UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended March 31, 1999 or
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ______________________.
No. 000-24601
(Commission File Number)
PSB BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2930740
(State of Incorporation) (IRS Employer ID Number)
11 Penn Center Suite 2601
1835 Market Street, Philadelphia, PA 19103
(Address of Principal Executive Offices) (Zip Code)
(215) 979-7900
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of the Exchange
Act: none
Securities registered pursuant to Section 12(g) of the Exchange
Act: Common Stock, no par value per share.
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months ( or for such shorter period that the
registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ____
Number of shares outstanding as of March 31, 1999
COMMON STOCK (No Par Value) 3,101,140
(Title of Class) (Outstanding Shares)
PAGE 1
<PAGE>
PSB Bancorp, Inc.
FORM 10-QSB
For the Quarter Ended March 31, 1999
Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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 Comprehensive
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
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
PAGE 2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
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, $1 par value, 15,000,000 shares
authorized; 3,101,140 shares
issued and outstanding 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 3
<PAGE>
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 4>
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 5
<PAGE>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
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 6
<PAGE>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
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 Pla 25,000
Change in assets and liabilities:
Decrease in loans held for sale 1,744,497 908,985
(Increase) decrease in accrued interest receiva (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-sal 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 7
<PAGE>
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 8
<PAGE>
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.
PAGE 9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Background
Effective July 17, 1998, Pennsylvania Savings Bank(the
"Savings Bank") and PSB Mutual Holding Company ("MHC") completed
the Plan of Conversion and Reorganization from Mutual Holding
Company to Stock Holding Company. Under the Plan of Conversion,
the newly formed holding company, PSB Bancorp. Inc.(" Holding
Company") issued 1,610,732 shares of common stock, no par value,
at a price of $10.00 per share. Existing shareholders of
Pennsylvania Savings Bank exchanged their shares for 2.572374
shares of PSB Bancorp, Inc. shares and the Mutual Holding Company
merged with and into the Savings Bank.
The Holding Company was organized as a Pennsylvania business
corporation on October 3, 1997 at the direction of the Savings
Bank for the purpose of becoming a holding company for the
Savings Bank upon completion of the Conversion and
Reorganization. The Holding Company is subject to regulation by
the Federal Reserve, and its principal business is the ownership
of the Savings Bank. In the future, the Holding Company may
acquire or organize other operating subsidiaries, although there
are no current plans, arrangements or understandings, written or
oral, to do so.
The Savings Bank is a Pennsylvania-chartered stock savings
bank headquartered in Philadelphia, Pennsylvania. The Savings
Bank is a community-oriented institution offering traditional
deposit and loan products. The Savings Bank operates five full
service offices in Philadelphia, Pennsylvania and one full-
service office in Glenside, Montgomery County, Pennsylvania.
The Savings Bank is primarily engaged in the business of
attracting deposits from the general public in the Savings Bank's
market area and investing such deposits in loans secured by one-
to-four family residential real estate, commercial real estate
loans, commercial business loans, construction loans and
investment and mortgage-backed securities. The Savings Bank's
deposits are insured by the Savings Association Insurance Fund
(the "SAIF") of the FDIC to the extent that such deposits were
assumed from the mutual savings bank in the MHC Reorganization.
Deposits accepted by the Savings Bank after the MHC
Reorganization are insured by the FDIC's Bank Insurance Fund (the
"BIF"), up to applicable limits.
PAGE 10
<PAGE>
Business Strategy
The Savings Bank's strategy is to maximize profitability by
providing quality deposit and loan products in an efficient
manner as a well-capitalized and independent 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, commercial real
estate loans, commercial business loans, construction loans and
consumer loans, mortgage-backed securities and other liquid
investment securities. On March 19, 1999, the Holding Company and
the Savings Bank signed a definitive agreement to acquire First
Bank of Philadelphia ("FBKP"), a one branch bank located in
Philadelphia with $63.5 million in assets and $57.5 million in
deposits. The Savings Bank plans further expansion of its branch
network in areas contiguous to its current market and then into
the suburbs of Philadelphia by opening branch offices or
acquiring the branches of other institutions.
The Savings Bank has been expanding the operations of
Transnational Mortgage Corp., its mortgage banking subsidiary, in
an effort to increase fee income. Retail mortgage origination is
being expanded by maintaining a staff of six commissioned sales
people to solicit mortgage loans throughout the Philadelphia
metropolitan area and surrounding counties in Pennsylvania, New
Jersey and Delaware; wholesale mortgage origination is being
expanded by originating, processing and servicing loans for other
mortgage companies; alternative mortgage lending is being
expanded through telemarketing origination programs for B through
D quality paper and FHA streamline programs.
The Savings Bank is increasing loan origination through its
existing office network and is increasing origination of other
loan products separate from Transnational Mortgage Corp. such as
commercial real estate, commercial business loans, construction
loans and consumer loans. During the three months ended
March 31, 1999, loan originations other than residential mortgage
loans totalled $2.52 million or 38.73% of originations during
that 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 FBKP. In connection with that transaction, the
Savings Bank will merge into FBKP which will be the surviving
subsidiary of the Holding Company. As a result the Holding
Company's operating subsidiary will hold a commercial bank
charter rather than a savings bank charter.
<PAGE 11>
The Savings Bank's business strategy incorporates the
following elements: (1) increasing assets by expanding its retail
branch network to include other contiguous segments of the
metropolitan Philadelphia market, (2) expanding its mortgage
banking operations throughout the metropolitan Philadelphia area
and the adjacent counties of Pennsylvania, New Jersey and
Delaware, and (3) increasing net interest income and reducing
interest rate risk by emphasizing the origination for portfolio
of commercial real estate, construction, commercial business and
consumer loans which generally bear higher interest rates and
have shorter terms than residential mortgage loans.
PAGE 12
<PAGE>
Financial Condition
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:
<TABLE>
<CAPTION>
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%
Commerical 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,
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.
<PAGE 13>
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.
Asset Quality
The following table sets forth non-performing assets as of
March 31, 1999 and December 31, 1998 (Dollars in thousands):
<TABLE>
<CAPTION>
At March 31, At December 31,
1999 1998
<S> <C> <C>
Loans past due 90 days or more as to interest or
principal and accruing interest $ 0 $ 0
Nonaccrual loans 1,430 1,609
Loans restructured to provided a reduction or deferrel
of interest or principal 0 0
Total nonperforming loans 1,430 1,609
Real estate owned (REO) 534 629
Total nonperforming assets $1,964 $2,238
====== ======
Nonperforming loans to total loans 1.89 % 2.19 %
Nonperforming assets to total assets 1.16 1.36
Allowance for loan losses to total loans 0.40 0.41
Allowance for loan losses to nonperforming loans 21.26 18.89
Allowance for loan losses to nonperforming assets 15.48 13.58
Net charge-offs as a percentage of total loans 0.00 0.37
</TABLE>
PAGE 14
<PAGE>
Results of Operations for the Three Month Periods Ended March 31,
1999 and 1998
General
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 are likely to be depressed, which in turn
would be likely to have a detrimental effect on the market value
of any investment in the Holding Company'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 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
<PAGE 15> primarily to an increase in deposits for the three
months ended March 31, 1999.
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. Interest is discontinued on all loans that are
contractually past due three months. 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.
<PAGE 16>
Liquidity and Capital Resources
On March 31, 1999, the Bank was in compliance with
regulatory capital requirements as follows:
<TABLE>
<CAPTION>
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>
The Bank is required to maintain a sufficient level of
liquid assets, as determined by management and defined and
reviewed for adequacy by the FDIC during its regular
examinations. The FDIC, however, does not prescribe by
regulation a minimum amount or percentage of liquid assets. The
FDIC allows any marketable security, whose sale would not impair
the capital adequacy of the Bank, to be eligible for liquidity.
The Bank's liquidity is quantified through the use of a standard
liquidity ratio of liquid assets(cash and cash equivalents,
investment securities available-for-sale, mortgage-backed
securities available-for-sale and Federal Home Loan Bank stock)
to short-term borrowings plus deposits. Using this formula, the
Bank's liquidity ratio was 59.37% as of March 31, 1999. The Bank
adjusts its liquidity levels in order to meet funding needs of
deposit outflows and loan commitments. The Bank also adjusts
liquidity as appropriate to meet its assets and liability
management objectives.
The Bank's primary source of funds are deposits, the
amortization and prepayment of loans and mortgage-backed
securities, maturities of investment securities and other short-
term investments, earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general
interest rate levels, economic conditions, and competition. The
Bank manages the pricing of its deposits to maintain a desired
deposit balance. In addition, the Bank invests excess funds in
short-term interest-earning assets and other assets which provide
liquidity to meet lending requirements and interest rate risk
<PAGE 17> management objectives. Short-term interest-earning
deposits with the FHLB of Pittsburgh amounted to $33.87 million
at March 31, 1999. For additional information about cash flows
from the Bank's operating, financing and investing activities,
see Statements of Cash Flows included in Item 1 of this report.
A major portion of the Bank's liquidity consists of cash and
cash equivalents, which are a product of its operating, investing
and financing activities. The primary sources of cash were net
income, principal repayments on loans and mortgage-backed
securities, and increases in deposit accounts.
Disclosure Regarding Year 2000 Compliance
The Holding Company and the Savings Bank's Board of
Directors and management is aware of the possible consequences
the Year 2000 ("Y2K") may pose with regard to the computer system
utilized to conduct business on a daily basis. The Y2K presents
several potential risks to the Holding Company and the Savings
Bank:
1. The Banking transactions of the Savings Bank's
customers are processed by an external data processing
service bureau. The failure of the service bureau's
system to function as a result of the millennium date
change could result in the Savings Bank's inability to
properly process customer transactions.
2. Concern on the part of certain depositors that Y2K
related problems could impair access to their deposit
balances following the millennium date change could
result in the Savings Bank experiencing a deposit
outflow prior to December 31, 1999.
3. A number of the Savings Bank's borrowers utilize
computers and computer software to varying degrees in
conjunction with the operation of their businesses.
The customers and suppliers of those businesses may
utilize computers as well. Should the Savings Bank's
borrowers, or the businesses on which they depend,
experience Y2K related computer problems, such
borrowers' cash flow could be disrupted, adversely
affecting their ability to repay their loans with the
Savings Bank.
4. Certain utility services, such as electrical power and
telecommunications services could be disrupted if those
services experience Y2K related problems.
The Holding Company and Savings Bank's Board of Directors
and management have addressed the Year 2000 ("Y2K") issue by
developing a Y2K Compliance Plan. This plan involves five
separate phases: awareness, assessment, renovation, validation
and implementation.
<PAGE 18>
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 ("Intrieve"). Under the agreement with
Intrieve, Intrieve is obligated to incur all software related
costs to make its system Y2K compliant. Intrieve has prepared a
detailed schedule of functions to be performed in its compliance
project. As of 3/31/99, 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
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
<PAGE 19> 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.
PAGE 20
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Document
2.1 Agreement and Plan of Reorganization, dated as of
March 19, 1999 between PSB Bancorp, Inc. and First
Bank of Philadelphia (incorporated herein by
reference to Exhibit 2.1 of the 10-KSB of PSB
Bancorp, Inc. filed March 31, 1999)
3.1 Articles of Incorporation of Pennsylvania Savings
Bank (incorporated herein by reference to
Exhibit 3.1 of the SB-2 Registration Statement of
PSB Bancorp, Inc. filed October 9, 1997).
3.2 Bylaws of Pennsylvania Savings Bank( incorporated
herein by reference to Exhibit 3.2 of the SB-2
Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
10.1* Pennsylvania Savings Bank Retirement Plan
(incorporated herein by reference to Exhibit 10.1
of the SB-2 Registration Statement of PSB Bancorp,
Inc. filed October 9, 1997).
10.2* Pennsylvania Savings Cash or Deferred Profit
Sharing Plan (incorporated herein by reference to
Exhibit 10.2 of the SB-2 Registration Statement of
PSB Bancorp, Inc. filed October 9, 1997).
10.3* Pennsylvania Savings Bank Profit Sharing Plan
(incorporated herein by reference to Exhibit 10.3
of the SB-2 Registration Statement of PSB Bancorp,
Inc. filed October 9, 1997).
10.4* Employment Agreement with Vincent J. Fumo
(incorporated herein by reference to Exhibit 7.1
of the SB-2 Registration Statement of PSB Bancorp,
Inc. filed October 9, 1997).
10.5* Employment Agreement with Anthony DiSandro
(incorporated herein by reference to Exhibit 7.2
of the SB-2 Registration Statement of PSB Bancorp,
Inc. filed October 9, 1997).
10.6* Pennsylvania Savings Bank Employee Stock Ownership
Plan (incorporated herein by reference to
Exhibit 10.4 of the SB-2 Registration Statement of
PSB Bancorp, Inc. filed October 9, 1997).
<PAGE 21>
10.7 Lease Agreement between Eleven Colonial Penn Plaza
Associates and Pennsylvania Savings Bank, dated as
of October 10, 1995(incorporated herein by
reference to Exhibit 10.7 of Form S-1, Amendment
No. 3 of PSB Bancorp, Inc. filed May 5, 1998).
10.8 Lease Agreement between Eleven Colonial Penn Plaza
Associates and Pennsylvania Savings Bank, dated as
of October 12, 1995 (incorporated herein by
reference to Exhibit 10.8 of Form S-1, Amendment
No. 3 of PSB Bancorp, Inc. filed May 5, 1998).
10.9* Pennsylvania Savings Bank Stock Option Plan.
(incorporated herein by reference to Exhibit 10.9
of Form 10-KSB filed March 31, 1999).
10.10* Pennsylvania Savings Bank Management Recognition
Plan (incorporated herein by reference to Exhibit
10.10 of Form 10-KSB filed March 31, 1999).
27 Financial Data Schedules
__________________________
* Denotes a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K
None.
PAGE 22
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
May 12, 1999
PSB Bancorp, Inc.
(Registrant)
By/s/Anthony DiSandro
Anthony DiSandro
President and Chief Operating
Officer <PAGE 23>
