) hedge exposure to change the fair value of a recognized asset
or liability or a firm commitment, referred to as a fair value
hedge, 2) hedge exposure to variable cash flow of forecasted
transactions, referred to as a cash flow hedge, or 3) hedge
foreign currency exposure.

The savings bank does not currently have any derivative
instruments or participate in any hedging activity.

The FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise" ("SFAS No. 134") during October
1998, which becomes effective for all periods beginning after
December 15, 1998. SFAS No. 134 conforms the accounting by
mortgage banking enterprises for mortgage-backed securities
subsequent to securitization of other types of assets by non-
mortgage-backed securities subsequent to securitization of other
types of assets by non-mortgage banking enterprises. This
statement should not have a material impact on the savings bank's
results of operations.

24. FINAL SAVINGS ASSOCIATION INSURANCE FUND LEGISLATION:
<PAGE H-102>
On September 30, 1996, the Deposit Insurance Funds Act
of 1996 (the Funds Act) was signed into law which, among other
things, imposed a special one-time assessment to recapitalize the
Savings Association Insurance Fund (SAIF). As required by the
Funds Act, the Federal Deposit Insurance Corporation (FDIC)
imposed a special assessment on SAIF-assessable deposits held on
March 31, 1995, payable November 27, 1996. The special
assessment was recognized as a tax-deductible expense in 1996.
The Bank recorded a special after-tax charge of $374,397
($567,269 before tax) as a result of the FDIC special assessment.

25. SUBSEQUENT EVENT:

<PAGE H-103>
ANNEX I

Additional Information With Respect to First Bank

<PAGE I-1>
ADDITIONAL INFORMATION WITH RESPECT TO FIRST BANK

Page

Description of Business................................... I-2

Market Price of and Dividends on First Bank Common
Stock and Related Shareholder Matters................... I-

Legal Proceeding.......................................... I-

Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... I-

Index to Financial Statements............................. I-

<PAGE I-2>
DESCRIPTION OF BUSINESS

First Bank of Philadelphia is a Pennsylvania state
chartered banking institution incorporated on February 2, 1987,
under the laws of the Commonwealth of Pennsylvania. The bank was
accepted as a member of the Federal Reserve System on July 13,
1987, and commenced operations on July 13, 1987.

The bank conducts its activities primarily from 1424
Walnut Street in Center City Philadelphia. The bank is a locally
managed and locally oriented financial institution which was
organized to serve the needs of small and medium-sized
businesses, professionals and other individuals in Center City
Philadelphia and the surrounding metropolitan area. The bank
seeks to project the image of a community bank emphasizing
personal service, flexibility and responsiveness to customers'
needs which it believes can best be provided by an independent,
locally controlled bank. The bank offers services and structures
its charges in a manner designed to attract the business of small
and medium-sized businesses, professionals and other individuals.
Services offered include the traditional commercial and consumer
banking services such as time, demand and savings deposits,
including NOW accounts, money market deposit accounts regular
savings accounts, escrow accounting services and certificates of
deposit. The bank makes primarily secured commercial loan
transactions and construction and permanent mortgage loans. The
bank offers safe deposit facilities and access to automated
teller machines through its own machine at 1424 Walnut Street and
through the MAC system. The deposits of the bank are insured by
the Federal Deposit Insurance Corporation (the "FDIC") to the
FDIC's applicable limits.

Providing the high level of service offered by the bank
requires the bank's staff to maintain personalized customer
contact. As a general rule, specific banking services are
offered only on a basis believed to be profitable to the bank,
and such services are assessed charges competitively unless other
aspects of the account relationship provide sufficient earnings
to offset the total cost of the services provided.

Although the bank's legal lending limit is
approximately $970,000 the bank directs its commercial lending
principally towards businesses with loan requirements in the
$100,000 to $500,000 range and which otherwise do business with
the bank. The bank has participated in inter-bank credit
arrangements in order to serve customers with loan requirements
in excess of the bank's lending limit. The bank offers various
types of consumer loans, including revolving lines of credit,
construction loans, and home equity and automobile loans on a
limited basis.

Properties
<PAGE I-3>
First Bank leases office space at 1424 Walnut Street in
Center City Philadelphia. The lease totals approximately 10,000
square feet and requires approximately $150,000 in annual rent.
This location encompasses First Bank's branch location,
operations and back office facilities, and executive offices.

Legal Proceedings

An action was filed on January 9, 1997 in the Court of
Common Pleas of Montgomery County, Pennsylvania, against eleven
defendants including First Bank. The action is related to a
former loan customer whose loan was paid off from the proceeds of
a subsequent lender after which the customer filed for
bankruptcy. The complaint, filed by a subsequent lender,
contains 20 separate counts against the numerous defendants.
First Bank filed objections to the complaint and does not intend
to answer the complaint until the objections are resolved. The
action is in the preliminary discovery stage (interrogatories and
requests for production of documents) and depositions have not
been scheduled. Management feels that the complaint contains
serious legal and procedural shortcomings. At this time,
management does not believe that the outcome of the case will
have a material impact on First Bank's financial position or
results of operation.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to
provide information about the financial condition and results of
operations of First Bank of Philadelphia for the fiscal years
ended December 31, 1998, 1997 and 1996, and the fiscal quarters
ended March 31, 1999 and March 31, 1998, and should be read in
conjunction with the Financial Statements of First Bank of
Philadelphia and related notes.

General

The bank's results of operations depend primarily on
its net interest income, which is the difference between interest
income on interest-earning assets, and interest expense on its
interest-bearing liabilities. Its interest-earning assets
consist primarily of loans receivable and investment securities,
while its interest-bearing liabilities consist primarily of
deposits and short-term borrowings. The bank's net income is
also affected by its asset quality, its level of non-interest
income and its non-interest expense, such as salary and employee
benefits, occupancy costs and charges relating to non-performing
and other classified assets.

Results of Operations

Results of Operations for the Years ended December 31, 1998 and
December 31, 1997 <PAGE I-4>

Net Income

The bank recorded net income of $752,000 for 1998
compared to net income of $403,000 for 1997 and net income
$202,000 for 1996. 1998's results are an improvement of $349,000,
or 87%, over 1997. The primary factors contributing to this
performance were an improvement in the bank's 1998 net interest
margin as compared to 1997, an income tax benefit recorded in
1998 of $160,000 and a modest decline in non-interest expense of
$94,000.

Net Interest Income and Average Balances

Net interest income is the key component of the bank's
profitability structure and is managed in coordination with the
bank's interest rate sensitivity position. Net interest income
of $2.42 million in 1998 was 6% higher than 1997's net interest
income of $2.29 million. The bank's net interest margin, net
interest income divided by total average interest-earning assets,
increased 24 basis points to 4.23% for 1998 from 3.99% for 1997.
The bank's net interest spread, the difference between the yield
on interest-earning assets and the rates paid on interest-bearing
liabilities, increased 13 basis points to 3.54% for 1998, from
3.41% for 1997. The improvement in net interest margin and net
interest spread reflected an improvement in the bank's yield on
interest earning assets and lower cost of funds and the
resolution of a significant portion of the bank's nonperforming
assets portfolio and subsequent conversion to a performing basis
during 1998. Total non-performing assets at December 31, 1998,
was $1.4 million, representing 2.2% of total assets, compared to
$2.6 million, representing 4.0% of total assets at December 31,
1997, and $4.5 million, representing 6.7% of total assets at
December 31, 1996. This was a $1.2 million, or 46% reduction in
total nonperforming assets from 1997 to 1998.

The bank's yield on average interest-earning assets
increased to 8.97% for 1998 compared to 8.90% for 1997. Average
loans of $47.9 million at December 31, 1998, represented 84% of
total average interest-earning assets, and provided a 1998 yield
of 9.72%, compared to average loans of $46.9 million at
December 31, 1997, representing 82% of total average interest-
earning assets, and providing a 1997 yield of 9.70%. Average
investments and interest bearing deposits with banks decreased
$1.1 million or 11% to $9.3 million at December 31, 1998, from
$10.4 million at December 31, 1997. These assets provided a
yield of 5.10% in 1998 compared to 5.27% in 1997.

Total-average interest-bearing liabilities decreased
$1.3 million or 3% to $49.9 million at December 31, 1998, from
$51.2 million at December 31, 1997. Total interest expense
decreased $0.1 million to $2.7 million at December 31, 1998 from
$2.8 million for 1997. The bank's cost of funds decreased to
5.43% for 1998 compared to 5.49% for 1997.
<PAGE I-5>
Net interest income of $2.3 million in 1997 was 5%
higher than the 1996 total of $2.2 million. Total interest
income increased $0.1 million in 1997 to $5.1 million from
$5.0 million in 1996. Total interest expense remained flat in
1997 at $2.8 compared to 1996. Total average interest-earning
assets provided an average yield of 8.90% in 1997 and average
interest-bearing liabilities cost 5.49% in 1997 compared to 8.70%
and 5.45%, respectively, for 1996. The bank's net interest
spread increased to 3.41% in 1997 from 3.25% in 1996 and the
bank's net interest margin increased to 3.99% in 1997 from 3.77%
in 1996.

The following tables presents a summary of the
principal components of and changes in interest income and
interest expense for the periods indicated (in thousands):

<TABLE>
<CAPTION>
Changes from Prior Period
1998 Compared to 1997 and
Year ended December 31 1997 Compared to 1996
1998 1997 1996 Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest bearing
deposits with banks $ 445 $ 515 $ 284 $ (70) (14%) $ 231 81%
Investment securities 32 35 29 (3) (9%) 6 21%
Loans 4,652 4,547 4,666 105 2% (119) (3%)
Total interest income 5,129 5,097 4,979 32 1% 118 2%

Interest expense
NOW checking accounts 73 65 55 8 12% 10 18%
Money market accounts 166 179 111 (13) (7%) 68 61%
Savings accounts 17 16 14 1 6% 2 14%
Certificates of
deposit 2,454 2,552 2,643 (98) (4%) (91) (3%)
Total interest expense 2,710 2,812 2,843 (102) (4%) (11) 0%

Net interest income $2,419 $2,285 $2,156 $ 134 6% $ 129 6%

</TABLE>

Net interest income is effected by changes in both
average interest rates and average volumes of interest-earning
assets and interest-bearing liabilities. The following table
presents, on a tax equivalent basis, the average daily balances
of assets, liabilities and shareholders' equity and the
respective interest earned or incurred on interest-bearing assets
and interest-bearing liabilities, as well as average rates for
the period indicated (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets: <PAGE I-6>
Interest bearing
deposits with banks $ 8,805 $ 445 5.05% $ 9,884 $ 515 5.21%
Investment securities 544 32 5.88% 546 35 6.41%
Loans
Construction loans 10,190 1,135 11.14% 2,979 358 12.02%
SBA Loans 8,644 603 6.98% 7,597 517 6.81%
All other loans 29,025 2,914 10.04% 36,294 3,672 10.12%
Total Loans(1) 47,859 4,652 9.72% 46,870 4,547 9.70%
Total interest
earning assets 57,208 $5,129 8.97% 57,300 $5,097 8.90%
Total non-interest
earning assets 1,910 2,905
Total assets $59,118 $60,205

Liabilities and
shareholders' equity
Interest bearing
liabilities
NOW checking accounts $ 2,322 $ 73 3.14% $ 1,852 $ 65 3.51%
Money market accounts 4,469 166 3.71% 4,977 179 3.60%
Savings accounts 710 17 2.39% 647 16 2.47%
Certificates of deposit 42,427 2,454 5.78% 43,725 2,552 5.84%
Total interest
bearing deposits 49,928 2,710 5.43% 51,201 2,812 5.49%
Demand deposits 3,720 4,017
Other liabilities 47 306
Shareholders' equity 5,211 4,681
Total liabilities and
shareholders' equity $59,118 $60,205

Net interest income/
net interest margin(2) $2,419 4.23% $2,285 3.99%

Net interest spread(3) 3.54% 3.41%

<CAPTION>
Year Ended December 31,
1996

Average Income/ Rate/
Balance Expense Yield

<S> <C> <C> <C>
Assets
Interest-earning assets:
Interest bearing
deposits with banks $ 5,617 $ 284 5.06%
Investment securities 564 29 5.14%
Loans
Construction loans -- --
SBA Loans 5,704 381 6.68%
All other loans 45,332 4,285 9.45%
Total Loans(1) 51,036 4,666 9.14%
Total interest
earning assets 57,217 $4,979 8.70%
Total non-interest
earning assets 2,339
Total assets $59,556

Liabilities and shareholders'
equity
Interest bearing
liabilities
NOW checking accounts $ 1,947 $ 55 2.82%
Money market accounts 3,737 111 2.97% <PAGE I-7>
Savings accounts 591 14 2.37%
Certificates of deposit 45,544 2,643 5.80%
Total interest
bearing deposits 51,819 2,823 5.45%
Demand deposits 2,968
Other liabilities 379
Shareholders' equity 4,390
Total liabilities and
shareholders' equity $59,556

Net interest income/
net interest margin(2) $2,156 3.77%

Net interest spread(3) 3.25%

</TABLE>
__________________

(1) Loan fees are included in interest income. Average loan
balances include non-accruing loans.

(2) Net interest margin is computed by dividing income by
average interest-earning assets.

(3) Net interest spread is the arithmetic difference between the
yield on interest-earning assets and the rate paid on
interest-bearing liabilities.

The following table presents the extent to which
changes in interest rates and changes in the volume of interest-
earning assets and interest-bearing liabilities have affected the
bank's interest income and interest expense during the periods
indicated. Information is provided in each category with respect
to (i) changes attributable to changes in volume (changes in
volume multiplied by prior rate), (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume), and
(iii) the net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate (in
thousands):

<TABLE>
<CAPTION>
1998 Versus 1997 1997 Versus 1996
Increase (decrease) Increase (decrease)
Net Net
Volume Rate Change Volume Rate Change
<S> <C> <C> <C> <C> <C> <C>
Interest income
Interest bearing
deposits with banks $ (54) $(16) $ (70) $ 223 $ 8 $ 231
Investment securities (1) (2) (3) (1) 7 6
Loans 96 9 105 (477) 358 (119)
Total interest income $ 41 $ (9) $ 32 $(255) $373 $ 118

Interest expense
NOW checking accounts $ 13 $ (5) $ 8 $ (3) $ 13 $ 10
Money market accounts (18) 5 (13) 41 27 68
Savings accounts 2 (1) 1 1 1 2
Certificates of deposit (73) (25) (98) (110) 19 (91)
<PAGE I-8>
Total interest expense $ (76) $(26) $(102) $ (71) $ 60 $ (11)

Net change in net
interest income $ 117 $ 17 $ 134 $(184) $313 $ 129
</TABLE>

Provision for Loan Losses

The provision for loan losses represents the charge
against earnings that is required to fund the allowance for loan
losses. The bank determines the level of the allowance for loan
losses through a periodic review of the loan portfolio.
Management's evaluation of the adequacy of the allowance for loan
losses is based upon an examination of the portfolio as well as
such factors as trends, the volume of loan concentrations,
adverse situations that may affect the borrowers ability to pay,
prior loss experience within the portfolio, current economic
conditions and the results of the most recent regulatory
examinations. The adequacy of the allowance for loan losses is
reviewed monthly by the Board of Directors. See "Asset
Quality -- Allowance for Loan Losses." Because the allowance for
loan losses was deemed to be adequate during the year ended
December 31, 1998, 1997 and 1996, no additional amounts were
provided. For further information see "Asset Quality --
Allowance for Loan Losses."

Although management utilizes its best judgment in
providing for loan losses, there can be no assurance that the
bank will not have to increase its provision for loan losses in
the future as a result of possible future increases to its non-
performing loans or for other reasons based on changes in facts
and circumstances. In addition various regulatory agencies, as
an integral part of their examination process, periodically
review the bank's allowance for loan losses and the carrying
value of its nonperforming assets. Such agencies may require the
bank to recognize additions to its allowance for loan losses
based on their judgments about information.

Non-Interest Income

The following table provides a summary of non-interest
income, by category of income, for the three years ended
December 31, 1998 (in thousands):

Year Ended December 31,
1998 1997 1996

Service fees on deposit accounts $ 34 $ 62 $ 75
Other 24 35 10
Total $ 58 $ 97 $ 85

Non-interest income decreased $39,000 or 40% to $58,000
for 1998 compared to $97,000 for 1997. The reason for this
decrease was the gain on sale of other real estate owned of
<PAGE I-9> $31,000 in 1997 compared to no gain or loss on sale of
other real estate owned in 1998. The major source of non-
interest income is service fees on deposit accounts which
decreased 45% or $28,000. The primary reason for this decline is
the bank's strict return check policy which encourages the bank's
depositors to maintain better fiscal responsibility with their
checking accounts in order to avoid service charges. Service fee
income is derived from return check and stop payment charges,
commissions on travelers checks, charges assessed for money
orders and official checks, MAC processing fees, safe deposit box
rentals and credit card fees. Total non interest income is low
relative to peers due primarily to the bank's "absolutely free
checking" program used as a means to attracting and maintaining
accounts in the competitive downtown market. Management does not
anticipate non-interest income to increase significantly in the
near future. There were no gains or losses on the sales of
investment securities during any of these years.

Non-Interest Expense

The following table provides a summary of non-interest
expense, by category of expense, for the three years ended
December 31, 1998 (in thousands):

Year Ended December 31,
1998 1997 1996

Salaries and employee benefits $ 720 $ 758 $ 733
Rent and occupancy expense 572 624 643
Legal fees 95 120 125
FDIC insurance expense 15 24 56
General insurance 90 78 113
Professional and examination fees 113 113 83
Data processing fees 64 64 64
Shares tax 57 64 70
Other operating expense 150 134 152
Total $1,885 $1,979 $2,039

Total non-interest expense declined a modest 5% or
$94,000, to $1.89 million in 1998 as compared to $1.98 million in
1997. Significant items of note include a $57,000 decrease in
rent and occupancy expense as the bank's sublease expired in
July of 1998 saving the bank approximately $100,000 on an
annualized basis, a $25,000 decrease in legal fees as collection
related litigation continues to decrease and a $38,000 decrease
in salaries and employee benefits.

Total non-interest expense decreased $60,000 or 3% to
$1.98 million in 1997 from $2.04 million in 1996. Significant
items of note include total salaries and employee benefits
increased 3% or $25,000 for 1997 as compared to 1996. This was
offset by a 3% decrease in rent and occupancy for 1997 as
compared to 1996. General insurance decreased $35,000 or 31%,
because of better pricing premiums related to an improvement in
the bank's financial condition. <PAGE I-10>

Results of Operations for the Periods ended March 31, 1999 and
March 31, 1998

Net Income

The bank recorded net income of $142,000 for the three
months ended March 31, 1999 compared to net income of $120,000
for the same period in 1998.

Net Interest Income and Average Balances

Net interest income for the three ended March 31, 1999,
was $573,000, 5.0% lower than the $603,000 for the same period
of 1998. This decrease can be attributed to the Bank's loan
portfolio repricing quicker from the 75 basis point drop in the
prime rate during the fourth quarter of 1998 than the Bank's
deposits. This translated into an 11% decrease in the Bank's net
interest margin (net interest income divided by total average
interest-earning assets) decreasing to 3.77% for the three months
ended March 31, 1999, as compared to 4.22% for the same period in
1998. The Bank's net interest spread (the difference between the
yield on interest-earning assets and the rates paid on interest-
bearing liabilities) decreased 12% to 3.10% for the three months
ended March 31, 1999, as compared to 3.54% for the same period in
1998.

Average total loans of $48.7 million for the three
months ended March 31, 1999, represented 80% of average total
interest-earning assets, and provided a yield of 9.21% for the
period, compared to average total loans of $48.7 million for the
three months ended March 31, 1998, representing 85% of average
total interest-earning assets, and providing a yield of 9.59% for
the period. Average investments and interest bearing deposits
with banks increased $3.6 million or 42% to $12.1 million for the
three months ended March 31, 1999, from $8.5 million for the same
period in 1998. These assets provided a yield of 4.62% for the
three months ended March 31, 1999, compared to 5.26% for the same
period in 1998. Overall, average total interest-earning assets
provided a yield of 8.29% for the three months ended March 31,
1999, compared to 8.94% for the same period in 1998. Average
total interest-bearing liabilities increased $3.1 million or 6.2%
to $53.0 million at a yield of 5.19% for the three months ended
March 31, 1999, from $49.9 million at a yield of 5.40% for the
same period in 1998.

Net interest income is effected by changes in both
average interest rates and average volumes of interest-earning
assets and interest-bearing liabilities. The following tables
present the average daily balances of assets, liabilities and
shareholders' equity and the respective interest earned or paid
on interest-earning assets and interest-bearing liabilities, as
well as average rates for the period indicated (in thousands):

[CAPTION]
<TABLE> <PAGE I-11>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
Average Interest/ Rate/ Average Interest/ Rate/
Balance Expense Yield Balance Expense Yield
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Interest bearing deposits with banks $11,584 $ 130 4.49% $ 7,939 $ 103 5.19%
Investment securities 544 10 7.35% 544 7 5.15%
Loans
Construction loans 13,523 369 10.91% 9,407 252 10.72%
Student loans held for sale 2,880 63 8.75% - - -
SBA loans 7,931 125 6.30% 8,562 159 7.43%
All other loans 24,316 563 9.26% 30,703 756 9.85%
Total loans 48,650 1,120 9.21% 48,672 1,167 9.59%
Total interest earning assets 60,778 $1,260 8.29% 57,155 $1,277 8.94%
Total non-interest earning assets 2,081 2,506
Total assets $62,859 $59,661

Liabilities and shareholders' equity
Interest bearing liabilities
NOW checking accounts $ 2,873 $ 21 2.92% $ 2,281 $ 20 3.51%
Money market accounts 4,575 43 3.76% 5,127 47 3.67%
Savings accounts 755 4 2.12% 632 4 2.53%
Certificates of deposit 44,790 619 5.53% 41,857 603 5.76%
Total interest bearing liabilities 52,993 $ 687 5.19% 49,897 $ 674 5.40%
Demand deposits 3,985 4,516
Other liabilities 206 273
Shareholders' equity 5,675 4,975
Total liabilities and shareholders'
equity $62,859 $59,661

Net interest income/net interest margin $ 573 3.77% $603 4.22%

Net interest spread 3.10% 3.54%

Interest-earning assets/interest-bearing liabilities 115% 115%
</TABLE>

Provision for Loan Losses

Because the adequacy of the allowance for loan losses
was deemed to be adequate as of March 31, 1999 and 1998, no
additional amounts were provided.

Non-interest Income and Non-Interest Expense

Non-interest income decreased $4,000 to $13,000 for the
three months ended March 31, 1999, compared to $17,000 for the
same period in 1998. Management does not anticipate non-interest
income to increase significantly in the near future. There were
no gains or losses on the sales of investment securities during
any of these years.

Total non-interest expense increased $4,000, or 1%, to
$504,000 for the three months ended March 31, 1999, compared to
$500,000 for the same period in 1998. Occupancy and equipment
expenses decreased $15,000 or 10% for the three months ended
March 31, 1999 as compared to the same period in 1998 primarily
due to the expiration of capital leases for computer equipment.
Other operating expenses increased $19,000 or 12% for the three
months ended March 31, 1999 as compared to the same period in
1998 due to a $20,000 loss on the sale of other real estate
owned. <PAGE I-12>

Liquidity and Interest Rate Sensitivity

Integral to the management of the bank's balance sheet
is the maintaining of adequate liquidity and the ability to
evaluate and control interest rate risk. Liquidity represents
the ability to meet potential cash outflows resulting from
deposit customers who need to withdraw funds or borrowers who
need available credit. Interest rate sensitivity focuses on the
impact of fluctuating interest rates and the repricing
characteristics of rate sensitive assets and liabilities on net
interest income.

The bank's asset/liability management committee
monitors the level of short-term assets and liabilities to
maintain an appropriate balance between liquidity, risk and
return. Liquidity is derived from various sources which includes
increases in core deposits, sales of certificates of deposits,
loan principal repayments and maturities and cash received on
maturities or amortization of investment securities. At
March 31, 1999 there were $4.1 million in interest earning
deposits maturing within twelve months, while at December 31,
1998 there were $11.9 million in interest earning deposits
maturing within twelve months compared to $13.0 million maturing
within twelve months as of December 31, 1997. At March 31, 1999,
there was $15.6 million of residential construction loans
maturing within the twelve month period, compared to
$12.7 million of residential construction loans maturing within
the twelve month period as of December 31, 1998 and $8.9 million
maturing within the twelve month period of December 31, 1997.
The bank had $9.2 million of student loans held for sale within
45 days compared to $400,000 at December 31, 1998 and $0 at
December 31, 1997. These loans are sold at an amount equal to
the carrying value and there is no gain or loss on the sale. The
bank had $7.5 million of individual Small Business Administration
loans as of March 31, 1999, compared to $8.2 million held by the
bank at December 31, 1998, and $8.2 million at December 31, 1997.
These loans are 100% guaranteed as to principal and interest and
are backed by the full faith and credit of the U.S. Government.
They reprice quarterly and are readily marketable. The liquidity
position of the bank is also strengthened by a $7.7 million
credit facility with the Federal Home Loan Bank (FHLB). Advances
are secured by all FHLB stock and qualifying mortgage loans.
There were no advances outstanding against this line at March 31,
1999 or at December 31, 1998 or 1997.

Maximizing cash flow over time is crucial to the
maintenance of adequate liquidity. The bank's total cash flow is
a product of its operating activities, investing activities and
financing activities. During 1998, net cash provided by
operating activities was $794,000, compared to net cash provided
by operating activities of $526,000 in 1997, and $570,000 in
1996. During 1998, the bank's investing activities provided
$2.1 million in net cash and the bank's financing activities used
$2.8 million in net cash. The major components within these two
categories during 1998 was a net decrease of $1.2 million of
<PAGE I-13> interest bearing deposits with banks, a net decrease
of $2.8 million in deposits and proceeds from the sale property
acquired through loan foreclosure actions of $1.1 million. The
net result of these items was a $29,000 increase in cash and cash
equivalents for 1998, compared to a net increase of $358,000 for
1997 and a net decrease of $160,000 for 1996.

During the three months ended March 31, 1999, net cash
used in operating activities was $257,000, compared to net cash
provided by operating activities of $113,000 for the same period
of 1998. During the three months ended March 31, 1999, net cash
provided by investing activities was $1.4 million, compared to
net cash provided by investing activities of $8.1 million for the
same period of 1998. Financing activities used net cash of
$632,000 during the three months ended March 31, 1999, compared
to $8.4 million in net cash used in financing activities for the
same period of 1998. The net result of these items was a
$485,000 increase in cash and cash equivalents for the three
months ended March 31, 1999, compared to a $178,000 decrease in
cash and cash equivalents for the same period of 1998.

Interest rate sensitivity is closely related to
liquidity since each is directly affected by the maturity of
assets and liabilities. Rate sensitivity also deals with
exposure to fluctuations in interest rates and its effect on net
interest income. The primary function of the bank's interest
rate sensitivity management is to reduce exposure to interest
rate risk through an appropriate balance between interest-earning
assets and interest-bearing liabilities. The goal is to minimize
fluctuations in the net interest margin of the bank due to
general changes in interest rates.

A bank that does not have a relatively close
relationship between the quantity of assets that mature or
reprice within a given time period and the quantity of
liabilities that mature or reprice within the same time period
will find that its net interest margin will fluctuate more widely
than a bank that has a closer match. Furthermore, a bank that
tends to have liabilities repricing earlier than it does assets
will be susceptible to a decline in its net interest margin as
interest rates rise.

The blending of fixed and floating rate loans and
investments to match the repricing and maturity characteristics
of the various funding sources is a continuous process in an
attempt to minimize any fluctuations in net interest income. The
composition of the balance sheet is designed to minimize any
significant fluctuation in net interest income and to maximize
liquidity. Management believes that the accessibility to FHLB
borrowings will provide the flexibility to assist in keeping
fluctuations in net interest income under control and to maintain
an adequate liquidity position.

One tool used by management to gauge the structure of
the balance sheet is a "gap" analysis which categorizes assets
<PAGE I-14> and liabilities on the basis of maturity date, the
date of next repricing, and the applicable amortization schedule.
This analysis summarizes the matching or mismatching of rate
sensitive assets versus rate sensitive liabilities according to
specified time periods. Management concentrates on the zero to
three month and one year gap intervals. At March 31, 1999, the
bank had a one-year asset sensitive gap of $1.9 million and a gap
ratio of 1.04 or 3.0% of total assets as of that date. This
compares with a one-year asset sensitive gap of $501,000 and a
gap ratio of 1.01 or 0.8% of total assets at December 31, 1998.

The following table shows the interest rate sensitive
data at March 31, 1999 (in thousands):
<TABLE>
<CAPTION>

Repricing Time Periods
Over 5 yrs Balance
or rate at
0-3 mos 3-12 mos 1-5 yrs insensitive 3/31/99
<S> <C> <C> <C> <C> <C>
Interest bearing deposits
with banks $ 4,123 $ 4,123
Investment securities - $ 544 544
Loans 34,588 $ 8,210 $10,873 1,697 55,368
Other - - - 2,933 2,933
Total assets $38,711 $ 8,210 $10,873 $ 5,174 $62,968

Non-interest bearing
deposits $ 3,912 $ 3,912
Interest bearing deposits $22,581 $ 22,482 $ 7,887 - 52,950
Other liabilities - - - 227 227
Total liabilities 22,581 22,482 7,887 4,139 57,089
Shareholders' equity - - - 5,879 5,879
Total liabilities and
shareholders' equity $22,581 $ 22,482 $ 7,887 $10,018 $62,968

GAP $16,130 $(14,272) $ 2,986 $(4,844) $ 0

Cumulative GAP $16,130 $ 1,858 $ 4,844 $ 0 $ 0

Cumulative GAP Ratio 1.71 1.04 1.09 1.00 1.00
</TABLE>

Capital Adequacy

The bank is required to maintain minimum ratios of
Tier I and total capital to total "risk weighted" assets and a
minimum Tier I leverage ratio, as defined by the banking
regulators. At March 31, 1999, the bank was required to have
minimum Tier I and total capital ratios of 4.0% and 8.0%,
respectively, and a minimum Tier I leverage ratio of 4.0%. The
bank's actual Tier I and total capital ratios at March 31, 1999
were 14.79% and 16.04%, respectively, and the bank's Tier I
leverage ratio was 9.35%. These ratios exceed the requirements
for classification as a "well-capitalized" institution, the
industry's highest capital category. Following are the bank's
risk based capital ratios at March 31, 1999 and at December 31,
1998 and 1997 (in 000's):
<PAGE I-15>
Well
Capitalized March 31, December 31,
Ratios 1999 1998 1997

Tier 1 Capital $ 5,879 $ 5,737 $ 4,985
Tier II Capital 500 455 480
Total Qualifying
Capital $ 6,379 $ 6,192 $ 5,465

Risk Adjusted Total
Assets $39,759 $36,094 $38,117

Tier I Risk-Based
Capital Ratio 6.00% 14.79% 15.89% 13.08%
Total Risk-Based
Capital Ratio 10.00% 16.04% 17.15% 14.34%
Leverage Ratio 5.00% 9.35% 9.12% 8.17%

Financial Condition

Financial Condition as of December 31, 1998 and December 31, 1997

Total assets of the bank decreased $2.1 million or 3%
during 1998, from $65.6 million at December 31, 1997 to
$63.5 million at December 31, 1998. The major reason for this
slight decrease in total assets came from a $2.8 million decrease
in total deposits during 1998. This decrease was funded by the
bank's interest bearing deposits with banks. Loans remained flat
at $48.4 million at December 31, 1998. Other real estate owned
decreased by $1.2 million as the bank sold several properties
from its portfolio. Total shareholders' equity increased by
$752,000 representing 1998 net income.

Investment Portfolio

The following table presents the cost basis and
approximate fair value ("FV") at December 31, 1998 and 1997,
respectively, for each major category of the bank's investment
securities (in thousands). There are no gross unrealized gains
and losses for 1998 and 1997.

December 31,
1998 1997
Securities available-for-sale Cost FV Cost FV

Federal Reserve Bank and FHLB stock
and other equity securities $544 $544 $544 $544

Total investment securities $544 $544 $544 $544

Loan Portfolio

At December 31, 1998 the bank's net loan portfolio
totaled $48.4 million, representing 76% of total assets at that
<PAGE I-16> date, compared to $48.3 million representing 74% of
total assets at December 31, 1997. The bank's principal loans
have traditionally been for commercial purposes collateralized by
residential real estate. The bank's primary lending area
encompasses the City of Philadelphia and its surrounding suburbs
in Pennsylvania and New Jersey. Loans may be considered
elsewhere in the Philadelphia tri-state area, but only if there
is a logical connection to the primary territory. A sizeable
portion of the bank's loan portfolio is a residential
construction loan program. Parameters of the program include a
three to nine month term with outside permanent financing in
place. Inspections are made prior to each advance. As of
December 31, 1998 the construction loan portfolio totaled
$12.7 million representing 26% of the total loan portfolio. This
compares to $8.9 million representing 18% at December 31, 1997.
Another significant portion of the bank's loan portfolio is
comprised of the guaranteed portion of individual Small Business
Administration ("SBA") loans. As of December 31, 1998 the SBA
loan portfolio totaled $8.2 million representing 17% of the total
loan portfolio. This compares to $8.2 million representing 17%
at December 31, 1997. The following table summarizes the loan
portfolio of the bank by loan category and amount at December 31
for the past three years. The loan categories correspond to the
bank's general classifications (in thousands):

Book Value
December 31,
1998 1997 1996
Commercial loans (substantially
all secured by real estate
mortgages) $ 9,633 $11,866 $16,279
Construction loans substantially
all secured by real estate
mortgages) 12,695 8,860 1,806
Mortgage loans (substantially
all secured by 1-4 family
real estate mortgages) 8,366 12,870 16,393
Commercial loans 10,142 7,209 6,542
SBA loans 8,251 8,225 7,047
Installment loans -- -- --
Unearned income -- -- (7)
49,087 49,030 48,060
Allowance for loan losses (727) (727) (1,193)
Total $48,360 $48,303 $46,867

The following table summarizes the loan portfolio of
the bank by loan category and amount at December 31, 1998 and
corresponds to appropriate regulatory definitions (in thousands):

Loans secured by real estate:
Construction and land Development $12,695
Secured by 1-4 family residential properties 8,366
Secured by multi-family residential properties 1,780
Secured by non-farm nonresidential properties 7,853
<PAGE I-17>
Commercial and industrial loans:
To U.S. addresses (domicile) 16,749

All other loans: 1,644

Total $49,087

The following table presents loans as of December 31,
1998, by maturity (in thousands):

Period to Maturity
Within One to After Five
One Year Five Years Years Total

Loans at fixed rates $13,606 $14,876 $2,958 $31,440
Loans at variable
rates 16,889 -- -- 16,889
Total accruing
loans $30,495 $14,876 $2,958 $48,329

Loans on non-accrual 758

Total loans $49,087

Asset Quality

Delinquent Loans. When a borrower fails to make a
required payment on a loan, the bank attempts to cure the
deficiency by contacting the borrower and seeking payment.
Contacts are generally made on the 15th day after a payment in
due. In most cases, deficiencies are cured promptly. If a
delinquency extends beyond 60 days, the loan and payment history
is carefully reviewed, additional notices are sent to the
borrower and efforts are made to collect the loan. While the
bank generally prefers to work with borrowers to resolve such
problems, when the account becomes 90 days delinquent, the bank
does institute foreclosure or other proceedings, as necessary, to
minimize any potential loss.

Non-Performing Assets. The bank's level of
nonperforming assets decreased $1.2 million or 46% to
$1.4 million at December 31, 1998, compared to $2.6 million at
December 31, 1997. Contributing to this decrease was a net
decrease of $1.1 million in the bank's OREO portfolio and the
continuing legal action against the bank's problem loan customers
through foreclosure and other court actions and aggressive
account management on the bank's performing loan portfolio to
minimize future problems.

As a matter of policy, the accrual of loan interest is
discontinued if management believes that, after considering
economic and business conditions and collection efforts, the
borrower's financial condition is such that collection of
interest becomes doubtful. This is normally done when a loan
<PAGE I-18> reaches 90 days delinquent. At this time, all
accrued but unpaid interest is backed out of interest income.
There are occasional exceptions if the loans are well secured and
in the process of collection.

The following table sets forth information regarding
loans 30 or more days delinquent and still accruing interest,
nonaccrual loans, and owned real estate held by the bank at the
dates indicated (in thousands):

Delinquent Other Total Total Non-
Delinquent Accruing Non- Real Non- performing
Period Total Loans Accruing Loans to Accrual Estate Performing Assets to
Ending Outstanding Loans(1) Total Loans Loans Owned Assets Total Loans
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/96 48,060 459 1.0% 2,338 2,194 4,532 9.4%
12/31/97 49,030 32 0.1% 843 1,792 2,635 5.4%
12/31/98 49,087 -- 0.0% 758 648 1,406 2.9%
</TABLE>
__________________

(1) Delinquent Accruing Loans includes all loans 30 or more days
delinquent at the period end.

At December 31, 1998, the recorded investment in loans
that are considered to be impaired was $0.1 million (all of which
was on a nonaccrual basis). Included in the allowance for loan
losses at December 31, 1998, was $18,000 related to the
$0.1 million of impaired loans. The average recorded investment
in impaired loans during 1998 was $0.1 million. No interest
income related to these impaired loans was recognized during the
year using the cash basis method of income recognition. At
December 31, 1997, the recorded investment in loans that are
considered to be impaired was $0.1 million (all of which was on a
nonaccrual basis). Included in the allowance for loan losses at
December 31, 1997, was $18,000 related to the $0.1 million of
impaired loans. The average recorded investment in impaired
loans during 1997 was $0.4 million. No interest income related
to these impaired loans was recognized during the year using the
cash basis method of income recognition.

Other Real Estate Owned. Real estate acquired by the
bank as a result of foreclosure is classified as other real
estate owned ("OREO") until it is sold. The OREO is initially
recorded at the lower of the related loan balance or fair value
of the property at the date acquired. At December 31, 1998, the
bank had 9 properties totaling $648,000 in OREO. The bank's five
largest OREO properties total $460,000, representing 71% of the
bank's total OREO portfolio as of December 31, 1998. At
December 31, 1997, the bank had 15 properties totaling
$1.8 million in OREO. The bank's five largest OREO properties
total $1.2 million, representing 67% of the bank's total OREO
portfolio as of December 31, 1997.
<PAGE I-19>
Classified Assets. As part of the bank's loan review
procedures which ultimately results in the establishment of the
bank's allowance for loan losses, which follows this section, the
bank identifies and classifies its problem assets into three
classifications: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the bank will
sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with
the additional characteristic that the weaknesses make collection
or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an
asset of the institution is not warranted. The bank charges-off
that portion of an asset as soon as it is classified as loss.
Another category designated "special mention" or "criticized" is
established and maintained for assets which do not currently
expose the bank to a sufficient degree of risk to warrant
classification as substandard, doubtful or loss. Exclusive of
the bank's $648,000 of OREO, the bank's classified assets at
December 31, 1998 consisted of $754,000 of loans classified as
substandard, compared to $1.0 million classified as substandard
at December 31, 1997.

Allowance for Loan Losses. The provision for loan
losses is an amount charged against earnings to fund the
allowance for loan losses on existing loans. In order to
determine the amount of the provision for loan losses, the bank
conducts a monthly review of the loan portfolio to evaluate
overall credit quality. In establishing its allowance for loan
losses, management considers the size and risk exposure for each
segment of the loan portfolio, past loss experience, current
indicators such as the present levels and trends of delinquency
rates and collateral values, and the potential losses for future
periods. The provisions are based on management's review of the
economy, interest rates, general market conditions, and in
certain instances, an estimate of fair value of the collateral,
as applicable, considering the current and anticipated future
operating environment. These estimates are particularly
susceptible to changes that may result in a material adjustment
to the allowance for loan losses. As adjustments become
identified, they are reported in earnings for the period in which
they become known. Management believes that it makes an informed
judgment based upon available information. The adequacy of the
allowance is reviewed monthly by the Board of Directors.

It is the objective of the bank's evaluation process to
establish the following components of the allowance for loan
losses. A specific allocation for certain identified loans, a
general allocation for pools of loans based on risk rating and a
general allocation for inherent loan portfolio losses.
Management performs current evaluations of its criticized and
classified loan portfolios and assigns specific reserves that
reflects the current risk to the bank. As a general rule,
<PAGE I-20> special mention assets will have a minimum reserve of
5%, substandard assets will have a minimum reserve of 15%, and
doubtful assets will have a minimum reserve of 50%. Due to the
fact that most of the bank's problem loans are secured by real
estate, management has allocated a majority of the allowance for
loan losses to these real estate collateralized loans. A general
reserve allocation is applied for pools of loans based on risk
rating for all loans not specifically reserved for as described
previously.

Based upon management's analysis, the bank recorded no
provisions for loan losses during 1998, 1997 and 1996. The
following table summarizes the changes in the bank's allowance
for loan losses for each of the past three years (in thousands):

Year Ended December 31,
1998 1997 1996

Balance, beginning of period $727 $1,193 $1,526
Provision charged to operations -- -- --
Net charge-offs -- (466) (333)
Balance end of period $727 $ 727 $1,193

Allowance for loan losses to total
loans 1.5% 1.5% 2.5%

Allowance for loan losses to
nonaccrual loans 95.9% 86.2% 51.0%

Ratio of net charge-offs to average
loans outstanding during the period 0.0% 1.0% 0.7%

Deposits

Deposits are the primary source of the bank's funds for
lending and other investment purposes. The bank's current
deposit products include statement savings accounts, NOW
accounts, personal and commercial demand deposit accounts, money
market accounts and certificates of deposit ranging in terms from
one month to five years. Included among these deposit products
are Individual Retirement Account certificates and Keogh
retirement certificates.

The bank's deposits are obtained primarily from
residents in its primary market area. The principal methods used
by the bank to attract deposit accounts include offering a wide
variety of services and accounts, no service charges for
maintaining accounts, competitive interest rates and convenient
office hours. The bank operates in a highly competitive banking
environment competing against large regional banks as well as
other community banks. This has limited the gathering of core
deposits. The bank relies upon certificates of deposit as its
primary funding source, but it has instituted a program that
emphasizes the gathering of more stable, core deposits through
<PAGE I-21> traditional marketing methods to attract new
customers and savings deposits.

The following tables present the average balances and
rates paid on deposits for each of the years ended December 31,
1998, 1997 and 1996 (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,

1998 1997
1996
Average Average Average Average
Average Average
Balance Rate Balance Rate
Balance Rate
<S> <C> <C> <C> <C> <C>
<C>
Demand deposits $ 3,720 $ 4,017 $
2,968
NOW checking accounts 2,322 3.16% 1,852 3.51%
1,947 2.82%
Money market accounts 4,469 3.71% 4,977 3.60%
3,737 2.97%
Savings accounts 710 2.44% 647 2.47%
591 2.37%
Certificates of deposit 42,427 5.78% 43,725 5.84%
45,544 5.80%
Total deposits $53,648 $55,218
$54,787
</TABLE>

As of December 31, 1998, the bank had total
certificates of deposit of approximately $44.8 million. The
following table summarizes the composition of these deposits (in
thousands):

Amount Percentage
Certificates of deposit in excess of
$100,000 $ 5,276 12%
Individual retirement accounts 3,191 7%
Other certificates of deposit 36,354 81%
Total $44,821 100%

The bank's certificates of $100,000 or more which
totaled $5.3 million at December 31, 1998, mature as follows:
$1.6 million within three months, $1.4 million between three and
six months; $1.5 million between six and twelve months; and
$0.8 million after twelve months.

The ability of the bank to attract and maintain
deposits and the bank's cost of funds on these deposit accounts
have been, and will continue to be, significantly affected by
economic and competitive conditions. <PAGE I-22>

Borrowings

The bank is a member of the Federal Home Loan Bank
System, which consists of 12 regional FHLB's subject to
supervision and regulation by the Federal Housing Finance Board.
The FHLB's provide a central credit facility primarily for member
institutions. The bank, as a member of the FHLB of Pittsburgh,
is required to hold shares of common stock in that FHLB in an
amount at least equal to 1% of the aggregate principal amount of
its unpaid residential mortgage loans, home purchase contracts,
and similar obligations at the beginning of each year, or 5% of
its advances (borrowings) from the FHLB of Pittsburgh, whichever
is greater. The bank had a $203,000 investment in stock of the
FHLB in Pittsburgh at December 31, 1998, which was in compliance
with this requirement. At December 31, 1998, the bank had no
outstanding borrowings from the FHLB of Pittsburgh.

Financial Condition as of March 31, 1999

General

Total Assets of the Bank remained relatively unchanged
during the quarter, decreasing 1% or $511,000 to $63.0 million at
March 31, 1999 from $63.5 million at December 31, 1998. A
significant change occurring during the quarter was the start-up
of the Bank's student loan program. These loans are funded to
students at qualifying schools and are subsequently contractually
sold at par within 45 to 60 days of origination to an investor.
The balance of these loans at March 31, 1999 was $9.2 million.
These loans were funded through a reduction of the Bank's
interest bearing deposits of $7.7 million during the quarter, and
from payoffs of the Bank's commercial loan portfolio.

Asset Quality

Non-Performing Assets. The Bank's level of
nonperforming assets decreased $60,000 or 4%, during the three
months ended March 31, 1999, from $1.41 million at December 31,
1998 to $1.35 million at March 31, 1999. This reduction in
nonperforming assets is attributed primarily to the sale of two
parcels of other real estate owned during the first quarter of
1999.

The following table sets forth information regarding
loans 30 or more days delinquent and still accruing interest,
nonaccrual loans, and owned real estate held by the Bank at the
dates indicated (in thousands):

Delinquent Other Total Total Non-
Delinquent Accruing Non- Real Non- performing
Period Total Loans Accruing Loans to Accrual Estate Performing Assets to
Ending Outstanding Loans(1) Total Loans Loans Owned Assets Total Loans
<S> <C> <C> <C> <C> <C> <C> <C>
<PAGE I-23>
03/31/98 48,444 0 0% 851 628 1,479 3.1%
12/31/98 49,087 0 0% 758 648 1,406 2.9%
03/31/99 55,368 147 0.3% 746 600 1,346 2.4%
</TABLE>
__________________

(1) Delinquent Accruing Loans includes all loans 30 or more days
delinquent at the period-end.

Allowance for loan losses. Based upon management's
analysis, the Bank did not record provisions for loan losses for
each of the three months ended March 31, 1999 and 1998. The
following table summarizes the changes in the Bank's allowance
for loan losses for the periods indicated (in thousands):

Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998

Balance, beginning of period $727 $727
Provision charged to operations 0 0
Recoveries 0 0
Charge-offs 0 0
Balance end of period $727 $727
Allowance for loan losses to
total loans 1.3% 1.5%
Allowance for loan losses to
non-accrual loans 97.5% 85.4%
Ratio of charge-offs to average
loans outstanding during the period 0.0%* 0.0%*
__________________

* Charge-offs for the three months ended March 31, 1999 and
1998 were annualized for comparison purposes.

Impact of Inflation

The financial statements and related financial data
presented herein have been prepared in accordance with generally
accepted accounting principles which require the measurement of
financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing
power of money over time due to inflation. The primary impact of
inflation on the operation of the bank is reflected in increased
operating costs. Unlike most industrial companies, virtually all
of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than
the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same
magnitude as the price of goods and services. The bank believes
that continuation of its efforts to manage the rates, liquidity
<PAGE I-24> and interest sensitivity of its assets and
liabilities is necessary to generate an acceptable return on
assets.

Impact of Year 2000

The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the
applicable year. Any of the Bank's computer programs or hardware
that have date-sensitive software or embedded chips may recognize
a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a
temporary inability to process transactions, generate statements,
compute payments, interest on delinquency, or engage in similar
normal business activities.

Management is committed to ensuring that the Bank's
daily operations suffer little or no impact from the century date
change. The Bank has formed a Year 2000 committee and has
developed a Year 2000 action plan to ensure Year 2000 compliance.
As of March 31, 1999, the Bank has determined that it is Year
2000 Compliant. The Bank has applied due diligence throughout
the Year 2000 process, following the guidelines contained in the
Federal Financial Institutions Examinations Council's Interagency
Guidelines and the SEC's Release No. 33-7558. The Bank is
subject to the regulation and oversight of various banking
regulators, whose oversight includes the provision of specific
timetables, programs and guidance regarding Year 2000 issues.
Regulatory examination of the Bank's Year 2000 programs are
conducted on a quarterly basis.

The Bank's plan to resolve the Year 2000 issues has
involved the following four phases: assessment, remediation,
testing, and implementation. The Bank has assessed and
inventoried mission critical, environmental, and other
information systems which could be impacted by the date change
for the year 2000. These systems include the Bank's data
processing, teller terminals, ATM machine, proof operating
machine, LANs, security systems, electrical, HVAC, telephone,
etc. The Bank is primarily reliant on third party vendors for
its computer output and processing. The Bank has received
certification from the vendors that these outsourced applications
are Year 2000 complaint. The Bank has performed independent
testing on these applications and has determined them to be Year
2000 compliant. The Bank's environmental systems which include
vaults, cameras, security and alarms, telephones, copiers and fax
machines have been tested and determined to be Year 2000
compliant. The Bank has replaced all equipment identified as not
being Year 2000 compliant.

The Year 2000 issue also affects certain of the Bank's
customers, particularly in the areas of access to funds and
additional expenditures to achieve compliance. The Bank has
engaged in a program of sending out a survey of its commercial
<PAGE I-25> customers regarding their awareness of the Year 2000
issue. Based upon the results received to date it appears that
its more sophisticated customers are aware of the Year 2000 issue
and are taking steps to address it while its smaller customers
appear to have fewer issues with the Year 2000.

As of March 31, 1999, $48,000 has been expended as Year
2000 costs. Management expects to spend a total of $50,000 for
the entire project. Of the total project's cost, approximately
$25,000 is attributable to the purchase of new software which
will be capitalized. The remaining $25,000 is being expensed as
incurred. The Bank does not expect the amounts required to be
expensed to have a material effect on the financial position or
results of operations. However, the Bank believes that the costs
or the consequences of incomplete or untimely resolution of its
Year 2000 issues would not represent a material event or
uncertainty that is reasonably likely to affect its future
financial results, or cause its reported financial information
not to be necessarily indicative of future operating results or
future financial condition.

The Year 2000 issue creates risk for the Bank from
unforeseen problems in its own computer systems and from third-
party vendors who provide the majority of mainframe and PC based
computer applications. Failure of third-party systems relative
to the Year 2000 issue could have a material impact on the Bank's
ability to conduct business.

The Bank has completed its own company-wide Year 2000
contingency plan. Individual contingency plans concerning
specific software and hardware issues have been formulated for
the specific departments of the Bank. Such plans include the
identification of Bank operations that can be performed on a
manual basis or with stand alone personal computers and printers.
The Bank has identified phone lines within and outside of the
Bank which should not be affected by any Year 2000 problems and
it also has identified alternative processing facilities and
electrical sources.

The information above contains forward-looking
statements including, without limitation, statements relating to
the Bank's plans, strategies, objectives, expectations,
intentions, and adequate resources that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward-
looking statements involve risks and uncertainties. The actual
impact on the Bank of the Year 2000 issue could materially differ
from that which is anticipated in the forward-looking statements
as a result of certain factors identified above.

MARKET PRICE OF AND DIVIDENDS ON FIRST BANK COMMON STOCK
AND RELATED SHAREHOLDER MATTERS

The bank's common stock is traded over-the-counter on
the National Association of Securities Dealers Automated
<PAGE I-26> Quotation System ("NASDAQ") Small-Cap Market under
the symbol "FBKP". The following table sets forth the high and
low bid prices for the bank's common stock on the NASDAQ Small-
Cap Market, as reported by the National Association of Securities
Dealers, Inc. The following quotes reflect interdealer prices
without retail mark-up, markdown or commission and may not
necessarily represent actual transactions.

1999 1998 1997
Bid Prices Bid Prices Bid Prices
High Low High Low High Low

First Quarter 7 4 6 4 13/16 5 2 3/4
Second Quarter 5 1/16 4 1/8 5 1/2 5 4 3/4 3 1/2
Third Quarter 5 3/8 4 1/8 4 3/8 3 5/8
Fourth Quarter 5 3/8 4 1/16 6 1/4 3 7/8

On July 28, 1995 a one for ten reverse stock split of
the bank's common stock became effective. As of February 27,
1998, there were approximately 330 holders of record of the
bank's common stock. The number of holders does not reflect the
number of beneficial owners who or which hold their common stock
in nominee or "street" name through various brokerage firms,
banks or other entities.
<PAGE I-27>
INDEX TO FINANCIAL STATEMENTS OF
FIRST BANK OF PHILADELPHIA
FIRST BANK OF PHILADELPHIA

CONTENTS

Page

Quarterly Statements for the Three Month
Period ended March 31, 1999

Consolidated Statement of Financial Condition
as of March 31, 1999 (Unaudited) and
December 31, 1998

Consolidated Statement of Income (Unaudited)
for the Three Month Periods Ended March 31, 1999
and 1998.

Consolidated Statement of Shareholders' Equity
(Unaudited) for the Three Month Periods Ended
March 31, 1999 and 1998.

Consolidated Statement of Cash Flows (Unaudited) for
the Three Month Periods Ended March 31, 1999 and 1998.

Note to Consolidated Financial Statements

Financial Statements for the Years ended
December 31, 1999 and 1998

Independent Auditors' Report

Financial Statements:

Consolidated Statement of Financial Condition
December 31, 1998 and 1997

Consolidated Statement of Income for the Years
Ended December 31, 1998, 1997, and 1996

Consolidated Statement of Shareholders' Equity
for the Years Ended December 31, 1998, 1997,
and 1996

Consolidated Statement of Cash Flows for the
Years Ended December 31, 1998, 1997,
and 1996

Notes to Consolidated Financial Statements
<PAGE I-28>
FIRST BANK OF PHILADELPHIA
BALANCE SHEETS
(In thousands, except per share data)

<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,198 $ 713
Interest bearing deposits with banks 4,123 11,857
Investment securities - available-for-sale 544 544
Loans, less allowance for loan losses of
$727 and $727, respectively 54,641 48,360
Property acquired through loan
foreclosure actions, net 600 648
Premises and equipment, net 679 629
Accrued interest receivable 438 413
Deferred tax asset 300 240
Other assets 445 75

TOTAL ASSETS $ 62,968 $ 63,479

LIABILITIES
Deposits
Non-interest bearing $ 3,912 $ 4,841
Interest bearing 52,950 52,653
56,862 57,494

Accrued interest payable 207 181
Other liabilities 20 67

Total liabilities 57,089 57,742

SHAREHOLDERS' EQUITY
Preferred stock - authorized, 500,000
shares of $2 par value; none issued - -
Common stock-authorized, 3,500,000
shares of $.25 par value;
issued and outstanding, 1,676,875 419 419
Additional paid-in capital 10,243 10,243
Accumulated deficit (4,783) (4,925)

Total shareholders' equity 5,879 5,737

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 62,968 $ 63,479
</TABLE>

The accompanying notes are an integral part of these financial
statements.
<PAGE I-29>
FIRST BANK OF PHILADELPHIA
STATEMENTS OF OPERATIONS
(In thousands, except per share data)

Three months ended
3/31/99 3/31/98
(unaudited) (unaudited)
INTEREST INCOME
Loans, including fees $ 1,120 $ 1,167
Investment securities 10 7
Deposits with banks 130 103

Total interest income 1,260 1,277

INTEREST EXPENSE ON DEPOSITS 687 674

Net interest income 573 603

PROVISION FOR LOAN LOSSES - -

Net interest income after
provision for loan losses 573 603

NON-INTEREST INCOME 13 17

NON-INTEREST EXPENSES
Salaries and employee benefits 191 191
Occupancy and equipment 139 154
Other operating 174 155
Total non-interest expenses 504 500

Income before income taxes 82 120

INCOME TAX BENEFIT 60 -

NET INCOME $ 142 $ 120

Net income per common share
Basic $ .08 $ .07
Diluted .06 .05

The accompanying notes are an integral part of these financial
statements.
<PAGE I-30>
FIRST BANK OF PHILADELPHIA
STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Three months ended
3/31/99 3/31/98
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 142 $ 120
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 57 65
Loss on sale of other real estate owned 20 -
(Increase) decrease in interest receivable (25) 10
Increase in deferred tax asset (60) -
Increase in other assets (370) (110)
Increase in accrued interest payable 26 28
Decrease in other liabilities (47) -

Net cash (used in) provided by operating activities (257) 113

INVESTING ACTIVITIES
Net decrease in interest bearing deposits with banks 7,734 6,434
Net (increase) decrease in loans ( 6,281) 586
Proceeds from sale of property acquired through loan
foreclosure actions 28 1,164
Purchase of premises and equipment (107) (63)

Net cash provided by investing activities 1,374 8,121

FINANCING ACTIVITIES
Net decrease in deposits (632) (8,412)
Net cash used in financing activities (632) (8,412)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 485 (178)

Cash and cash equivalents at beginning of period 713 684

Cash and cash equivalents at end of period $ 1,198 $ 506
======== ======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE I-31>
FIRST BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)

1. The accompanying financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information. The financial
information included herein is unaudited, however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of the
management of First Bank of Philadelphia, necessary to present
fairly the financial statements for the interim periods. For
further information, refer to the financial statements and
footnotes thereto included in the Bank's Annual Report on form
10-K for the year ended December 31, 1998.

2. The results of operations for the three month period
ended March 31, 1999, are not necessarily indicative of the
results to be expected for the full year.

3. The Bank does not have any items other than net income
that would be required to be recognized as comprehensive income
in accordance with SFAS No. 130, "Reporting Comprehensive
Income."

4. The Bank has not identified any individual operating
segments required to be disclosed in accordance with SFAS No.
131, "Disclosures About Segments of an Enterprise and Related
Information."

5. Management does not expect SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" to have a
material effect on the financial statements of the Bank.

6. Certain amounts from prior periods are reclassified for
comparative purposes. Such reclassifications have no impact on
net income.

7. Basic earnings per share ("EPS") is computed based on
the weighted average number of shares of common stock outstanding
during the periods presented. Stock options are considered
common stock equivalents and are included in the computation of
dilutive EPS using the treasury stock method, unless anti-
dilutive.

The following table reconciles the numerators and
denominators of the basic and diluted EPS computations for the
Bank's net income for the three months ended March 31, 1999:

<TABLE>
<CAPTION>
Income Shares Per-Share
<PAGE I-32>
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS:
Income available to common shareholders $142,000 1,676,875 $.08

Effect of Dilutive Securities:
Options 805,313

Diluted EPS:
Income available to common shareholders $142,000 2,482,188 $.06
</TABLE>
<PAGE I-33>
FIRST BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)

The following table reconciles the numerators and
denominators of the basic and diluted EPS computations for the
Bank's net income for the three months ended March 31, 1998:

<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS:
Income available to common shareholders $120,000 1,676,875 $.07

Effect of Dilutive Securities:
Options 843,750

Diluted EPS:
Income available to common shareholders $120,000 2,520,625 $.05
</TABLE>

8. Commitments and Contingencies - There has been no
change in the action brought against the Bank on January 9, 1997.
This action was filed in the Court of Common Pleas of Montgomery
County, Pennsylvania, against eleven defendants including the
Bank. The action is related to a former loan customer whose loan
was paid off from the proceeds of a subsequent lender after which
the customer filed for bankruptcy. The complaint, filed by a
subsequent lender, contains 20 separate counts against the
numerous defendants. The Bank filed objections to the complaint
and does not intend to answer the complaint until the objections
are resolved. The action is in the preliminary discovery stage
(interrogatories and requests for production of documents) and
depositions have not been scheduled. Management feels that the
complaint contains serious legal and procedural shortcomings. At
this time, management does not believe that the outcome of the
case will have a material impact on the Bank's financial position
or results of operation.

9. On March 19, 1999, the Bank announced the execution of
a Definitive Agreement and Plan of Reorganization (the
"Agreement") with PSB Bancorp, Inc. ("PSBI") pursuant to which
PSBI will acquire the Bank. Pursuant to the Agreement, PSBI will
exchange that number of shares of PSBI common stock equal to $6
divided by the average closing price of PSBI common stock for the
20 trading days ended three days before closing; provided that
PSBI will not issue less than .667 or more than .857 shares
unless PSBI's stock price is less than $6.50 and PSBI elects to
issue additional shares in order to complete the transaction. In
connection with the transaction, PSBI's subsidiary Pennsylvania
Savings Bank, will merge with and into First Bank of Philadelphia
with the commercial bank charter of First Bank of Philadelphia
surviving the merger under a new name to be chosen before
<PAGE I-34> closing. The Agreement is subject to regulatory
approval and the approval of each party's shareholders. The
transaction is expected to qualify as a tax-free reorganization
for federal income tax purposes and a pooling-of-interests for
financial reporting purposes. In connection with the Agreement,
the Bank has granted PSBI an option to acquire additional 210,625
shares of the Bank under certain circumstances.
<PAGE I-35>
<TABLE>
<CAPTION>

FIRST BANK OF PHILADELPHIA
BALANCE SHEETS

(In thousands, except per share data)
December 31, 1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 713 $ 684
Interest bearing deposits with banks 11,857 13,012
Investment securities - available-for-sale 544 544
Loans, less allowance for loan losses of $727 and
$727, respectively 48,360 48,303
Property acquired through foreclosure 648 1,792
Premises and equipment, net 629 647
Accrued interest receivable 413 405
Other assets 315 185

TOTAL ASSETS $ 63,479 $ 65,572
=========== =========
LIABILITIES
Deposits
Non-interest bearing $ 4,841 $ 5,391
Interest bearing 52,653 54,926
57,494 60,317

Accrued interest payable 181 221
Other liabilities and capital lease obligations 67 49

Total liabilities 57,742 60,587

COMMITMENTS AND CONTINGENCIES (Note K)

SHAREHOLDERS' EQUITY
Preferred stock - authorized, 500,000
shares of $2 par value; none issued - -
Common stock-authorized, 3,500,000 shares
of $.25 par value; issued and outstanding,
1,676,875 shares 419 419
Additional paid-in capital 10,243 10,243
Accumulated deficit (4,925) (5,677)

Total shareholders' equity 5,737 4,985

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,479 $ 65,572
=========== =========
</TABLE>
<PAGE I-36>
<TABLE>
<CAPTION>

FIRST BANK OF PHILADELPHIA
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years ended December 31 1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 4,652 $ 4,547 $ 4,666
Investment securities 32 35 29
Deposits with banks 445 515 284

Total interest income 5,129 5,097 4,979

INTEREST EXPENSE ON DEPOSITS 2,710 2,812 2,823

Net interest income 2,419 2,285 2,156

PROVISION FOR LOAN LOSSES - - -

Net interest income after provision
for loan losses 2,419 2,285 2,156

NON-INTEREST INCOME 58 97 85

NON-INTEREST EXPENSES
Salaries and employee benefits 720 758 733
Rent and occupancy 572 624 643
Legal fees 95 120 125
FDIC insurance 15 24 56
General insurance 90 78 113
Professional and examination fees 122 113 83
Data processing fees 64 64 64
Shares tax 57 64 70
Other operating 150 134 152

Total other expenses 1,885 1,979 2,039

Income (loss) before income taxes 592 403 202

INCOME TAXES 160 - -

NET INCOME (LOSS) $ 752 $ 403 $ 202
======== ======== ========
Net income (loss) per common share
Basic $ .45 $ .24 $ .12
Diluted .30 .16 .12
</TABLE>
<PAGE I-37>
<TABLE>
<CAPTION>
FIRST BANK OF PHILADELPHIA
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Years ended-December 31, 1998, 1997 and 1996

______________________________________________________________________________
Additional Total
Common paid-in Accumulated shareholders'
stock capital deficit equity
<S> <C> <C> <C> <C>
Balance as of January 1, 1996 $ 419 $ 10,243 $ (6,282) $ 4,380

Net income - - 202 202

Balance as of December 31, 1996 419 10,243 (6,080) 4,582

Net income - - 403 403

Balance as of December 31, 1997 419 10,243 (5,677) 4,985

Net income - - 752 752

Balance as of December 31, 1998 $419 $10,243 $(4,925) $ 5,737
===== ======= ======= ========
</TABLE>
<PAGE I-38>
<TABLE>
<CAPTION>

FIRST BANK OF PHILADELPHIA
STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31, 1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 752 $ 403 $ 202
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 202 266 219
Gain on sale of other real estate owned - (31) -
Increase in interest receivable (8) - 113
(Increase) decrease in other assets (130) (67) 48
Decrease in accrued interest payable (40) (6) (58)
Increase (decrease) in other liabilities 18 (39) 46
Net cash provided by operating
activities 794 526 570

INVESTING ACTIVITIES
Proceeds from sales of investment securities
available-for-sale - 9 49
Net decrease (increase) in interest
bearing deposits with banks 1,155 3,384 (10,674)
Net (increase) decrease in loans (105) (2,133) 1,977
Proceeds from sale of property acquired
through loan foreclosure actions 1,192 1,130 1,374
Purchase of premises and equipment (184) (103) (88)
Net cash provided by (used in)
investing activities 2,058 2,251 (7,362)

FINANCING ACTIVITIES
Net (decrease) increase in deposits (2,823) (2,382) 6,687
Principal payments under capital lease
obligation - (37) (35)
Repayments of convertible subordinated
debenture - - (20)
Net cash used in financing activities (2,823) (2,419) 6,632

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 29 358 (160)

Cash and cash equivalents at beginning
of year 684 326 486

Cash and cash equivalents at end
of year $ 713 $684 $326

Supplemental cash flow information:
Interest paid $2,750 $2,818 $2,881
Income taxes paid 0 0 0
Loans transferred to property acquired
through foreclosure 48 697 1,706
</TABLE>
<PAGE I-39>
FIRST BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS
December 31, 1998

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

First Bank of Philadelphia (the "Bank") is a state chartered
commercial bank incorporated under the laws of the Commonwealth
of Pennsylvania and a member of the Federal Reserve System. The
Bank's principal business consists of attracting deposits and
then converting those deposits into various types of loans,
interest bearing deposits and other investments. The Bank is a
locally managed and locally oriented financial institution which
was organized to serve the needs of small and medium-sized
businesses, professionals and other individuals in Center City
Philadelphia and the surrounding metropolitan area. The Bank
seeks to project the image of a community bank emphasizing
personal service, flexibility and responsiveness to customers'
needs which it believes can best be provided by an independent,
locally controlled bank. The Bank competes with local commercial
banks as well as numerous regionally-based commercial banks which
have assets, capital and lending limits significantly larger than
those of the Bank. The Bank also competes with thrift
institutions, credit unions, issuers of commercial paper and
other securities and other nondepository institutions. As a
state-chartered bank, the Bank is subject to regulation,
supervision and regular examination by the Pennsylvania
Department of Banking (the "Department") and is subject to the
applicable provisions of the Pennsylvania Banking Code of 1965,
as amended (the "Banking Code"). The Bank is a member of the
Federal Reserve System and is subject to regulation, supervision,
reporting requirements and regular examinations by the Federal
Reserve Board. In addition, the Bank's deposits are insured by
the Federal Deposit Insurance Corporation (the "FDIC") up to a
maximum of $100,000 per insured account holder.

The financial statements of the Bank have been prepared in
accordance with generally accepted accounting principles and
practices within the banking industry. In preparing the
financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet, and the reported
results of operations for the year then ended. Actual results
could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant
changes in the near term relate to the determination of the
allowance for loan losses, the valuation of real estate acquired
in connection with foreclosures or in satisfaction of loans, and
the realizability of deferred tax assets. In connection with the
determination of the allowance for loan losses and the estimated
fair value of real estate owned, management obtains independent
appraisals for significant properties.
<PAGE I-40>
The financial information has not been reviewed or confirmed
for accuracy or relevance by the Federal Reserve System. The
significant accounting policies consistently applied are
summarized as follows.

1. Investment Securities

Investments in securities may be classified in one of three
categories: held-to-maturity, trading, or available-for-sale.
Debt securities that the Bank has the positive intent and ability
to hold to maturity are classified as held-to-maturity and are
reported at amortized cost. The Bank did not hold any debt
securities at December 31, 1998 or 1997. The Bank's equity
securities are classified as available-for-sale and are stated at
fair value. Net unrealized gains and losses for such securities,
net of tax, are recognized as a separate component of
shareholders' equity and excluded from the determination of net
income. The Bank does not engage in security trading.

Accretion of premiums and amortization of discounts are
recognized in interest income using the interest method over the
period to maturity. Gains and losses are determined using the
specific identification method and are recorded at the time of
sale.

2. Loans

The Bank defers and amortizes certain origination and
commitment fees, and certain direct loan origination costs over
the contractual life of the related loans. This results in an
adjustment of the related loan's yield. Interest income is not
accrued on commercial loans where management has determined that
borrowers may be unable to meet contractual principal or interest
payments, or where such payments are 90 days or more past due
(unless the loan is well secured and in the process of
collection). Impaired loans are measured based upon the present
value of expected future cash flows discounted at the loan's
effective interest rate or the fair value of the underlying
collateral.

3. Allowance for Loan Losses

An allowance for loan losses is maintained at a level that
management considers adequate to provide for potential losses
based upon an evaluation of known and inherent risks in the loan
portfolio. Management's periodic evaluation of the adequacy of
the allowance for loan losses is based upon evaluation of
individual loans, the overall risk characteristics of the various
portfolio segments, past loss experience, current and projected
financial status and creditworthiness of its borrowers, the
adequacy of collateral, the level and nature of non-performing
loans, current economic conditions, the results of the most
recent regulatory examination (which was in mid 1998) and other
relevant factors. This evaluation is inherently subjective.
While management uses the best information available to make such
<PAGE I-41> evaluations, future adjustments to the allowance may
be necessary if conditions differ substantially from the
assumptions used in making the evaluations. In addition, various
regulatory agencies as an integral part of their examination
process, periodically review the allowance for loan losses. Such
agencies may require the Bank to recognize additions to the
allowance for loan losses based on their judgments of information
which is available to them at the time of their examination.

Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent.
Impairment is based on the fair value of the collateral when the
creditor determines that foreclosure is probable.

4. Premises and Equipment

Premises, fixtures and equipment are carried at cost.
Leasehold improvements are carried at cost and are amortized over
the shorter of their useful lives or the lives of the respective
leases to which they relate. Depreciation and amortization is
provided by the straight-line method over the estimated useful
lives of the related assets ranging from three to ten years.

5. Property Acquired through Foreclosure

Foreclosed property consists of property acquired through
foreclosures. When property is acquired, the excess, if any, of
the loan balance over fair value is charged to the allowance for
possible loan losses. Thereafter, the asset is carried at the
lower of fair value less estimated costs to sell or carrying
value. Gains and losses on subsequent sale are included in the
statement of operations.

6. Income Taxes

Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of
assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse. Deferred tax
expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets
and liabilities for financial statement and tax return purposes
are the allowance for loan losses, accumulated depreciation and
net operating loss carryforwards.

7. Cash Equivalents

The Bank considers cash on hand, amounts due from banks and
federal funds sold with original terms of maturity of less than
three months as cash equivalents.

8. Comprehensive Income
<PAGE I-42>
The Bank has no items of comprehensive income other than net
income.

9. Segment Information

Management has not identified any individual operating
segments of the Bank.

10. Derivative Instruments and Hedging Activities

Management does not expect SFAS No. 133 to have a material
effect on the Bank.

11. Reclassifications

Certain amounts from prior years are reclassified for
comparative purposes. Such reclassifications have no impact on
net income.

12. Earnings Per Share and Common Stock Equivalents

In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
128 ("SFAS No. 128"), "Earnings Per Share" and Statement No. 129
("SFAS No. 129") "Disclosures of Information about Capital
Structure." SFAS No. 128, which superseded APB Opinion No. 15
("APB No. 15") specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock. It replaced the
presentation of primary EPS with basic EPS which, unlike primary
EPS, excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is
computed similarly to fully diluted EPS under APB No. 15. The
Bank adopted SFAS No. 128 as of December 15, 1997. All prior
period EPS amounts have been restated to reflect the provisions
of this statement.

There were 1,676,875 weighted average number of shares of
common stock outstanding used for the basic EPS calculation for
the fiscal years ended December 31, 1998, 1997 and 1996. Stock
options are considered common stock equivalents and are included
in the computation of the number of shares outstanding using the
treasury stock method, unless anti-dilutive. The options had a
dilutive effect on the income available to common shareholders
only for the fiscal years ended December 31, 1998 and 1997 of
813,304 and 910,598 additional shares respectively. For the
fiscal year ended December 31, 1996 there were no securities
which had a dilutive effect on the income available to common
shareholders, and thus the Diluted EPS is the same as Basic EPS,
or $.12.

The following table reconciles the numerators and
denominators of the basic and diluted EPS computations for the
Bank's net income for the following years: <PAGE I-43>

<TABLE>
<CAPTION>
______________________________________________________________________________
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Year ended December 31, 1998:

Basic EPS:
Income available to common
shareholders $752,000 1,676,875 $.45

Effect of Dilutive Securities:
Options 813,304

Diluted EPS:
Income available to common
shareholders $752,000 2,490,179 $.30
====

Year ended December 31, 1997:

Basic EPS:
Income available to common
shareholders $403,000 1,676,875 $.24
====

Effect of Dilutive Securities:
Options 910,598

Diluted EPS:
Income available to common
shareholders $403,000 2,587,473 $.16
====
Year ended December 31, 1996:

Basic EPS:
Income available to common
shareholders $202,000 1,676,875 $.12
====
</TABLE>

NOTE B - CAPITAL ADEQUACY AND REGULATORY DIRECTIVES

The Bank was previously operating under a formal written
agreement with the Pennsylvania Department of Banking and the
Federal Reserve Bank of Philadelphia, entered into on
September 14, 1993. On December 15, 1997, the Bank was notified
by the Pennsylvania Department of Banking that the Memorandum of
Understanding that the Bank had previously been operating under
had been lifted. On January 23, 1998, the Bank was notified by
the Federal Reserve Bank that because of its improved condition
and compliance with all provisions, that the formal agreement had
also been lifted.

The Bank is required to maintain minimum ratios of Tier I
and total capital to total "risk-weighted " assets and a minimum
Tier I leverage ratio, as defined by the banking regulators. At
December 31, 1998, the Bank was required to have minimum Tier I
and total capital ratios of 4.0% and 8.0%, respectively, and a
minimum Tier I leverage ratio, as defined. The Bank's actual
<PAGE I-44> Tier I and total capital ratios at December 31, 1998
were 15.89% and 17.15%, respectively, and the Bank's Tier I
leverage ratio was 9.12%. These ratios are in excess of the
levels required to be classified as a well capitalized
institution. At December 31, 1997, these ratios were 13.08%,
14.34% and 8.17%, respectively. The Bank's actual and minimum
capital requirement amounts and ratios as of December 31, 1998
are as follows (dollars in thousands):

<TABLE>
<CAPTION>
___________________________________________________________________________________________________________
Minimum Well
Actual Capital Requirements Capital Requirements
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk weighted assets $ 5,737 15.89% $ 1,444 4.00% $ 2,166 6.00%
Total capital to risk weighted assets 6,192 17.15% 2,888 8.00% 3,609 10.00%
Leverage to average assets 5,737 9.12% 2,517 4.00% 3,147 5.00%
</TABLE>

Under the Federal Reserve Act (the Act), if losses have
at any time been sustained by a bank, equal to or exceeding
its undivided profits then on hand, no dividend shall be
made; and no dividends shall ever by made in an amount
greater than the Bank's net profits less losses and bad
debts. Cash dividends must be approved by the Board of
Directors if the total of all cash dividends declared by the
Bank in any calendar year, including the proposed cash
dividend, exceeds the total of the Bank's net profits for
that year plus its retained net profits from the preceding
two years less any required transfers to surplus or a fund
for the retirement of preferred stock, it any. The Board
has the authority under the Act to prohibit the payment of
cash dividends by a bank when it determines that such
payment to be an "unsafe and unsound banking practice" under
the then existing circumstances. There are also
restrictions set forth in the Pennsylvania Banking Code of
1965 (the Banking Code) and the FDI Act concerning the
payment of dividends by the Bank. Under the Banking Code,
no dividends may be paid except from "accumulated net
earnings" (generally undivided profits). Under the FDI Act,
no dividend may be paid if the Bank is in arrears in the
payment of any insurance assessment due the FDIC. The Bank
has not paid any dividends since inception and is not able
to pay any dividends due to its accumulated deficit.

The Bank was not required to have reserve balances on
deposit with the Federal Reserve Bank during the years ended
December 31, 1998 and 1997.

NOTE C - INVESTMENT SECURITIES AVAILABLE FOR SALE

The amortized cost, unrealized gains and losses, and fair
market value of the Bank's available-for-sale investment
securities at December 31, 1998 and 1997, are as follows (in
thousands): <PAGE I-45>

<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
1998
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value

<S> <C> <C> <C> <C>
Investment securities available-for-sale:
Federal Reserve Bank stock $ 320 $ - $ - $ 320
Federal Home Loan Bank stock 203 - - 203
Other equity securities 21 - - 21
544 - - 544

$544 $ - $ $ 544
======= ===== ======= =======
</TABLE>

<TABLE>
<CAPTION>
___________________________________________________________________________________________________________
1997

Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
<S> <C> <C> <C> <C>
Investment securities available-for-sale:
Federal Reserve Bank stock $ 320 $ - $ - $ 320
Federal Home Loan Bank stock 203 - - 203
Other equity securities 21 - - 21
544 - - 544

$ 544 $ - $ $ 544
======= ===== ======= ========
</TABLE>
There were no gross realized gains or losses on sales of
securities in 1998, 1997 or 1996.

There are minimum capital stock requirements for the Bank to
be a member of the Federal Reserve System and the Federal Home
Loan Bank of Pittsburgh. The minimum capital stock requirement
for membership in the Federal Reserve System is governed by
Regulation I, "Issue and Cancellation of Capital Stock of Federal
Reserve Banks." In accordance with this regulation, at
December 31, 1998 and 1997, the Bank was required to, and did,
hold $320,000 in the form of issued Federal Reserve Bank stock.

The minimum capital stock requirement for membership in the
Federal Home Loan Bank of Pittsburgh is based on a percentage of
mortgage related assets. At December 31, 1998 and 1997, the Bank
was required to, and did, hold $203,000 and $203,000,
respectively, in Federal Home Loan Bank stock.

NOTE D - LOANS

A summary of loans as of December 31, 1998 and 1997 is as
follows (in thousands):

<TABLE>
<CAPTION>
______________________________________________________________________________
1998 1997
<PAGE I-46>
<S> <C> <C>
Commercial loans (substantially all secured by
real estate mortgages) $9,633 $11,866
Construction loans (substantially all
secured by real estate mortgages) 12,695 8,860
Mortgage loans (substantially all one-to-four
family residential mortgages) 8,366 12,870
Commercial loans 10,142 7,209
SBA loans 8,251 8,225

Total loans 49,087 49,030

Allowance for loan losses (727) (727)

$ 48,360 $ 48,303
======== ==========
</TABLE>

An analysis of activity in the allowance for loan losses is
as follows (in thousands):

______________________________________________________________________________
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $ 727 $ 1,193 $ 1,526
Provision for loan losses - - -
Recoveries - - 138
Loans charged off - (466) (471)

Balance, end of year $ 727 $ 727 $ 1,193
======= ========= ========
</TABLE>

Nonaccrual loans which consist of loans 90 days past due and
loans on which the accrual of interest has been discontinued was
approximately $0.8 million, $0.8 million and $2.3 million at
December 31, 1998, 1997 and 1996, respectively. Interest on
these non-performing loans would have been approximately $71,000,
$147,000 and $216,000 in 1998, 1997 and 1996, respectively. All
payments received during 1998, 1997 and 1996 on these
nonperforming loans was applied to principal.

At December 31, 1998, 1997 and 1996, the recorded investment
in loans that are considered to be impaired was $0.1 million,
$0.1 million and $1.3 million, respectively (all of which was on
a nonaccrual basis). Included in the allowance for loan losses
related to the impaired loans at December 31, 1998, 1997 and 1996
was $17,000, $17,000 and $267,000, respectively. The average
recorded investment in impaired loans during 1998, 1997 and 1996
was $0.1 million, $0.4 million and $1.7 million, respectively.
All payments received during 1998, 1997 and 1996 on these
impaired loans was applied to principal.
<PAGE I-47>
Loans made by the Bank to its directors and principal
officers, including loans to affiliated persons, were made in the
ordinary course of business at substantially the same terms and
conditions as those to other borrowers. The aggregate amount of
these loans outstanding at December 31, 1998 and 1997 was $0 and
$0, respectively.

In October 1998, the Bank began originating non-traditional
student loans which are held for sale and contractually sold to
an investor at par within 45 days of origination. At
December 31, 1998 the balance of these loans was approximately
$400,000. The Bank did not recognize any gains or losses on the
sale of these loans during 1998.

NOTE E - PREMISES AND EQUIPMENT

A summary of premises and equipment is as follows (in
thousands):

<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
1998 1997

<S> <C> <C>
Furniture, fixtures and equipment $1,532 $1,380
Leasehold improvements 581 549
Computer equipment under capital lease 170 170
2,283 2,099
Less accumulated depreciation and amortization 1,654 1,452

$ 629 $ 647
====== =======
</TABLE>

NOTE F - DEPOSITS

A summary of deposits is as follows (in thousands):

<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
1998 1997
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Non-interest bearing $4,841 8% $ 5,391 9%
Interest bearing
NOW checking accounts 2,975 5 2,271 4
Money market accounts 3,994 7 9,502 16
Savings accounts 863 2 651 1
Certificates less than $100,000 39,545 69 38,471 64
Certificates $100,000 and greater 5,276 9 4,031 6
Total interest bearing 52,653 92 54,926 91

$ 57,494 100% $ 60,317 100%
=========== === ========== ===
</TABLE>

While the certificates frequently are renewed at maturity
rather than paid out, they are scheduled to mature contractually
as follows (in thousands):

_________________________________________________________________
<PAGE I-48>
1998 1997

Within one year $ 35,581 $ 37,750
Beyond one year but within three years 7,221 3,802
Due thereafter 2,019 950

$ 44,821 $ 42,502
========== =========

As of December 31, 1997, one of the Bank's directors
had a $4.6 million money market account with the Bank at
substantially the same rate and terms offered to other
depositors.

NOTE G - INCOME TAXES

The Bank recorded an income tax benefit of $160,000 in
1998 and did not record any income tax expense or benefit in 1997
or 1996.

A reconciliation of the differences between the
effective rates and statutory tax rate of is as follows (in
thousands):

<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
1998 1997 1996
<S> <C> <C> <C>
Federal income tax expense at statutory rate $ 201 $137 $ 69
Net operating loss limitation (utilization) - 83 (41)
Valuation allowance effect (356) (221) (29)
Other (5) 1 1

$(160) $ $
===== ==== =====

Deferred tax assets (liabilities) consist of the following (in thousands):
<CAPTION>
____________________________________________________________________________________________________________
1998 1997 1996
<S> <C> <C> <C>
Effect of allowable federal tax bad debt deduction $ (130) $ (134) $ 62
Loss carryforward limitation 1,730 1,957 1,997
Other 81 54 39
1,681 1,877 2,098
Less valuation allowance (1,441) (1,797) (2,018)

Net deferred tax asset $ 240 $ 80 $ 80
====== ====== ======
</TABLE>

Management has determined that based on its assessment
of projected levels of taxable income, realization of the net
deferred tax asset is more likely than not. The valuation
allowance decreased as a result of the decline in gross deferred
tax assets.

The Bank has available the following net operating loss
carryforwards for federal income tax purposes: <PAGE I-49>

Expiration Amount

2008 $ 25,974
2009 3,149,710
2010 1,732,016
2011 126,058
2012 53,119

$5,086,877
==========

The utilization of net operating loss carryforwards
generated prior to February 1995 is limited to $548,748 per year
due to the limitation imposed under Section 382 of the Internal
Revenue Code. As of December 31, 1998, approximately $1.8
million of these carryforwards are subject to this annual
limitation.

NOTE H - ADVANCES FROM THE FEDERAL HOME LOAN BANK

The Bank has a borrowing capacity with the Federal Home
Loan Bank (FHLB) totaling approximately $7.3 million. All
advances are secured by FHLB stock and qualifying first mortgage
loans. Interest rates on this borrowing capacity approximate six
month LIBOR. The were no advances outstanding during 1998 or
1997.

NOTE I - SHAREHOLDERS' EQUITY

On February 2, 1995, the Bank closed an offering of
16 million shares of its common stock at a price of $.25 per
share through a concurrent rights offering and public offering.
Gross proceeds to the Bank from the offering were $4.0 million
less offering costs of $350,000. At closing, an additional
16 million options were granted to the standby purchasers at an
exercise price of $.25. These options are immediately exercisable
and have a ten year expiration period (see Note M).

On July 28, 1995 a one for ten reverse stock split of
the Bank's common stock became effective. Total common stock
authorized as of December 31, 1998 is 3.5 million shares with a
par value of $.25 per share.

NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Bank is required to disclose information about the
fair value of financial instruments. The limitations on the
making of estimates of fair value are: Estimates are made at a
specific point in time, based upon, where available, relevant
market prices and information about the financial instruments.
For a substantial portion of the Bank's financial instruments, no
quoted market exists. Therefore, estimates of "fair value" are
based on a number of subjective assumptions including current
economic conditions, perceived risks associated with these
financial instruments, expected durations and other factors.
<PAGE I-50> Given the uncertainties associated with these
estimates, the reported "fair values" represent estimates only
and, therefore, cannot be compared to the historical accounting
model. Use of different assumptions would likely result in
different "fair value" estimates.

The fair values for cash and due from banks, interest
bearing deposits with banks, investment securities available for
sale, accrued interest receivable and accrued interest payable
approximate the current carrying amounts. In arriving at fair
values for loans, the portfolio was segregated into pools of
similar financial characteristics, including segmenting them by
fixed and adjustable rate terms. The estimated fair value of the
segregated portfolios was calculated by discounting expected
future cash flows through the estimated maturity using estimated
market rates that reflect credit risk inherent in the loans. The
fair value of deposit accounts with no stated maturity, such as
non-interest bearing deposits, savings, NOW and money market
accounts approximate their carrying amounts. The fair value of
certificates of deposit is based on the present value of
contractual cash flows. The discount rates used to compute
present values are estimated using the rates currently offered
for deposits of similar maturities in the Bank's marketplace.

The Bank's commitments to extend credit and letters of
credit carry current market interest rates if converted to loans.
Because commitments to extend credit and letters of credit are
generally unassignable by either the Bank or the borrower, they
only have value to the Bank or the borrower. The estimated fair
value approximates the recorded deferred fee amounts.

Carrying amounts and fair values for the Bank's
financial instruments as of December 31, 1997 and 1996 are as
follows (in thousands):

<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
1998 1997
Carrying Fair Carrying Fair
Amount Value losses Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 713 $ 713 $ 684 $ 684
Interest bearing deposits with banks 11,857 11,857 13,012 13,012
Investment securities available for sale 544 544 544 544
Loans, net 48,360 49,745 48,303 49,412
Accrued interest receivable 413 413 405 405
Financial liabilities:
Deposits with no stated maturity 12,673 12,673 17,815 17,815
Certificates of deposit 44,821 45,144 42,502 42,741
Accrued interest payable 181 181 221 221
</TABLE>

NOTE K - COMMITMENTS AND CONTINGENCIES

1. Lease Commitments
<PAGE I-51>
The Bank has entered into non-cancelable operating
lease agreements for office space and banking facilities. The
lease terms are ten years with two five year options to renew.
The Bank is responsible for pro rata operating expense
escalations. The approximate minimum annual rental payments
under the leases are as follows (in thousands):

Year ending December 31,

1999 $ 151
=====

2. Other

There has been no change in the action brought against
the Bank on January 9, 1997. This action was filed in the Court
of Common Pleas of Montgomery County, Pennsylvania, against
eleven defendants including the Bank. The action is related to a
former loan customer whose loan was paid off from the proceeds of
a subsequent lender after which the customer filed for
bankruptcy. The complaint, filed by a subsequent lender,
contains 20 separate counts against the numerous defendants. The
Bank filed objections to the complaint and does not intend to
answer the complaint until the objections are resolved. The
action is in the preliminary discovery stage (interrogatories and
requests for production of documents) and depositions have not
been scheduled. Management feels that the complaint contains
serious legal and procedural shortcomings. At this time,
management does not believe that the outcome of the case will
have a material impact on the Bank's financial position or
results of operation.

NOTE L - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK

The Bank is a party to financial instruments with off-
balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure
to fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of
credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount
recognized in the balance sheets. The contract amounts of those
instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments. The Bank's exposure
to credit loss in the event of non-performance by the other party
to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it
does for on balance sheet instruments. As of December 31, 1998
and 1997, the Bank had contracts to extend standby letters of
credit in the amount of $167,000 and $872,000, respectively.
There were no open commitments to extend credit as of December 3
1, 1998 or 1997. Commitments generally have fixed expiration
<PAGE I-52> dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
no necessarily represent future cash requirements. Substantially
all of the Bank's loans, commitments and standby letters of
credit have been granted to customers in the Bank's market area
that consists primarily of Philadelphia, Pennsylvania, and its
suburbs. The concentrations by type of loan are set forth in
Note D. Although the Bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their
contracts is dependent upon the economic environment within the
Bank's market area.

NOTE M - STOCK OPTION PLANS AND WARRANTS

The Bank has a Stock Option Plan (the Plan) for the
benefit of key employees of the Bank. The stock option may be in
the form of Incentive Stock Options or Non-qualified Stock
Options. The option price per share under any option must equal
the fair market value of the Bank's common stock on the date of
the option grant. However, in certain circumstances the option
price must be equal to 110% of the fair market value. Options
become exercisable as to 33.3% of the grant one year after the
grant date and as to an additional 33.3% each of the next two
years thereafter. These options expire ten years after the date
of grant, if not exercised. An aggregate of 12,500 shares of
authorized but unissued common stock of the Bank has been
reserved under the Plan.

In connection with the closing of the Bank's offering
of 16 million shares of common stock on February 2, 1995, an
additional 16 million options were granted to the standby
purchasers at an exercise price of $.25. These options became
immediately exercisable and have a ten year expiration period.
On July 28, 1995 a one for ten reverse stock split of the Bank's
common stock became effective. This had the effect of reducing
the amount of these options to $1.6 million at an exercise price
of $2.50.

Information concerning options as of December 31, 19978
is as follows (all amounts have been retroactively adjusted to
prior periods due to a one for ten reverse stock split that
occurred during 1995):

_________________________________________________________________
Shares Price

Balance at January 1, 1996 1,602,200 $2.50 - $25.00
Options cancelled (2,200) $25.00
Options granted 12,500 $2.875
Options exercised - -
Balance at December 31, 1996 1,612,500 $2.50 - $2.875
Options cancelled - -
Options granted - -
Options exercised - -
<PAGE I-53>
Balance at December 31, 1997 1,612,500 $2.50 - $2.875
Options cancelled - -
Options granted - -
Options exercised - -
Balance at December 31, 1998 1,612,500 $2.50 - $2.875

The Bank applies APB Opinion No. 25 and related
Interpretations in accounting for its stock option plan.
Accordingly, no compensation expense has been recognized for the
12,500 options granted in 1996. Had compensation cost for the
grant of options during 1996 been determined in accordance with
their fair value the Bank's net income would have been reduced by
approximately $4,000 and there would be no change in the Bank's
earnings per share. The fair value for these options was
estimated to be approximately $ 1.00 per option at the date of
grant, using a Black-Scholes option pricing model with the
following weighted-average assumptions: expected dividend yield
of 0%, risk-free interest rate of 5.8%, volatility factors of the
expected market price of the Bank's common stock of .35, and a
weighted-average expected life of the option of 5 years.
<PAGE I-54>
ANNEX J

PSB Employee Stock Option Plan

<PAGE J-1>
___/___

1998 PSB BANCORP, INC.
STOCK OPTION PLAN
<PAGE J-2>
Article 1. PURPOSE OF THE PLAN

1.1 Purpose - The 1998 PSB Bancorp, Inc. Stock Option Plan
(the "Plan") is intended to provide key employees of
PSB Bancorp, Inc. (the "Corporation") and its
Subsidiaries an opportunity to acquire Common Stock of
the Corporation. The Plan is being instituted in
connection with the conversion and reorganization of
PSB Mutual Holding Company from a mutual holding
company to a stock holding company in accordance with a
Plan of Conversion from Mutual Holding Company to Stock
Holding Company and Agreement and Plan of
Reorganization first approved by the Corporation and
the Pennsylvania Savings Bank's (the "Bank's") Board of
Directors and Board of Trustees, respectively, in July
1998. The Plan is designed to help the Corporation
attract, retain and motivate key employees to make
substantial contributions to the success of the
Corporation's business. Stock Options are granted
under the Plan based on the Participant's level of
responsibility and performance within the Corporation.

1.2 Stock Options to be Granted - Incentive Stock Options
within the meaning of Code Section 422(b) and
Nonqualified Stock Options may be granted within the
limitations of the Plan.

Article 2. DEFINITIONS

2.1 "Agreement" - The written instrument evidencing the
grant of an Option. A Participant may be issued one or
more Agreements from time to time, reflecting one or
more Options.

2.2 "Bank" - Pennsylvania Savings Bank or any Subsidiary.

2.3 "Board" - The Board of Directors of the Corporation.

2.4 "Code" - The Internal Revenue Code of 1986, as amended.

2.5 "Committee" - The Committee which the Board appoints to
administer the Plan.

2.6 "Common Stock" - The common stock of the Corporation
(without par value) as described in the Corporation's
Articles of Incorporation, or such other stock as shall
be substituted therefor.

2.7 "Corporation" - PSB Bancorp, Inc. or any Subsidiary.

2.8 "Employee" - Any key employee (including officers) of
the Corporation.
<PAGE J-3>
2.9 "Exchange Act" - The Securities Exchange Act of 1934,
as amended.

2.10 "Incentive Stock Option" - A stock option intended to
satisfy the Requirements of Code Section 422(b).

2.11 "Nonqualified Stock Option" - A stock option other than
an Incentive Stock Option.

2.12 "Optionee" - A Participant who is awarded a Stock
Option pursuant to the provisions of the Plan.

2.13 "Participant" - An Employee selected by the Committee
to receive a grant of an Option under the Plan.

2.14 "Plan" - The PSB Bancorp, Inc. Stock Option Plan.

2.15 "Retirement" - The later of the attainment of age
sixty-five or retirement as provided in the
Pennsylvania Savings Bank Defined Benefit Pension Plan
and Trust.

2.16 "Securities Act" - The Securities Act of 1933, as
amended.

2.17 "Stock Option" or "Option" - An award of a right to
purchase Common Stock pursuant to the provisions of the
Plan.

2.18 "Subsidiary" - A subsidiary corporation as defined in
Code Section 424(f) that is a subsidiary of the
Corporation.

Article 3. ADMINISTRATION OF THE PLAN

3.1 The Committee - The Plan shall be administered by a
committee of the Board (the "Committee") composed of those
members of the Board (at least three in number) who (a) are not
employees of the Corporation, and (b) are "Disinterested Persons"
as such term is defined by the Securities and Exchange Commission
pursuant to Section 16(b) of the Exchange Act. No Committee
member shall be eligible (or shall have been eligible within one
year prior to his appointment) to be granted Options under the
Plan or to be selected as a Participant under any other
discretionary plan of the Corporation entitling them to acquire
Common Stock, stock options or stock appreciation rights of the
Corporation. The Board may from time to time remove members
from, or add members to, the Committee. Vacancies on the
Committee, howsoever caused, shall be filled by the Board.

3.2 Powers of the Committee -

(a) The Committee shall be vested with full authority
to make such rules and regulations as it deems
necessary or desirable to administer the Plan and
<PAGE J-4> to interpret the provisions of the
Plan, unless otherwise determined by the Board.
Any determination, decision or action of the
Committee in connection with the construction,
interpretation, administration or application of
the Plan shall be final, conclusive and binding
upon all Optionees and any person claiming under
or through an Optionee, unless otherwise
determined by the Board.

(b) Subject to the terms, provisions and conditions of
the Plan and subject to review and approval by a
majority of the disinterested members of the
Board, the Committee shall have exclusive
authority to:

(i) select, based upon the recommendation of the
Corporation's Chief Executive Officer, the
key Employees to be granted Options (it being
understood that more than one Option may be
granted to the same person);

(ii) determine the number of shares subject to
each Option;

(iii) determine the date or dates when the Options
will be granted;

(iv) determine the purchase price of the shares
subject to each Option in accordance with
Article 5 of the Plan;

(v) determine the date or dates when each Option
may be exercised within the term of the
Option specified pursuant to Article 7 of the
Plan;

(vi) determine whether or not an Option
constitutes an Incentive Stock Option; and

(vii) prescribe the form, which shall be consistent
with the Plan, of the Agreement evidencing
any Options granted under the Plan.

3.3 Terms - The grant of an Option under the Plan shall be
evidenced by an Agreement and may include any terms and
conditions consistent with this Plan, as the Committee
may determine.

3.4 Liability - No member of the Board or the Committee
shall be liable for any action or determination made in
good faith by the Board or the Committee with respect
to this Plan or any Options granted under this Plan.

Article 4. COMMON STOCK SUBJECT TO THE PLAN <PAGE J-5>

4.1 Common Stock Authorized - The aggregate number of
shares of Common Stock for which Options may be granted
under the Plan shall not exceed ten percent (10%) of
the number of shares sold in the Conversion Offerings
as defined in the Plan of Commission from Mutual
Holding Company to Stock Holding Company and Agreement
and Plan of Reorganization. The limitation established
by the preceding sentence shall be subject to
adjustment as provided in Article 9 of the Plan.

4.2 Shares Available - The Common Stock to be issued upon
exercise of Options granted under the Plan shall be the
Common Stock which shall be made available at the
discretion of the Board, either from authorized but
unissued Common Stock or from Common Stock acquired by
the Corporation, including shares of common stock
purchased in the open market. In the event that any
outstanding Option under the Plan for any reason
expires or is terminated, the shares of Common Stock
allocable to the unexercised portion of such Option may
thereafter be regranted subject to option under the
Plan.

Article 5. STOCK OPTIONS

5.1 Exercise Price - The exercise price of Common Stock
shall be, in the case of an Incentive Stock Option, 100
percent of the fair market value of one share of Common
Stock on the date the Option is granted, except that
the purchase price per share shall be 110 percent of
such fair market value in the case of an Incentive
Stock Option granted to any individual described in
Section 6.2 of the Plan. The exercise price of Common
Stock shall be, in the case of a Nonqualified Stock
Option, not less than one hundred percent (100%) of the
fair market value of one share of Common Stock on the
date the Option is granted. The exercise price shall
be subject to adjustment only as provided in Article 9
of the Plan.

5.2 Limitation on Incentive Stock Options - The aggregate
fair market value (determined as of the date an Option
is granted) of the stock with respect to which
Incentive Stock Options are exercisable for the first
time by any individual in any calendar year (under the
Plan and all other plans maintained by the Corporation
and the Bank) shall not exceed $100,000.

5.3 Determination of Fair Market Value -

(a) If the Common Stock is listed on an established
stock exchange or exchanges, the fair market value
shall be deemed to be the closing price of Common
Stock on such stock exchange or exchanges on the
day the Option is granted or, if no sale of Common
<PAGE J-6> Stock has been made on any stock
exchange on that day, the fair market value shall
be determined by reference to such price for the
next preceding day on which a sale occurred.

(b) During such time as Common Stock is not listed on
an established stock exchange or exchanges but is
listed on the NASDAQ Small-Cap Market or National
Market System, the fair market value per share
shall be the closing sale price for the Common
Stock on the day the Option is granted. If no
sale of Common Stock has occurred on that day, the
fair market value shall be determined by reference
to such price for the next preceding day on which
a sale occurred.

(c) During such time as the Common Stock is not listed
on an established stock exchange or on the NASDAQ
Small-Cap Market or National Market System, fair
market value per share shall be the mean between
the closing dealer "bid" and "asked" prices for
the Common Stock for the day of the grant, and if
no "bid" and "asked" prices are quoted for the day
of the grant, the fair market value shall be
determined by reference to such prices on the next
preceding day on which such prices were quoted.

(d) In the event that the Common Stock is not traded
on an established stock exchange or on the NASDAQ
Small-Cap Market or National Market System, and no
closing dealer "bid" and "asked" prices are
available, or within a reasonable period prior to,
the date of a grant, then fair market value will
be the price established by the Committee in good
faith.

Article 6. ELIGIBILITY

6.1 Participation - Options shall be granted only to
persons who are Employees of the Corporation, as
determined by the Committee, based upon the
recommendation of the Chief Executive Officer and
ratified by a majority of the disinterested members of
the Board. Neither the members of the Committee nor
any member of the Board who is not an employee of the
Corporation shall be eligible to receive an Option
under the Plan.

6.2 Incentive Stock Option Eligibility - Notwithstanding
any other provision of the Plan, an individual who owns
more than 10 percent of the total combined voting power
of all classes of outstanding stock of the Corporation
shall not be eligible for the grant of an Incentive
Stock Option, unless the special requirements set forth
in Sections 5.1 and 7.1 of the Plan are satisfied. For
<PAGE J-7> purposes of this Section 6.2, in determining
stock ownership, an individual shall be considered as
owning the stock owned, directly or indirectly, by or
for his brothers and sisters (whether by the whole or
half blood), spouse, ancestors and lineal descendants.
Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be
considered as being owned proportionately by or for its
shareholders, partners or beneficiaries, as the case
may be, "outstanding stock" shall include all stock
actually issued and outstanding immediately before the
grant of the Option. "Outstanding stock" shall not
include shares authorized for issue under outstanding
Options held by the Optionee or by any other person.

Article 7. TERM AND EXERCISE OF OPTIONS

7.1 Termination - Each Option granted under the Plan shall
terminate on the date determined by the Committee and
approved by a majority of the disinterested members of
the Board, and specified in the corresponding
Agreement; provided, however, that (i) each intended
Incentive Stock Option granted to an individual
described in Section 6.2 of the Plan shall terminate
not later than five (5) years after the date of the
grant, (ii) each other intended Incentive Stock Option
shall terminate not later than ten (10) years after the
date of grant, and (iii) each Option granted under the
Plan which is intended to be a Nonqualified Stock
Option shall terminate not later than ten (10) years
and one month after the date of grant. Except as
otherwise provided in Section 8, each Option granted
under the Plan shall become exercisable only after the
Optionee has completed one year of continuous
employment with the Corporation immediately following
the date of the grant of the Option. The Committee at
its discretion may provide further limitations on the
exercisability of Options granted under the Plan. An
Option may be exercised only during the continuance of
the Optionee's employment, except as provided in
Article 8 of the Plan.

7.2 Exercise -

(a) A person electing to exercise an Option shall give
written notice to the Corporation of such election
and of the number of shares such person has
elected to purchase, in such form as the Committee
shall have prescribed or approved, and shall at
the time of exercise tender the full purchase
price of the shares such person has elected to
purchase. The purchase price shall be paid in
full, in cash, upon the exercise of the Option,
provided, however, that in lieu of cash, with the
approval of the Committee at or prior to exercise,
<PAGE J-8> an Optionee may exercise an Option by
tendering to the Corporation shares of Common
Stock owned by the Optionee and having a fair
market value equal to the cash exercise price
applicable to the Option (with the fair market
value of such stock to be determined in the manner
provided in Section 5.3 hereof) or by delivering
such combination of cash and such shares as the
Committee in its sole discretion may approve.
Notwithstanding the foregoing, Common Stock
acquired pursuant to the exercise of an Incentive
Stock Option may not be tendered as payment unless
the holding period requirements of Code Section
422(a)(1) have been satisfied, and Common Stock
acquired other than pursuant to the exercise of an
Incentive Stock Option may not be tendered as
payment unless it has been held, beneficially and
of record, for at least one year.

(b) A person holding more than one Option at any
relevant time may, in accordance with the
provisions of the Plan, elect to exercise such
Options in any order.

(c) At the request of the Participant and to the
extent permitted by applicable law, the
Corporation may, in its sole discretion,
selectively approve arrangements with a brokerage
firm under which such brokerage firm, on behalf of
the Participant, shall pay to the Corporation the
exercise price of the Stock Options being
exercised, and the Corporation, pursuant to an
irrevocable notice from the Participant, shall
promptly deliver the shares being purchased to
such firm.

Article 8. TERMINATION OF EMPLOYMENT

8.1 Retirement - In the event of Retirement, an Option
shall lapse at the earlier of the term of the Option
or:

(a) in the case of an Incentive Stock Option, three
(3) months from the date of Retirement; and

(b) in the case of Options other than Incentive Stock
Options, up to 24 months, at the discretion of the
Committee, from the date of Retirement.

8.2 Voluntary Termination - In the event of voluntary
termination of employment at the election of the
Optionee or termination at the election of the
Corporation, all Options shall lapse as of the date of
termination.
<PAGE J-9>
8.3 Death or Total and Permanent Disability - In the event
of termination due to death or total and permanent
disability, the Option shall lapse at the earlier of
the term of the Option or one year after termination
due to such causes.

Article 9. ADJUSTMENT PROVISIONS

9.1 Share Adjustments -

(a) In the event that the shares of Common Stock shall
be changed into or exchanged for a different
number or kind of shares of stock or other
securities of the Corporation or of another
corporation (whether by reason of merger,
consolidation, recapitalization, reclassification,
split-up, combination of shares or otherwise) or
if the number of such shares of Common Stock shall
be increased through the payment of a stock
dividend, then, subject to the provisions of
Subsection (c) below, there shall be substituted
for or added to each share of stock of the
Corporation which was theretofore appropriated, or
which thereafter may become subject to an option
under the Plan, the number and kind of shares of
stock or other securities into which each
outstanding share of the Common Stock shall be so
changed or for which each such share shall be
exchanged or to which each such share shall be
entitled, as the case may be. Outstanding Options
shall also be appropriately amended as to price
and other terms, as may be necessary to reflect
the foregoing events.

(b) If there shall be any other change in the number
or kind of the outstanding shares of the Common
Stock, or of any stock or other securities in
which such stock shall have been changed, or for
which it shall have been exchanged, and if a
majority of the disinterested members of the Board
shall, in its sole discretion, determine that such
change equitably requires an adjustment in any
Option which was theretofore granted or which may
thereafter be granted under the Plan, then such
adjustment shall be made in accordance with such
determination.

(c) The grant of an Option pursuant to the Plan shall
not affect in any way the right or power of the
Corporation to make adjustments,
reclassifications, reorganizations or changes of
its capital or business structure, to merge, to
consolidate, to dissolve, to liquidate or to sell
or transfer all or any part of its business or
assets. <PAGE J-10>

9.2 Corporate Changes - A dissolution or liquidation of the
Corporation, or a merger or consolidation in which the
Corporation is not the surviving corporation, shall
cause each outstanding Option to terminate, except to
the extent that another corporation may and does in the
transaction assume and continue the Option or
substitute its own options.

9.3 Fractional Shares - Fractional shares resulting from
any adjustment in Options pursuant to this Article 9
may be settled as the Board or the Committee (as the
case may be) shall determine.

9.4 Binding Determination - To the extent that the
foregoing adjustments relate to stock or securities of
the Corporation, such adjustments shall be made by the
Board, whose determination in that respect shall be
final, binding and conclusive. Notice of any
adjustment shall be given by the Corporation to each
holder of an Option which shall have been so adjusted.

Article 10. GENERAL PROVISIONS

10.1 Effective Date - The Plan shall become effective upon
its adoption by the Board, provided that any grant of
Option is subject to the approval of the Plan by the
shareholders of the Corporation within 12 months of
adoption by the Board.

10.2 Termination of the Plan - Unless previously terminated
by the Board, the Plan shall terminate on, and no
Options shall be granted after, then tenth anniversary
of its adoption by the Board.

10.3 Limitation on Termination, Amendment or Modification

(a) The Board may at any time terminate, amend, modify
or suspend the Plan, provided that no amendment or
modification shall be made by the Board, without
the approval of the shareholders of the
Corporation, which:

(i) increases the maximum number of shares of
Common Stock as to which Options may be
granted under the Plan (other than pursuant
to Article 9);

(ii) changes the class of eligible Employees; or

(iii) otherwise requires the approval of
shareholders in order to maintain the
exemption available under Rule 16b-3 (or any
similar rule) under the Exchange Act.
<PAGE J-11>
(b) No amendment, modification, suspension or
termination of the Plan shall in any manner affect
any Option theretofore granted under the Plan
without the consent of the Optionee or any person
validly claiming under or through the Optionee.

10.4 No Right to Employment - Neither anything contained in
the Plan or in any instrument under the Plan nor the
grant of any Option hereunder shall confer upon any
Optionee any right to continue in the employ of the
Corporation or of any Subsidiary or limit in any
respect the right of the Corporation or of any
Subsidiary to terminate the Optionee's employment at
any time and for any reason.

10.5 Withholding Taxes -

(a) Subject to the provisions of Subsection (b), the
Corporation will require that an Optionee, as a
condition of the exercise of an Option, other than
an Incentive Stock Option or any other person or
entity receiving Common Stock upon exercise of an
Option, pay or reimburse any taxes which the
Corporation is required to withhold in connection
with the exercise of the Option.

(b) An Optionee may satisfy the withholding obligation
described in Subsection (a), in whole or in part,
by electing to have the Corporation withhold
shares of Common Stock (otherwise issuable upon
the exercise of an Option) having a fair market
value equal to the amount required to be withheld.
An election by an Optionee to have shares withheld
for this purpose shall be subject to the following
restrictions:

(i) it shall be made prior to the date on which
the amount of tax to be withheld is
determined (the "Tax Date");

(ii) it shall be irrevocable;

(iii) it shall be subject to disapproval by the
Committee;

(iv) if the Optionee is an officer of the
Corporation within the meaning of Section 16
of the Exchange Act (an "Officer"), such
election may not be made within six months of
the grant of the Option (except that this
restriction shall not apply in the event of
the death or disability of the Optionee prior
to the expiration of the six-month period);
<PAGE J-12>
(v) if the Optionee is an Officer, such election
must be made either at least six months prior
to the Tax Date or in the ten-day "window
period" beginning on the third day following
the release of the Corporation's quarterly or
annual summary statement of revenues and
earnings; and

(vi) where the Tax Date of an Officer is deferred
up to six months after the exercise of an
Option, the full number of Option shares will
be issued or transferred to the Officer upon
exercise, but the Officer will be
unconditionally obligated to tender back to
the Corporation the proper number of shares
of Common Stock on the Tax Date.

10.6 Listing and Registration of Shares - No Option granted
pursuant to the Plan shall be exercisable in whole or
in part if at any time the Board shall determine in its
discretion that the listing, registration or
qualification of the shares of Common Stock subject to
such Option on any securities exchange or under any
applicable law, or the consent or approval of any
governmental regulatory body, is necessary or desirable
as a condition of, or in connection with, the granting
of such Option or the issue of shares thereunder,
unless such listing, registration, qualification,
consent or approval shall have been effected or
obtained free of any conditions not acceptable to the
Board.

* * *
<PAGE J-13>

STOCK OPTION AGREEMENT FOR

INCENTIVE STOCK OPTION
______________________

BETWEEN

PSB BANCORP, INC.

AND

______________________

(the Optionholder)

Date of Grant: ____________________

Number of Shares: _____________ shares

Purchase Price: $___________________

Option Expires: ____________________

<PAGE J-14>
INCENTIVE STOCK OPTION AGREEMENT

Number of shares subject to option: ______________ shares.

This Agreement dated ________________ is by and between PSB
Bancorp, Inc. (the "Corporation") and ___________________ (the
"Optionholder"),

WITNESSETH:

1. Grant of Option

Pursuant to the provisions of the 1998 PSB Bancorp, Inc.
Stock Option Plan (the "Plan") the Corporation hereby grants to
the Optionholder, subject to the terms and conditions of the Plan
and subject further to the terms and conditions herein set forth,
the right and option to purchase from the Corporation for cash,
or for common stock of the Corporation, $.01 par value per share
(the "Common Stock"), subject to the approval of the Committee
(as defined in the Plan), all or any part of an aggregate of
__________ shares of Common Stock (the "Option") at the purchase
price of $_______________ per share, to be exercised as
hereinafter provided.

2. Terms and Conditions

It is understood and agreed that the Option is subject to
the following terms and conditions:

(a) Expiration Date. Subject to the provisions of
Paragraph 2(d), the Option shall expire on
__________________ [not more than 10 years from the
date of grant, except for an Option granted to a 10%
shareholder, which shall be limited to 5 years].

(b) Exercise of Option. Except as set forth in the Plan,
no part of this Option may be exercised until the
Optionholder has remained in the employ of the
Corporation or of a Subsidiary of the Corporation for a
period of one year after the date hereof.

This Option may be exercised, to the extent exercisable
by its terms, in whole or from time to time in part at
any time prior to the expiration hereof. Any exercise
shall be accompanied by a written notice to the
Corporation specifying the number of shares of Common
Stock (the "Shares") as to which the Option is being
exercised.

(c) Payment of Purchase Price Upon Exercise. At the time
of any exercise, the purchase price of the Shares shall
be paid in cash (or, subject to the conditions and
limitations described in the Plan, by delivering shares
of Common Stock of the Corporation or by delivering a
<PAGE J-15> combination of such shares and cash equal
to the purchase price set forth in Paragraph 1 hereof)
to the Corporation.

(d) Exercise Upon Death or Termination of Employment.

(1) In the event of the death of the Optionholder
while an employee of the Corporation or of a
Subsidiary, this Option may be exercised, to the
extent that the Optionholder was entitled to do so
at the date of termination of employment, by the
person or persons to whom the Optionholder's
rights under this Option pass by will or
applicable law, or if no such person has such
right by his executors or administrators, at any
time, or from time to time, but in no event later
than the expiration date specified in Paragraph
2(a) or one year after the Optionholder's death,
whichever is earlier.

(2) If the Optionholder's employment with the
Corporation terminates because of total and
permanent disability, then the Optionholder may
exercise this Option at any time, or from time to
time, within one year after the date of
termination, but in no event later than the
expiration date.

(3) If the Optionholder's employment with the
Corporation terminates because of retirement after
attaining age 65 or retirement at an earlier age
with the consent of the Board of Directors, then
the Optionholder may exercise this Option at any
time, or from time to time, within three (3)
months after the date of termination, but in no
event later than the expiration date set forth in
2(a).

(4) If the Optionholder's employment with the
Corporation is voluntarily terminated by the
Optionholder, except for retirement after
attaining age 65 or retirement at an earlier age
with the consent of the Board of Directors, then
the Option will expire on the date of termination
of employment.

(5) Notwithstanding anything herein to the contrary,
if the Optionholder's employment is terminated by
the Corporation, all rights to exercise this
Option shall terminate at the date of such
termination.

(e) Nontransferability. This Option shall not be
transferable other than by will or by the laws of
descent and distribution. During the lifetime of the
<PAGE J-16> Optionholder, this Option shall be
exercisable only by the Optionholder.

(f) Adjustments. In the event of any change in the Common
Stock by reason of any stock dividend,
recapitalization, reclassification, merger,
consolidation, split-up, combination or exchange of
shares, or of any similar change affecting the Common
Stock, then in any such event the number and kind of
Shares and their purchase price per Share shall be
appropriately adjusted consistent with such change. If
any other change in the number or kind of the
outstanding Common Stock occurs, an adjustment may be
made to the number and kind of Shares subject to this
Option and their purchase price in such manner as a
majority of the disinterested members of the Board of
Directors may deem equitable to prevent substantial
dilution or enlargement of the rights granted to the
Optionholder hereunder. Any adjustment so made shall
be final and binding upon the Optionholder.

(g) No Rights as Shareholder. The Optionholder shall have
no rights as a shareholder with respect to any shares
of Common Stock subject to this Option prior to the
date of issuance of a certificate or certificates for
such shares.

(h) No Right To Continued Employment. This Option shall
not confer upon the Optionholder any right with respect
to continuance of employment by the Corporation or any
Subsidiary, nor shall it interfere in any way with the
right of his or her employer to terminate his or her
employment at any time.

(i) Compliance with Law and Regulations. This Option and
the obligation of the Corporation to sell and deliver
Shares hereunder shall be subject to all applicable
federal and state laws, rules and regulations and to
such approvals by any government or regulatory agency,
as may be required. The Corporation shall not be
required to issue or deliver any certificates for
shares of Common Stock prior to (1) the listing of such
shares on any stock exchange on which the Common Stock
may then be listed and (2) the completion of any
registration or qualification of such shares under any
federal or state law, or any rule or regulation of any
government body which the Corporation shall, in its
sole discretion, determine to be necessary or
advisable.

3. Investment Representation

The Committee appointed pursuant to Article 3 of the Plan
may require the Optionholder to furnish to the Corporation, prior
to the issuance of any Shares upon the exercise of all or any
<PAGE J-17> part of this Option, an agreement (in such form as
such Committee may specify) in which the Optionholder represents
that the Shares acquired upon exercise are being acquired for
investment and not with a view to the sale or distribution
thereof.

4. Optionholder Bound by Plan

The Optionholder hereby acknowledges receipt of a copy of
the Plan and agrees to be bound by all the terms and provisions
thereof, which, to the extent relevant, are incorporated herein
by reference. The terms of this Agreement shall not supersede
any term of the Plan.

5. Notices

Any notice hereunder to the Corporation shall be addressed
to it at its office, Eleven Penn Center, Suite 2601, 1835 Market
Street, Philadelphia, Pennsylvania 19103, Attention: Anthony
DiSandro, President; and any notice hereunder to Optionholder
shall be addressed to the address below, subject to the right of
either party to designate at any time hereafter in writing some
other address.

IN WITNESS WHEREOF, PSB Bancorp, Inc. has caused this
Agreement to be executed by a duly authorized officer and the
Optionholder has executed this Agreement, both as of the day and
year first above written.

PSB BANCORP, INC. OPTIONHOLDER

By_______________________ _____________________________
(Signature) (Signature)

_________________________ _____________________________
(Print Name) (Print Name)

_________________________ _____________________________
(Print Title) (Print Address)

<PAGE J-18>
STOCK OPTION AGREEMENT FOR

NONQUALIFIED STOCK OPTION
_________________________

BETWEEN

PSB BANCORP, INC.

AND

_________________________
(the Optionholder)

Date of Grant: ____________________

Number of Shares: _____________ shares

Purchase Price: $___________________

Option Expires: ____________________

<PAGE J-19>
NONQUALIFIED STOCK OPTION AGREEMENT

Number of shares subject to option: _____________ shares.

This Agreement dated ______________________ is by and
between PSB Bancorp, Inc. (the "Corporation") and
____________________ (the "Optionholder"),

WITNESSETH:

1. Grant of Option.

Pursuant to the provisions of the 1998 PSB Bancorp, Inc.
Stock Option Plan (the "Plan") the Corporation hereby grants to
the Optionholder, subject to the terms and conditions of the Plan
and subject further to the terms and conditions herein set forth,
the right and option to purchase from the Corporation for cash,
or for common stock of the Corporation, $.01 par value per share
(the "Common Stock"), subject to the approval of the Committee
(as defined in the Plan), all or any part of an aggregate of
__________ shares of Common Stock at the purchase price of
$___________ per share, such option to be exercised as
hereinafter provided (the "Option").

2. Terms and Conditions.

It is understood and agreed that the Option is subject to
the following terms and conditions:

(a) Expiration Date. Subject to the provisions of
Paragraph 2(d), the Option granted hereby shall expire
on _____________ [not more than 10 years and one month
from the date of grant].

(b) Exercise of Option. Except as otherwise provided in
Paragraph 2(d)(6), no part of this Option may be
exercised until the Optionholder has remained in the
employ of the Corporation or of a Subsidiary of the
Corporation for a period of one year after the date
hereof.

(c) Payment of Purchase Price Upon Exercise. At the time
of any exercise the purchase price of the shares as to
which this Option shall be exercised shall be paid in
cash (or, subject to the conditions and limitations
described in the Plan, by delivering shares of Common
<PAGE J-20> Stock or by delivering a combination of
such shares and cash equal to the price per share set
forth in Paragraph 1 hereof) to the Corporation.

(d) Exercise Upon Death or Termination of Employment.

(2) If the Optionholder's employment with the
Corporation terminates because of total and
permanent disability, then the Optionholder may
exercise this option at any time, or from time to
time, within one year after the date of
termination, but in no event later than the
expiration date.

(3) If the Optionholder's employment with the
Corporation terminates because of retirement after
attaining age 65 or retirement at an earlier age
with the consent of the Board of Directors, then
the Optionholder may exercise this Option at any
time, or from time to time, within ____________
[not more than 24] months after the date of
termination, but in no event later than the
expiration date.

(5) If the Optionholder's employment is terminated by
the Corporation, all rights to exercise this
Option shall terminate at the date of such
termination, except as otherwise provided in
Paragraph 2(d)(6).

(6) In the event the Optionholder's employment is
terminated pursuant to Paragraph 2(d)(4) or
<PAGE J-21> 2(d)(5) and, no later than 30 days
thereafter, the Committee in its discretion makes
a determination that such termination is or was
"at the convenience of the employer," then any
nonqualified options held by such Optionholder on
the date of termination shall lapse on the earlier
of (i) its otherwise scheduled expiration date, or
(ii) a date that is the first anniversary of the
Optionholder's termination of employment. In
addition, the requirement of Paragraph 2(b) shall
not apply to such Optionholder, provided, however,
that no affected option may be exercised until one
year has elapsed from its grant date.

For purposes of this Paragraph 2(d)(6), the phrase
"at the convenience of the employer" means, with
respect to the termination of employment of an
Optionholder, a termination in the nature of a
layoff, whether effected through a general
reduction in force or on an individual or small
group basis, provided such termination of
employment is unrelated to the terminated
individual's specific work performance.

(e) Nontransferability. This Option shall not be
transferable other than by will or by the laws of
descent and distribution. During the lifetime of the
Optionholder, this Option shall be exercisable only by
the Optionholder.

(f) Adjustments. In the event of any change in the Common
Stock by reason of any stock dividend,
recapitalization, reclassification, merger,
consolidation, split-up, combination or exchange of
shares, or of any similar change affecting the Common
Stock, then in any such event the number and kind of
Shares subject to this Option and their purchase price
per share shall be appropriately adjusted consistent
with such change. If any other change in the number or
kind of the Common Stock occurs, an adjustment may be
made to the number and kind of Shares subject to this
Option and their purchase price per share in such
manner as a majority of the disinterested members of
the Board of Directors may deem equitable to prevent
substantial dilution or enlargement of the rights
granted to the Optionholder hereunder. Any adjustment
so made shall be final and binding upon the
Optionholder.

(g) No Rights As Shareholder. The Optionholder shall have
no rights as a shareholder with respect to any shares
of Common Stock subject to this option prior to the
date of issuance of a certificate or certificates for
such Shares.
<PAGE J-22>
(h) No Right to Continued Employment. This Option shall
not confer upon the Optionholder any right with respect
to continuance of employment by the Corporation or any
Subsidiary, nor shall it interfere in any way with the
right of his or her employer to terminate his or her
employment at any time.

(i) Compliance with Law and Regulations. This Option and
the obligation of the Corporation to sell and deliver
shares hereunder, shall be subject to all applicable
federal and state laws, rules and regulations and to
such approvals by any government or regulatory agency
as may be required. The Corporation shall not be
required to issue or deliver any certificates for
shares of Common Stock prior to (1) the listing of such
Shares on any stock exchange on which the Common Stock
may then be listed and (2) the completion of any
registration or qualification of such Shares under any
federal or state law, or any rule or regulation of any
government body which the Corporation shall, in its
sole discretion, determine to be necessary or
advisable.

3. Investment Representation.

The Committee appointed pursuant to Article 3 of the Plan
may require the Optionholder to furnish to the Corporation prior
to the issuance of any Shares upon the exercise of all or any
part of this Option, an agreement (in such form as such Committee
may specify) in which the Optionholder represents that the shares
acquired by him upon exercise are being acquired for investment
and not with a view to the sale or distribution thereof.

4. Optionholder Bound By Plan.

The Optionholder hereby acknowledges receipt of a copy of
the Plan and any amendments thereto, and agrees to be bound by
all the terms and provisions thereof, which, to the extent
relevant, are incorporated herein by reference. The terms of
this Agreement shall not supersede any term of the Plan.

5. Withholding of Taxes.

The Corporation will require as a condition precedent to the
exercise of this Option that appropriate arrangements be made for
the withholding of any applicable taxes. The obligation of the
Optionholder under this paragraph to provide for the payment of
withholding taxes may be satisfied, subject to the provisions of
Section 10.5 of the Plan, by electing to have the Corporation
withhold certain of the Shares that would otherwise be issuable
pursuant to the exercise of the Option.

6. Notices.
<PAGE J-23>
Any notice hereunder to the Corporation shall be addressed
to it at its office, Eleven Penn Center, Suite 2601, 1835 Market
Street, Philadelphia, Pennsylvania 19103, Attention: Anthony
DiSandro, President; and any notice hereunder to Optionholder
shall be addressed to the address below, subject to the right of
either party to designate at any time hereafter in writing some
other address.

PSB BANCORP, INC. OPTIONHOLDER

By_______________________ _____________________________
(Signature) (Signature)

_________________________ _____________________________
(Print Name) (Print Name)

_________________________ _____________________________
(Print Title) (Print Address)
<PAGE J-24>
ANNEX K

PSB Management Recognition Plan

1998 PSB BANCORP, INC.

Management Recognition
Plan and Trust Agreement
<PAGE K-2>
SUMMARY

I. PLAN PURPOSE

This management recognition plan is adopted by PSB Bancorp,
Inc. (the "Corporation"). The Corporation is adopting the Plan
in connection with (i) the Conversion and Reorganization of the
Corporation's predecessor (PSB Mutual Holding Company (the "MHC")
in mutual holding company form) from mutual holding company to
stock holding company consisting of: (i) the conversion of PSB
Mutual Holding Company into a stock bank holding company;
(ii) the reorganization of Pennsylvania Savings Bank (the "Bank")
as a wholly-owned subsidiary of the Corporation; and (iii) the
issuance of up to 1,311,000 shares of the Corporation's common
stock, without par value (the "Common Stock") to certain
depositors and potentially to officers, directors and/or
trustees, as the case may be, and employees of the Corporation
and the public (the "Conversion Offering").

The purpose of the Plan is to retain employees of the
Corporation with experience and ability in key positions by
providing them with a proprietary interest in the Corporation (in
the form of shares of Common Stock). Awards of Common Stock will
be made in recognition of service to the Corporation and its
subsidiaries and affiliates and as encouragement to continue such
contributions in the future.

II. PLAN SHARE AWARDS

A. Aggregate Number: The total number of Plan Shares that
may be issued pursuant to the Plan will be equal to the number of
shares of Common Stock that are purchased by the Trust, not to
exceed 4% of the shares of Common Stock issued in connection with
the Conversion Offerings. The Trust will acquire Common Stock
with funds contributed to it by the Corporation.

B. Individual Awards: All directors and/or trustees, as
the case may be, executive officers and employees of the
Corporation and its subsidiaries are eligible to receive awards;
however, it is anticipated that Plan Share Awards will be made
primarily to executive officers of the Corporation. The Board of
Directors of the Corporation (the "Board") will determine which
eligible persons will be granted Plan Share Awards and the number
of shares covered by each Plan Share Award. Such determinations
will be based upon the position and responsibilities of the
eligible person, the value of their services, and any other fact
the Board deems relevant.

Plan Share Awards will not be made until the Corporation's
shareholders have approved the Plan.

C. Conditions Upon Earning of Plan Shares Subject to
Awards: Plan Shares covered by Plan Share Awards are earned
<PAGE K-3> (i.e., become vested) at the rate determined by the
Board and as provided herein.

Awards are nontransferable and nonassignable.

Recipients of Plan Share Awards may direct the voting of all
shares of Common Stock allocated to them, and will receive
dividends paid on Plan Shares when shares are distributed.

D. Distribution of Earned Plan Shares: Earned Plan Shares
are distributed to recipients as soon as practicable following
the date on which they are earned. The Plan Trustee may withhold
cash distributions as needed for tax purposes and, if necessary,
can require distributees to provide funds required to satisfy tax
obligations as a condition to distributing Plan Shares.

E. Forfeitures: Plan Shares forfeited in accordance with
Section 7.01(b) will be returned to the pool of Plan Shares with
respect to which additional Plan Share Awards may be granted.

III. Plan Administration

A. Plan Administration: The Plan will be administered by
the Board and a Plan Trustee appointed by the Board. The Board
may designate as Plan Trustee one or more persons or an entity,
subject to replacement by the Board at any time. Expenses of
administering the Plan and the Trust will be borne by the
Corporation. The Corporation shall indemnify the Plan Trustee
and Board members as to activities with respect to the Plan.

B. ERISA: The Plan is not "qualified" within the meaning
of the Internal Revenue Code, and is not subject to ERISA's
requirements and restrictions.

C. Duration: The Plan will become effective upon
completion of the Conversion and Reorganization as set forth in
the Plan of Conversion from Mutual Holding Company to Stock
Holding Company and Agreement and Plan of Reorganization (the
"Plan of Conversion") and will continue until the earlier of
(1) 21 years from such Effective Date, (2) the time at which the
Board terminates the Plan, or (3) the time at which all of the
Trust assets have been expended. The Board may amend or
terminate the Plan at any time.
<PAGE K-4>
ARTICLE I

ESTABLISHMENT OF THE PLAN AND TRUST

1.01 The Corporation hereby establishes the 1998 PSB
Bancorp, Inc. Management Recognition Plan (the "Plan") and Trust
upon the terms and conditions hereinafter stated in this
Agreement.

1.02 The Plan Trustee hereby accepts this Trust and agrees
to hold legal title to the Trust assets existing on the date of
this Agreement and all additions and accretions thereto on the
terms and conditions hereinafter stated.

ARTICLE II

PURPOSE OF THE PLAN

2.01 The purpose of the Plan is to retain personnel of
experience and ability in key positions by providing such key
employees with a proprietary interest in the Corporation in
consideration for, and in recognition of, their contributions to
the Corporation, its subsidiaries and its affiliates and as an
incentive to make such contributions in the future.

ARTICLE III

DEFINITIONS

The following words and phrases when used in this Agreement
with an initial capital letter, unless the context clearly
indicates otherwise, shall have the meanings set forth below.
Wherever appropriate, the masculine pronoun shall include the
feminine pronoun and the singular shall include the plural. All
terms used herein and not defined shall have the meanings given
such terms in the Plan of Conversion.

3.01 "Agreement" means this 1998 PSB Bancorp, Inc.
Management Recognition Plan and Trust Agreement between the
Corporation and the Plan Trustee.

3.02 "Bank" means Pennsylvania Savings Bank, a wholly-owned
subsidiary of the Corporation.

3.03 "Beneficiary" means the person or persons designated
by a Recipient to receive any benefits payable under the Plan in
the event of such Recipient's death. Such person or persons
shall be designated in writing on forms provided for this purpose
by the Board and may be changed from time to time by similar
written notice to the Board. In the absence of a written
designation, the Beneficiary shall be the recipient's surviving
spouse, if any, or if none, his estate.
<PAGE K-5>
3.04 "Board" means, for purposes of administering the Plan,
the Board of Directors of the Corporation.

3.05 "Cause" means:

(i) willful violation of any law, rule or
regulation (other than traffic violations or similar
offenses that would not in the Board's good faith reasonable
determination effect the ability to perform and discharge
one's duties to the Corporation);

(ii) breach of fiduciary duty involving personal
profit or an act of personal dishonesty in connection with
the performance of one's duties; or

(iii) willful failure to follow the lawful
instructions of the Board after receipt of written notice of
such instructions, other than a failure resulting from the
incapacity because of physical or mental illness.

3.06 "Common Stock" means shares of the Corporation's
common stock, par value $.01 per share.

3.07 "Corporation" means PSB Bancorp, Inc. or any
Subsidiary.

3.08 "Disability" means any physical or mental impairment
which qualifies an employee for disability benefits under the
applicable long-term disability plan maintained by the
Corporation, or a Subsidiary, or, if no such plan applies to the
employee, which would qualify such employee for disability
benefits under the long-term disability plan maintained by the
Corporation, if such employee were covered by that Plan.

3.09 "Eligible Person" means any person who is currently
employed by the Corporation or a Subsidiary or affiliate of the
Corporation.

3.10 "Plan of Conversion" means the Savings Bank's and the
MHC's Plan of Conversion from Mutual Stock Holding Company to
Stock Holding Company and Agreement and Plan of Reorganization.

3.11 "Plan Shares" means shares of Common Stock held in the
Trust and issued or issuable to a Recipient pursuant to the Plan.

3.12 "Plan Share Award" means a right granted under this
Agreement to earn Plan Shares.

3.13 "Plan Share Reserve" means the shares of Common Stock
held by the Trustee as determined pursuant to Sections 5.03 and
5.04.

3.14 "Plan Trustee" means that person(s) or entity
nominated and approved by the Board pursuant to Section 4.01 and
<PAGE K-6> 4.02 to hold legal title to the Plan assets for the
purposes set forth herein.

3.15 "Recipient" means an Eligible Person who receives a
Plan Share Award under the Plan.

3.16 "Retirement" means a termination of employment which
constitutes a "retirement" under any applicable qualified pension
benefit plan maintained by the Corporation or any Subsidiary
which employs the Recipient, or, if no such Plan is maintained,
pursuant to the retirement policy of the Corporation.

3.17 "Savings Bank" means Pennsylvania Savings Bank.

3.18 "Subsidiary" means a subsidiary corporation as defined
in Code Section 424(f) that is a subsidiary of the Corporation.

3.19 "Trust" means the trust established pursuant to this
Agreement.

ARTICLE IV

ADMINISTRATION OF THE PLAN

4.01 Role and Powers of the Board. The Plan shall be
administered and interpreted by the Board. The interpretation
and construction by the Board of any provisions of this Agreement
or of any Plan Share Award granted hereunder shall be final and
binding. Subject to the express provisions and limitations of
this Agreement, the Board may adopt such rules, regulations and
procedures as it deems appropriate for the Plans' affairs. The
Board shall appoint one or more persons (excluding Eligible
Persons) or an entity to act as Plan Trustee in accordance with
this Agreement and the terms of Article VIII hereof. The Board
may reverse or override any action taken or decision made with
respect to the Plan, provided, however, except as provided in
Section 7.01(b) hereof, that the Board may not revoke any Plan
Share Award already made.

4.02 Limitation on Liability. No member of the Board or
Plan Trustee shall be liable for any determination made in good
faith with respect to the Plan or any Plan Shares or Plan Share
Awards granted under it. If a member of the Board or any Plan
Trustee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
reason of anything done or not done by him in such capacity under
or with respect to the Plan, the Corporation shall indemnify such
member or Plan Trustee against expenses (including, but not
limited to, attorneys' fees and disbursements), judgments, fines
and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if
1) such person acted in good faith and in a manner which such
person reasonably believed to be in the best interests of the
Corporation (in the case of a member of the Board) or in the best
<PAGE K-7> interests of the beneficiaries of the Trust (in the
case of the Plan Trustee), and 2) with respect to any criminal
action or proceeding, which such person had no reasonable cause
to believe the conduct was unlawful.

ARTICLE V

CONTRIBUTIONS; PLAN SHARE RESERVE

5.01 Amount and Timing of Contributions. The Board shall
determine the amounts (or the method of computing the amounts) to
be contributed by the Corporation to the Trust. Such amounts
shall be paid to the Plan Trustee at the time of contribution.
No contributions by Eligible Persons shall be permitted.

5.02 Initial Investment. Any amounts held by the Trust
prior to the purchase of Common Stock shall be invested by the
Plan Trustee in such interest-bearing account or accounts at the
Savings Bank as the Plan Trustee shall determine to be
appropriate.

5.03 Investment of Trust Assets; Conversion; Creation of
Plan Share Reserve. Except as otherwise permitted under this
Agreement, the Plan Trustee shall invest all of the Trust's
assets exclusively in Common Stock. The Common Stock initially
acquired by the Trust, together with any shares thereafter
acquired by the Trust, shall constitute the "Plan Share Reserve."
Any cash earnings received with respect to Common Stock held in
the Trust subject to the Plan Share Awards shall be distributed
to the Individual Recipient.

5.04 Effect of Allocations, Returns and Forfeitures Upon
Plan Share Reserves. Upon the allocation of Plan Share Awards
under Section 6.02, the Plan Share Reserve shall be reduced by
the number of Plan Shares subject to the Plan Share Awards so
allocated. Any Plan Shares subject to a Plan Share Award which
may no longer be earned because of a forfeiture by the Recipient
pursuant to Section 7.01(b) shall be added to the Plan Share
Reserve.

ARTICLE VI

ELIGIBILITY; ALLOCATIONS

6.01 Allocations. The Board will determine which Eligible
Persons will be granted Plan Share Awards and the number of Plan
Shares covered by each Plan Share Award, provided, however, that
the number of Plan Shares covered by such Plan Share Awards may
not exceed the number of Plan Shares in the Plan Share Reserve
immediately prior to the grant of such Plan Share Awards, and
provided, further, that in no event shall any Plan Share Award be
made which will violate the Corporation's Articles of
Incorporation or Bylaws or any applicable law. In the event Plan
Shares are forfeited for any reason, the Board may, from time to
<PAGE K-8> time, determine which Eligible Persons will be granted
Plan Share Awards from forfeited Plan Shares.

In selecting those Eligible Persons to whom Plan Share
Awards will be granted and the number of Plan Shares covered by
such Plan Share Awards, the Board shall consider the position and
responsibilities of the Eligible Persons, the value of their
services to the Corporation and/or its subsidiaries and any other
fact the Board may deem relevant.

6.02 Form of Allocation. Promptly after making a Plan
Share Award, the Board shall notify the Recipient in writing of
the grant of the Plan Share Award, the number of Plan Shares
covered by the Plan Share Award, and the terms upon which the
Plan Shares subject to the Plan Share Award may be earned. The
date on which the Board so notifies the Recipient shall be
considered the date of grant of the Plan Share Awards. The Board
shall maintain records as to all grants of Plan Share Awards
under the Plan.

6.03 Allocations Not Required. Notwithstanding anything to
the contrary in Sections 6.01 and 6.02, no Eligible Person shall
have any right or entitlement to receive a Plan Share Award
hereunder, the grant of Plan Share Awards being at the total
discretion of the Board.

ARTICLE VII

EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS

7.01 Earning Plan Shares; Forfeitures.

(a) General Rules. Unless the Board shall
specifically state otherwise at the time a Plan Share Award is
granted, Plan Shares subject to a Plan Share Award shall be
earned by a Recipient at the rate of twenty percent (20%) of the
aggregate number of Plan Shares covered by the Plan Share Award
at the end of each full twelve month period following the date of
the grant. Except as set forth in Section 7.01(b) below. The
termination of a Recipient's employment with the Corporation
shall constitute revocation of the unearned Plan Share Award.
The merger, consolidation or sale of substantially all of the
assets of the Corporation shall effect a Recipient's right to
earn shares.

(b) Revocation for Misconduct. Notwithstanding
anything hereinafter to the contrary, the Board may, by
resolution, immediately revoke, rescind and terminate any Plan
Share Award, or portion thereof, previously awarded under this
Plan, to the extent Plan Shares have not been delivered
thereunder to the Recipient, whether or not yet earned, in the
case of a Recipient who is discharged from the employ of the
Corporation or a Subsidiary for Cause, or who is discovered after
termination of employment to have engaged in conduct that would
<PAGE K-9> have justified termination for Cause, and in the case
of a member of the Board, who is removed from the Board for
Cause.

7.02 Payment of Dividends. Cash dividends on Plan Shares
shall be allocated and distributed to a Recipient when declared
and paid by the Corporation with respect to all shares.

7.03 Distribution of Plan Shares.

(a) Timing of Distributions. Plan Shares shall be
distributed to the Recipient or his Beneficiary, as the case may
be, as soon as practicable after they have been earned.

(b) Form of Distribution. All Plan Shares, together
with any shares representing stock dividends, shall be
distributed in the form of Common Stock. One share of Common
Stock shall be given for each Plan Share earned and payable.

(c) Withholding. The Plan Trustee may withhold from
any payment or distribution made under this Plan sufficient
amounts of cash or shares of Common Stock to cover any applicable
withholding and employment taxes, and if the amount of such
payment is insufficient, the Plan Trustee may require the
Recipient or Beneficiary to pay to the Plan Trustee the amount
required to be withheld as a condition of delivering the Plan
Shares. The Plan Trustee shall pay over to the Corporation any
such amount withheld from or paid by the Recipient or
Beneficiary.

7.04 Voting of Plan Shares. After a Plan Share Award has
been granted, the Recipient shall be entitled to direct the
Trustee as to the voting of the Plan Shares which are covered by
the Plan Share Award and which have not yet been earned and
distributed to him pursuant to Section 7.03, subject to rules and
procedures adopted by the Board for this purpose. All shares of
Common Stock held by the Trust as to which Recipients are not
entitled to direct, or have not directed, the voting, shall be
voted by the Plan Trustee in the same proportion as Plan Shares
which have been awarded and voted.

ARTICLE VIII

TRUST

8.01 Trust. The Plan Trustee shall receive, hold,
administer, invest and make distributions and disbursements from
the Trust in accordance with the provisions of this Agreement and
the applicable directions, rules, regulations, procedures and
policies established by the Board pursuant to this Agreement.

8.02 Management of Trust. It is the intent of this
Agreement that, subject to the provisions of this Agreement, the
Plan Trustee shall have complete authority and discretion with
respect to the management, control and investment of the Trust,
<PAGE K-10> and that the Plan Trustee shall invest all assets of
the Trust in Common Stock to the fullest extent practicable, and
except to the extent that the Plan Trustee determines that the
holding of monies in cash or cash equivalents is necessary to
meet the obligations of the Trust. In performing its duties, the
Plan Trustee shall have the power to do all things and execute
such instruments as may be deemed necessary or proper, including
the following powers:

(a) To invest up to one hundred percent (100%) of all
Trust assets in Common Stock without regard to any law now or
hereafter in force limiting investments by trustees or other
fiduciaries. The investment authorized herein constitutes the
only investment of the Trust, and in making such investment, the
Plan Trustee is authorized to purchase Common Stock from the
Corporation or from any other source, and such Common Stock so
purchased may be outstanding, newly-issued, or treasury shares.

(b) To invest any Trust assets not otherwise invested
in accordance with (a) above in such deposit accounts,
certificates of deposit (including those issued by the Savings
Bank), obligations of the United States government or its
agencies or such other investments as shall be considered the
equivalent of cash, or to invest in mutual funds which invest in
such securities.

(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of
words indicating that such security is an asset of the Trust (but
accurate records shall be maintained showing that such security
is an asset of the Trust).

(e) To hold cash without interest in such amounts as
may be in the opinion of the Trustee reasonable for the proper
operation of the Plan and Trust.

(f) To employ brokers, agents, consultants and
accountants.

(g) To hire counsel to render advice with respect to
the Plan Trustee's rights, duties and obligations hereunder, and
such other legal services or representation as the Plan Trustee
may deem desirable.

(h) To hold funds and securities representing the
amounts to be distributed to a Recipient or his Beneficiary as a
consequence of a dispute as to the disposition thereof, whether
in a segregated account or held in common with other assets of
the Trust.

Notwithstanding anything herein contained to the
contrary, the Plan Trustee shall not be required to make any
<PAGE K-11> inventory, appraisal or settlement or report to any
court, or to secure any order of court for the exercise of any
power herein contained, or give bond.

8.03 Records and Accounts. The Trustee shall maintain
accurate and detailed records and accounts of all transactions of
the Trust, which shall be available at all reasonable times for
inspection by any legally entitled person or entity to the extent
required by applicable law, or any other person determined by the
Board.

8.04 Earnings. All earnings, gains and losses with respect
to Trust assets shall be allocated in accordance with a
reasonable procedure adopted by the Board.

8.05 Expenses. All costs and expenses, including the Plan
Trustee's fees, incurred in the operation and administration of
this Plan shall be borne by the Corporation. The Plan Trustee
shall be entitled to a fee of $______________ for its full
performance hereunder.

ARTICLE IX

MISCELLANEOUS

9.01 Adjustments for Capital Changes. The aggregate number
of Plan Shares available for issuance pursuant to Plan Share
Awards and the number of Plan Shares to which any Plan Share
Award relates shall be proportionately adjusted for any increase
or decrease in the total number of outstanding shares of Common
Stock issued subsequent to the Effective Date resulting from any
split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such Common Stock
effected without receipt or payment of consideration, by the
Corporation.

9.02 Amendment and Termination of Plan. The Board may, by
resolution, at any time amend or terminate the Agreement. Upon
termination, the Corporation may direct the Plan Trustee to
return to the Corporation any shares of Common Stock held in the
Plan Share Reserve and any other unallocated assets of the Trust.
Termination or amendment of the Trust shall not affect a
Recipient's right to earn Plan Shares pursuant to previously
granted Plan Share Awards or to the distribution of Common Stock
relating thereto, including earnings thereon. Termination of the
Plan shall not become effective as to previously awarded Plan
Share Awards that remain outstanding on the proposed termination
date unless the Board elects to distribute all unearned Plan
Shares subject to such Plan Share Awards immediately upon such
termination.

9.03 Nontransferable. Plan Share Awards and rights to Plan
Shares shall not be transferable by a Recipient or Beneficiary,
and during the lifetime of the Recipient, Plan Shares may only be
<PAGE K-12> earned by and paid to the Recipient who was notified
in writing of the Plan Share Award by the Board pursuant to
Section 6.03.

9.04 Employment Rights. Neither the Plan nor any grant of
a Plan Share Award or Plan Shares hereunder nor any action taken
by the Plan Trustee or the Board in connection with the Plan
shall create any right on the part of any Eligible Person to
continue in the employ of the Corporation or to continue to sit
on the Board thereof.

9.05 Voting and Dividend Rights. No Recipient shall have
any voting or dividend rights or other rights of a shareholder in
respect of any Plan Shares covered by a Plan Share Award, except
as expressly provided in Sections 7.02 and 7.04 above, prior to
the time said Plan Shares are actually distributed to him.

9.06 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the Commonwealth of
Pennsylvania without regard to its conflicts of law rules.

9.07 Effective Date. This Plan shall be effective as of
the date of the closing of the Conversion Offerings contemplated
by the Plan of Conversion and Reorganization.

9.08 Term of Plan. This Plan shall remain in effect until
the earlier of (1) 21 years from the Effective Date,
(2) termination by the Board, or (3) the distribution of all
assets of the Trust. Termination or amendment of the Plan shall
not affect any Plan Share Awards previously granted, and such
Plan Share Awards shall remain valid and in effect until they
have been earned and paid, or by their terms expire or are
forfeited.

IN WITNESS WHEREOF, the Corporation has caused this
Agreement to be executed by its duly authorized officers and the
corporate seal to be affixed and duly attested, as of the
____ day of _________, 1998.

PSB BANCORP, INC.

By:________________________________

Attest:____________________________

IN WITNESS WHEREOF, I, ____________________, on behalf of
_____________________, execute this Agreement, as Plan Trustee
undertaking to perform the obligations and duties of the Plan
Trustee hereunder and consenting to the foregoing 1998 Management
Recognition Plan and Trust Agreement.

Signed:____________________________
<PAGE K-13>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20. Indemnification of Directors and Officers.

Pennsylvania law provides that a Pennsylvania
corporation may indemnify directors, officers, employees and
agents of the corporation against liabilities they may incur in
such capacities for any action taken or any failure to act,
whether or not the corporation would have the power to indemnify
the person under any provision of law, unless such action or
failure to act is determined by a court to have constituted
recklessness or willful misconduct. Pennsylvania law also
permits the adoption of a bylaw amendment, approved by
shareholders, providing for the elimination of a director's
liability for monetary damages for any action taken or any
failure to take any action unless (1) the director has breached
or failed to perform the duties of his office and (2) the breach
or failure to perform constitutes self-dealing, willful
misconduct or recklessness.

The bylaws of PSB provide for (1) indemnification of
directors, officers, employees and agents of the registrant and
its subsidiaries and (2) the elimination of a director's
liability for monetary damages, to the fullest extent permitted
by Pennsylvania law.

Directors and officers are also insured against certain
liabilities for their actions, as such, by an insurance policy
obtained by PSB.

Item 21. Exhibits and Financial Statement Schedules.

(a) Exhibits.

2.1 Agreement and Plan of Reorganization dated as of
October 15, 1997, between PSB Corp. and First Bank
Bancorp Inc. (included as Annex A to the Joint
Proxy Statement Prospectus).

3.1 Articles of Incorporation, as amended, of PSB
Bancorp, Inc. (Incorporated by reference to
Exhibit 3.1 on Form SB-2 filed by PSB Bancorp,
Inc. on October 9, 1997).

3.2 Bylaws of PSB Bancorp, Inc. (incorporated by
reference to Exhibit 3.2 on Form SB-2 filed by PSB
Bancorp, Inc. on October 9, 1997).

5.1 Opinion of Stevens & Lee, P.C. re: Legality.*
<PAGE II-1>
8.1 Opinion of Stevens & Lee, P.C. re: tax matters.**

23.1 Consent of KPMG, LLP.*

23.2 Consent of Stockton Bates, LLP.*

23.3 Consent of Stevens & Lee, P.C. (contained in
Exhibit 5).*

23.4 Consent of Stevens & Lee, P.C. re: tax opinion.**

23.5 Consent of Berwind Financial, L.P.**

23.6 Consent of Hopper Soliday, L.P.**

24.1 Powers of Attorney of Directors and Officers
(included on signature page hereof).

99.1 Form of Proxy for the annual meeting of
Shareholders of PSB Bancorp, Inc..*

99.2 Form of Proxy for the special meeting of
Shareholders of First Bank of Philadelphia*

99.3 Opinion of Berwind Financial, L.P. dated ______,
1999 (included as Annex B to joint proxy
statement/prospectus).*

99.4 Opinion of Hopper Soliday. dated ______ __, 1999
(included as Annex C to joint proxy statement/
prospectus).*

____________________

* Filed herewith.
** To be filed by amendment.

(b) Financial Statement Schedules.

None required.

Item 22. Undertakings.

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement:

(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any fact or
events arising after the effective date of the registration
statement (or the most recent post-effective amendment
<PAGE II-2> thereof) which, individually or in the
aggregate, represent a fundamental change in the information
set forth in the registration statement;

(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.

(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.

(b) The undersigned registrant hereby undertakes to deliver
or cause to be delivered with the prospectus, to each person to
whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the requirements
of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the
prospectus, to deliver, or cause to be delivered to each person
to whom the prospectus is sent or given, the latest quarterly
report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.

(c) (1) The undersigned registrant hereby undertakes as
follows: that prior to any public reoffering of the
securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called
for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of
the applicable form.

(2) The registrant undertakes that every prospectus
(i) that is filed pursuant to paragraph (1) immediately
preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and
that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating
<PAGE II-3> to the securities offered therein, and the
offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.

(d) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the bylaws of the registrant, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.

(e) The undersigned registrant hereby undertakes to respond
to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the
registration statement through the date of responding to the
request.

(f) The undersigned registrant hereby undertakes to supply
by means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration
statement when it became effective.
<PAGE II-4>
SIGNATURES

Pursuant to the requirements of the Securities Act of
1933, the registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Philadelphia, Commonwealth of
Pennsylvania, on _______ __, 1999.

PSB BANCORP, INC.
(Registrant)

By:/s/ Anthony DiSandro
Anthony DiSandro,
President and Chief Operating
Officer

KNOWN ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Anthony
DiSandro, his true and lawful attorney-in-fact, as agent with
full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacity, to sign any or
all amendments to this Registration Statement and to file the
same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto such attorney-in-fact and agent full
power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as they might
or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.

In accordance with the Securities Exchange Act of 1934,
this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.

Signature Title Date

/s/Vincent J. Fumo Chairman and Chief
Vincent J. Fumo Executive Officer

/s/Anthony DiSandro President and Chief
Anthony DiSandro Operating Officer

______________________ Director
Jane Scaccetti Fumo

/s/Rosanne Pauciello Corporate Secretary and
Rosanne Pauciello Director
<PAGE II-5>
__ __________________ Director
James W. Eastwood

/s/Thomas J. Finley, Jr. Director
Thomas J. Finley, Jr.

______________________ Vice President and
Gary Polimeno Treasurer (Principal
Accounting and
Financial Officer)
<PAGE II-6>
EXHIBIT INDEX

Number Description

2.1 Agreement and Plan of Reorganization dated as
of October 15, 1997, between PSB Bancorp,
Inc. and First Bank of Philadelphia (included
as Annex A to the Joint Proxy Statement/
Prospectus).

3.1 Articles of Incorporation, as amended, of PSB
Bancorp, Inc. (Incorporated by reference to
Exhibit 3.1 on Form SB-2 filed by PSB
Bancorp, Inc. on October 9, 1997).

3.2 Bylaws of PSB Bancorp, Inc. (incorporated by
reference to Exhibit 3.2 on Form SB-2 filed
by PSB Bancorp, Inc. on October 9, 1997).

5.1 Opinion of Stevens & Lee, P.C. re:
Legality.*

8.1 Opinion of Stevens & Lee, P.C. re: tax
matters.**

23.1 Consent of KPMG, LLP.*

23.2 Consent of Stockton Bates, LLP.*

23.3 Consent of Stevens & Lee, P.C. (contained in
Exhibit 5).*

23.4 Consent of Stevens & Lee, P.C. re: tax
opinion.**

23.5 Consent of Berwind Financial, L.P.**

23.6 Consent of Hopper Soliday, L.P.**

24.1 Powers of Attorney of Directors and Officers
(included on signature page hereof).

99.1 Form of Proxy for the annual meeting of
Shareholders of PSB Bancorp, Inc..*

99.2 Form of Proxy for the special meeting of
Shareholders of First Bank of Philadelphia*

99.3 Opinion of Berwind Financial, L.P. dated
______, 1999 (included as Annex B to joint
proxy statement/prospectus).*
<PAGE II-7>
99.4 Opinion of Hopper Soliday. dated ______ __,
1999 (included as Annex C to joint proxy
statement/prospectus).*
____________________

* Filed herewith.
** To be filed by amendment.

EXHIBIT 5.1

June 22, 1999

Board of Directors
PSB Bancorp, Inc.
11 Penn Center, Suite 2601
1835 Market Street
Philadelphia, Pennsylvania 19103

Re: Registration Statement on Form S-4
PSB BANCORP, INC.

Ladies and Gentlemen:

In connection with the proposed offering of up to 2,818,994
shares of common stock, no par value per share (the "Common
Stock"), by PSB BANCORP, INC. (the "Company"), covered by the
Company's Registration Statement on Form S-4 (the "Registration
Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, with respect to
such Common Stock, we, as special counsel to the Company, have
reviewed:

(1) the Articles of Incorporation of the Company;

(2) the Bylaws of the Company;

(3) resolutions adopted by the Board of Directors of the
Company relating to the Registration Statement, certified by the
Secretary of the Company;

(4) a subsistence certificate with respect to the Company
issued by the Pennsylvania Department of State;

(5) the Registration Statement; and

Based upon our review of the foregoing, it is our opinion
that:

(a) the Company has been duly incorporated under the laws
of the Commonwealth of Pennsylvania and is validly existing and
in good standing under the laws of such Commonwealth; and

(b) the Common Stock covered by the Registration Statement
has been duly authorized and, when issued pursuant to the terms
described in the Registration Statement, will be legally issued
by the Company and fully paid and nonassessable.

We consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to us under the
heading "LEGAL MATTERS" in the related Prospectus. In giving
this consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.

Very truly yours,

/s/ Stevens & Lee

EXHIBIT 23.1

The Board of Directors
First Bank of Philadelphia:

We consent to the inclusion herein of our report dated
January 29, 1999, except as to note M, which is as of March 19,
1999, relating to the balance sheets of First Bank of
Philadelphia as of December 31, 1998 and 1997 and the related
statements of operations, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended
December 31, 1998, which report appears in the December 31, 1998
Form 10-K of First Bank of Philadelphia. We also consent to the
reference included herein to our firm under the heading
"Experts".

KPMG LLP

Philadelphia, Pennsylvania
June 25, 1999

<PAGE>
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________________________________________________________________________

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FINAL - DATE REMOVED FROM FOOTER I.D. 06/25/99 - dlg

Origination Date: 06/25/99

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Last Revised By: dlg

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Paragraph Numbering:
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2 = 5 = 8 =
3 = 6 =

Exhibit 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in the registration statement of
PSB Bancorp, Inc. on Form SB-4 of our report, dated march 10,
1999, on our audits of the consolidated financial statements of
PSB Bancorp, Inc. as of December 31, 1999 and December 31, 1997.

/s/ Stockton Bates, LLP

Stockton Bates, LLP
Certified Public Accountants

Philadelphia, Pennsylvania
June 18, 1999