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 June 30, 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 June 30, 1999
COMMON STOCK (No Par Value) 3,101,140
(Title of Class) (Outstanding Shares)
<PAGE 1>
PSB Bancorp, Inc.
FORM 10-QSB
For the Quarter Ended June 30, 1999
Contents
Page No.
PART I. FINANCIAL INFORMATION. 3
Item 1. Financial Statements 3
Consolidated Statement of Financial
Condition as of June 30, 1999
(Unaudited) and December 31, 1998 3
Consolidated Statement of Income
(Unaudited) for the Six and Three Month
Periods Ended June 30, 1999 and 1998. 4
Consolidated Statement of Comprehensive Income
(Unaudited) for the Six and Three Month
Periods Ended June 30, 1999 and 1998. 5
Consolidated Statement of Cash Flows (Unaudited)
for the Six Month Periods Ended June 30, 1999
and 1998. 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 19
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE 2>
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
At June 30, At December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents:
Cash and due from banks $1,712,189 $1,413,249
Interest bearing deposits in other financial institutions 10,986,479 33,543,499
Investments:
Investment securities available-for-sale, at fair value 21,608,518 16,907,350
Mortgage-backed securities available-for-sale, at fair value 48,752,226 22,073,453
Mortgage-backed securities held-to-maturity (fair
value of $1,135,945 and $1,404,753) 1,088,270 1,326,737
Investment securities held-to-maturity (fair value
of $3,938,346 and $4,005,600) 3,999,413 3,996,118
Loans receivable, net 79,488,821 72,880,160
Loans Held for Sale 8,963,112 6,938,160
Real Estate:
Acquired in settlement of loans 325,870 629,263
Office properties and equipment, net of accumulated
depreciation 937,812 990,071
Federal Home Loan Bank stock, at cost 820,800 572,200
(Restricted investment required by law)
Accrued interest receivable 1,527,959 1,288,666
Investment in data center, common stock, at cost 15,000 15,000
Prepaid corporate taxes 537,527 448,317
Excess of acquisition cost over fair value of assets
acquired, net of accumulated amortization 5,750 6,250
Net deferred taxes 738,491 0
Prepaid expenses and other assets 1,418,237 978,789
Total Assets $182,926,474 $164,007,282
============ ============
LIABILITIES:
Deposits $133,200,232 $128,160,510
Securities purchased under agreements to resell 16,236,468 2,495,030
Advances from borrowers for taxes 875,654 1,096,339
Income taxes payable 742,108 465,108
Net deferred taxes 0 97,100
Accrued pension cost 138,815 138,815
Accrued interest payable on savings accounts 251,864 320,896
Accrued expenses and other liabilities 1,625,436 606,413
Employee stock ownership plan debt 0 234,226
Total Liabilities 153,070,577 133,614,437
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 30,076,914 30,128,052
Employee stock ownership plan debt (1,316,466) (1,442,886)
Retained earnings 2,345,593 1,704,436
Unrealized gain (loss), investments available for sale (1,250,144) 3,243
Total Shareholders' Equity 29,855,897 30,392,845
Total Liabilities and Shareholders' equity $182,926,474 $164,007,282
============ ============
</TABLE>
<PAGE 3>
<TABLE>
<CAPTION>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest Income:
Interest on loans $3,652,538 $3,254,136 $1,875,592 $1,635,311
Mortgage-backed securities 1,019,340 154,176 642,223 73,884
Investment securities
Taxable Interest 511,099 575,333 266,232 269,858
Taxable Dividends 62,377 68,396 31,109 37,287
Tax-exempt interest 71,370 0 35,723 0
Interest-earning deposits 536,031 743,538 188,286 393,594
Total interest income 5,852,755 4,795,579 3,039,165 2,409,934
Interest expense:
Interest on deposits 2,733,969 2,461,527 1,349,514 1,254,164
Interest - other 115,947 13,299 110,759 6,542
Total interest expense 2,849,916 2,474,826 1,460,273 1,260,706
Net interest income 3,002,839 2,320,753 1,578,892 1,149,228
Provision for loan losses 0 183,066 0 133,066
Net interest income after provision
for loan losses 3,002,839 2,137,687 1,578,892 1,016,162
Noninterest income:
Gain on sale of loans 257,849 382,591 118,346 241,671
Loan fees 45,969 23,048 38,715 28,096
Service charges 201,082 181,403 106,925 90,033
Rental income 21,610 16,373 10,673 7,136
Other income 9,010 14,218 4,093 4,856
Total noninterest income 535,520 617,633 278,752 371,792
Noninterest Expenses:
Compensation and employee benefits 1,344,872 1,199,165 687,754 604,128
Premises and occupancy costs 337,600 331,899 155,666 165,584
Federal Insurance premiums 39,315 33,400 19,674 16,828
Data processing 77,399 73,975 38,506 37,195
Advertising 62,123 63,772 33,878 48,901
Directors' Fees 107,750 113,350 54,250 58,450
Stationery, printing and postage 74,110 56,090 39,048 29,119
Real estate owned (gain)/loss 160,709 (1,936) 133,255 (6,717)
Other 416,324 343,283 238,355 174,950
Total noninterest expenses 2,620,202 2,212,998 1,400,386 1,128,438
Income before provision for income taxes 918,157 542,322 457,258 259,516
Provision for federal and state income taxes:
Current 277,000 165,000 144,000 90,000
Deferred tax (benefit) __________ __________ __________ __________
Total income tax provision 277,000 165,000 144,000 90,000
Net Income $641,157 $377,322 $313,258 $169,516
========== ========== ========== ==========
Earnings per share - basic $0.22 $0.32 $0.11 $0.15
========== ========== ========== ==========
Earnings per share - diluted $0.22 $0.32 $0.11 $0.14
========== ========== ========== ==========
</TABLE>
<PAGE 4>
<TABLE>
<CAPTION>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Income $641,157 $377,322 $313,258 $169,516
Other comprehensive income, net of tax:
Unrealized gain (loss), investments available for sale (1,253,387) (1,810) (1,005,569) (5,714)
Other comprehensive income (1,253,387) (1,810) (1,005,569) (5,714)
Comprehensive Income ($612,230) $375,512 ($692,311) $163,802
========== ======== ========== ========
</TABLE>
<PAGE 5>
<TABLE>
<CAPTION>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Six Months Ended
June 30,
1999 1998
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $641,157 $377,322
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of premium/discount on
mortgage-backed securities 25,481 (6,828)
Depreciation and amortization 58,759 72,772
Write-down and expenses of real estate owned 158,959 (1,870)
Gain on sale of real estate owned 0 (18,281)
Gain on sale of loans (257,849) (382,591)
Compensation expense-Employee Stock Ownership Plan 75,282 0
Change in assets and liabilities:
Decrease in loans held for sale (1,767,103) (503,407)
(Increase) decrease in accrued interest receivable (239,293) 18,030
Increase in prepaid expenses (439,448) (249,947)
(Increase) decrease in prepaid corporate taxes (89,210) 296,775
Increase(decrease) in corporate taxes payable 277,000 (143,000)
Decrease in accrued interest payable (69,032) (4,482)
Increase in accrued expenses 1,019,023 356,125
Total Adjustments (1,247,431) (566,704)
Net cash provided by operating activities (606,274) (189,382)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage-backed securities, available for sale (29,691,531) 0
Purchase of investment securities, held-to-maturity 0 (7,000,000)
Purchase of investment securities, available-for-sale (6,250,000) 7,220,000
Maturities of investment securities, available-for-sale 1,000,000 4,000,000
Maturities of investment securities, held-to-maturity 0 0
Mortgage-backed security maturities and
principal repayments 1,682,303 593,180
Acquisition costs of and proceeds from the sale of
Federal Home Loan Bank stock (248,600) (12,300)
Increased in capitalized conversion costs (49,542)
Proceeds from sale of real estate owned net of
improvements 338,800 95,185
Capital expenditures (6,000) (29,575)
Increase in total loans receivable, net (6,803,027) (6,156,310)
Net cash used in investing activities (39,978,055) (1,339,362)
=========== ==========
</TABLE>
<PAGE 6>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
Six Months Ended
June 30,
1999 1998
(unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net $5,039,722 $19,508,574
Decrease in Employee Stock Ownership Debt (234,226) 0
Change in advances for borrowers' taxes and
insurance (220,685) (230,049)
Change in securities purchased under agreements to resell 13,741,438 (375,972)
Net cash provided by financing activities 18,326,249 18,902,553
NET INCREASE IN CASH AND CASH EQUIVALENTS (22,258,080) 17,373,809
Cash and Cash equivalents, beginning of period 34,956,748 27,888,650
CASH AND CASH EQUIVALENTS, END OF PERIOD $12,698,668 $45,262,459
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $2,803,001 $2,466,009
========== ==========
Income taxes $72,000 $100,000
========== ==========
Noncash activities
Loans transferred to real estate owned $194,366 $380,793
========== ==========
</TABLE>
<PAGE 7>
PSB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 six months ended
June 30, 1999 are not necessarily indicative of the results that
may be expected for any fiscal year.
PROPOSED ACQUISITION:
On March 19, 1999, PSB Bancorp, Inc. (the "Company") and
First Bank of Philadelphia ("FBKP") executed an Agreement and
Plan of Reorganization (the "Agreement") pursuant to which the
Company has agreed to acquire FBKP in a stock transaction valued
at approximately $15.7 million. FBKP is a one-branch bank
located in Philadelphia with $63.5 million in assets and $57.5
million in deposits. Pursuant to the Agreement, for each share
of FBKP common stock outstanding, the Company will exchange that
number of shares of its common stock equal to $6.00 divided by
the average closing price of its common stock for the 20 trading
days ending three days before closing; provided that the Company
will not issue less than .667 or more than .857 shares of Company
stock for each share of FBKP stock unless the Company's stock
price is less than $6.50 per share and the Company elects to
issue additional shares in order to complete the transaction.
In connection with the transaction, the Company's
subsidiary, Pennsylvania Saving Bank, will merge with FBKP with
the commercial bank charter of FBKP surviving the merger under a
new name to be chosen before 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.
<PAGE 8>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Background
PSB Bancorp, Inc. (the "Company") was organized as a
Pennsylvania business corporation on October 3, 1997 at the
direction of Pennsylvania Savings Bank (the "Bank") for the
purpose of becoming a holding company for the Bank. The Company
is subject to regulation by the Federal Reserve, and its
principal business is the ownership of the Bank. In the future,
the Company may acquire or organize other operating subsidiaries,
although there are no current plans, arrangements or
understandings, written or oral, to do so, except as described
herein. Because the Bank is the primary operating entity of the
Company, management's discussion and analysis will focus on the
operations of the Bank.
The Bank is a Pennsylvania-chartered stock savings bank
headquartered in Philadelphia, Pennsylvania. The Bank is a
community-oriented institution offering traditional deposit and
loan products. The Bank operates five full service offices in
Philadelphia, Pennsylvania and one full-service office in
Glenside, Montgomery County, Pennsylvania.
Business Strategy
The 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 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, construction loans
and consumer loans, mortgage-backed securities and other liquid
investment securities. The Bank's deposits are insured by the
FDIC up to applicable limits.
On March 19, 1999, the Company and the 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 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 branches of other
institutions.
The 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 <PAGE 9>
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 loans (nonprime and subprime loans) and FHA streamline
programs.
In addition to Transnational Mortgage, the Bank is
increasing loan origination through its existing office network.
The Bank is also increasing origination of loan products other
than residential mortgage loans, such as commercial real estate
loans, commercial business loans, construction loans and consumer
loans, reflecting management's effort to diversify the 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 Bank expects this diversification trend to continue
and accelerate with the acquisition of FBKP. In connection with
that transaction, the Bank will merge into FBKP, and FBKP will be
the surviving subsidiary of the Company. As a result, the
Company's operating subsidiary will hold a commercial bank
charter rather than a savings bank charter.
The 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.
Financial Condition
The Bank's total assets increased $18.92 million or 11.54%
from $164.01 million at December 31, 1998 to $182.93 million at
June 30, 1999. The increase in assets was primarily the result
of a $13.74 million increase in funds borrowed in connection with
securities purchased under agreements to resell and a $5.04
increase in deposits, which resulted in higher levels of
investment securities, net loans and loans held for sale that
were partially offset by a decrease in cash and cash equivalents.
Total loans receivable increased to $80.23 million at
June 30, 1999 from $73.62 million at December 31, 1998. The
increase of $6.61 million, or 8.98%, reflects the Bank's
diversification strategy because it was primarily the result of
increased origination of loan products such as commercial real
<PAGE 10> estate loans, residential mortgage loans and consumer
loans, as well as modest growth in construction loans, as
illustrated by the following loan composition table:
<TABLE>
<CAPTION>
At June 30, At December 31,
1999 1998
Amount Percent Amount Percent Variance % Change
<S> <C> <C> <C> <C> <C> <C>
(Dollar amounts in thousands)
Real Estate Loans:
One-to-four family $50,420 67.76% $49,796 67.64% $624 1.24%
Construction loans 3,334 5.06 3,286 4.46 48 1.44%
Five or more family residence 1,397 1.85 1,576 2.14 (179) -12.81%
Nonresidential 19,904 19.90 14,722 20.00 5,182 26.03%
Commercial loans 3,737 3.77 3,074 4.17 663 17.74%
Consumer loans 1,437 1.66 1,168 1.59 269 18.72%
Total loans $80,229 100.00% $73,622 100.00% 6,607 8.24%
======= ====== ======= ====== ===== =====
<CAPTION>
<S> <C> <C>
Less:
Unearned fees and discounts $434 $431
Undisbursed loan proceeds 2 7
Allowance for loan losses 304 304
Net Loans $79,489 $72,880
======= =======
<CAPTION>
<S> <C> <C> <C> <C>
Total loans with:
Fixed rates $64,651 87.81% $55,289 88.08%
Adjustable rate 8,971 12.19 7,480 11.92
Total loans(2) 73,622 100.00% 62,769 100.00%
</TABLE>
Total investment securities(including mortgage-backed
securities) increased $31.15 million, or 70.32%, to $75.45
million at June 30, 1999, from $44.30 million at December 31,
1998. The increase occurred because the Bank transferred cash
and cash equivalents and new deposit funds into higher yielding
mortgage-backed securities with maturities of 15 years or
greater.
In addition, on January 29, 1999, the Company purchased
1,600,000 shares of Series A Convertible Preferred Stock, $.01
par value per share, of McGuire Performance Solutions, Inc.
("MPS"). The Company purchased the shares for $.78125 per share
for a total cost of $1,250,000. The 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, decreased $22.26 million from $34.96 million
at December 31, 1998 to $12.70 million at June 30, 1999. This
decrease was the result of the use of cash and cash equivalents
to purchase mortgage-backed securities.
<PAGE 11>
Total liabilities increased from $133.61 million at
December 31, 1998 to $153.07 million at June 30, 1999. This
$19.46 million, or 14.56% increase, reflected a $5.04 million
increase in the Bank's primary source of funds, saving deposits,
which aggregated $133.20 million at June 30, 1999, an increase of
3.93% from the $128.16 million of deposits at December 31, 1998,
and an increase in securities purchased under agreements to
resell of $13.74 million.
Shareholders' equity decreased by $530,000, or 1.74%, from
$30.39 million at December 31, 1998 to $29.86 million at June 30,
1999. This decrease reflects the $1.25 million change in
unrealized gains (losses) on investment and mortgage-backed
securities held in the Bank's available for sale portfolio, net
of taxes, as offset by the Bank's earnings for the six months
ended June 30, 1999.
Asset Quality
The following table sets forth non-performing assets as of
June 30, 1999 and December 31, 1998 (Dollars in thousands):
<TABLE>
<CAPTION>
At June 30, At December 31,
1999 1998
<S> <C> <C>
Loans past due 90 days or more as to interest or
principal and accruing interest $51 $ 0
Nonaccrual loans 1,452 1,609
Loans restructured to provided a reduction or deferral
of interest or principal 0 0
Total nonperforming loans 1,503 1,609
Real estate owned (REO) 326 629
Total nonperforming assets $1,829 $2,238
====== ======
Nonperforming loans to total loans 1.87 % 2.19 %
Nonperforming assets to total assets 1.00 1.36
Allowance for loan losses to total loans 0.38 0.41
Allowance for loan losses to nonperforming loans 20.23 18.89
Allowance for loan losses to nonperforming assets 16.62 13.58
Net charge-offs as a percentage of total loans 0.00 0.37
</TABLE>
Approximately $1.02 million of the $1.83 million in
nonperforming assets as of June 30, 1999 were one-to-four family
residential mortgage loans.
Results of Operations for the Six and Three Month Periods Ended
June 30, 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
<PAGE 12> mortgage-backed securities, other investment securities
and loans), and its cost of funds (consisting of interest paid on
deposits). The Bank's net income also is affected by its
provision for loan losses, as well as by the amount of
noninterest income, including income from fees and service
charges, net gains and losses on sales of mortgage-backed
securities and other investments, and noninterest expense such as
employee compensation and benefits, deposit insurance premiums,
occupancy and equipment costs, and income taxes. Earnings of the
Bank also are affected significantly by general economic and
competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities,
which events are beyond the control of the Bank. In particular,
the general level of market interest rates tends to be highly
cyclical. In periods of high interest rates, earnings of the
Bank are likely to be depressed, which in turn would be likely to
have a detrimental effect on the market value of any investment
in the Company's common stock.
Net Income. The Bank's net income totaled $641,000 and
$377,000 for the six months ended June 30, 1999 and 1998,
respectively. Net income for the quarters ended June 30, 1999
and 1998 was $313,000 and $170,000, respectively. These
increases were due largely to the increase in interest income
discussed below. The Company's earnings per share for the three
and six months ended June 30, 1999 were $.11 and $.22,
respectively, compared to $.15 and $.32 per share for the three
and six month periods ended June 30, 1998, respectively. The
decrease in earnings per share reflects the increased number of
shares outstanding as a result of the completion of the Bank's
conversion and reorganization from a mutual holding company
structure to a full stock company (the "Conversion and
Reorganization").
Interest Income. Total interest income increased by $1.05
million, or 21.88%, to $5.85 million for the six months ended
June 30, 1999, from $4.80 million for the six months ended
June 30, 1998. The increase in interest income resulted largely
from an increase of $398,000 in interest earned on loans and a
$866,000 increase in income earned on mortgage-backed and
investment securities. Total interest income increased by
$630,000 or 26.14% to $3.04 million for the quarter ended
June 30, 1999 compared to $2.41 million for the comparable period
of 1998, due principally to an increase of $240,000 in interest
earned on loans and a $594,000 increase in income earned on
mortgage-backed and investment securities which was offset by a
decrease of $205,000 in income earned on deposits. The increase
in interest income generally reflected management's strategy of
pursuing diversification of the Bank's loan composition. The
increase in interest income also occurred due to the investment
of the increased capital from the Conversion and Reorganization,
which was completed in July 1998, and the transfer of cash and
cash equivalents to higher yielding mortgage-backed securities.
<PAGE 13>
Interest Expense. Total interest expense increased to $2.85
million for the six months ended June 30, 1999, from $2.47
million for the six months ended June 30, 1998, representing an
increase of $380,000 or 15.38%. Interest expense increased by
$200,000 or 15.87% to $1.46 million for the quarter ended
June 30, 1999 compared to $1.26 million for the quarter ended
June 30, 1998. The increase for both periods was due primarily
to the increases in deposits and in securities purchased by the
Bank under agreements to resell, which are interest-bearing
obligations.
Provision for Loan Losses. The Bank makes a provision to
its allowance for loan losses to protect the Bank against
possible but not yet identified losses inherent in the Bank's
loan portfolio. This provision is recognized for financial
reporting purposes as a reduction of income. In making such
provision, management of the Bank considers, among other factors,
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 and six month periods ended
June 30, 1999, the Bank made no provision to its allowance for
loan losses based on the determination of management and the
board of directors that the allowance was adequate. The Bank
also did not have any charge-offs against the allowance during
such period. During the six months ended June 30, 1998, the Bank
had charge-offs against the allowance for loan losses of $73,000.
During such period, the Bank provided $183,000 for possible loan
losses. During the three months ended June 30, 1998, the Bank
had charge-offs against the allowance for loan losses of $73,000.
During such period, the Bank provided $133,000 for possible loan
losses.
Net Interest Income After Provision for Loan Losses. Net
interest income after the provision for possible loan losses for
the six months ended June 30, 1999, increased to $3.00 million
from $2.14 million for the six months ended June 30, 1998, an
increase of $860,000, or 40.19%. Net interest income after the
provision for loan losses increased to $1.58 million for the
quarter ended June 30, 1999 from $1.02 million for the quarter
ended June 30, 1998. These increases were due to the increase in
total interest income and the lack of a provision for loan losses
during the three and six month periods ended June 30, 1999, as
discussed above.
Noninterest Income. Noninterest income consists of gain on
sale of loans, loan fees, service charges, rental income and
other income. Noninterest income decreased by $82,000, or
13.27%, to $536,000 for the six months ended June 30, 1999, from
$618,000 for the six months ended June 30, 1998. The principal
reason for the decrease in noninterest income was a $125,000
decrease in gain on sale of loans to $258,000 in 1999 from
$383,000 in 1998, due to a decrease in number of loans sold by
<PAGE 14> Transnational Mortgage Corp. in 1999. This decrease
was partially offset by a $23,000 increase in loan fees and a
$20,000 increase in service charges. For the second quarter of
1999, increases in loan fees, service charges and rental income
were offset by decreases in the gain on sale of loans and other
income resulting largely from the decrease in Transnational's
business. This decrease resulted in noninterest income of
$279,000 for the second quarter 1999 compared to $372,000 for the
second quarter 1998.
Noninterest Expense. Noninterest expense principally
consists of employees' compensation and benefits, deposit
insurance premiums, expenses incurred in the sale of real estate
owned and premises and occupancy costs. Noninterest expense
increased by $410,000, or 18.55%, to $2.62 million for the six
months ended June 30, 1999, from $2.21 million for the six months
ended June 30, 1998. The principal reasons for the increase were
a $146,000 increase in compensation and employee benefits due to
normal salary increases, a $5,700 increase in premises and
occupancy costs, a $163,000 increase in expenses of real estate
owned due to management's decisions to liquidate a portion of its
inventory of such property throughout the period, an $18,000
increase in stationery, printing and postage and a $73,000
increase in other expenses. Total noninterest expense for the
second quarter 1999 increased to $1.40 million from $1.13 million
for the second quarter 1998 because of increases in compensation
and employee benefits, stationery, printing and postage, expenses
of real estate owned and other expenses. Noninterest expense has
increased in both periods due to cost associated with the Bank's
expansion strategy.
Income Taxes. Income tax provisions for the six months
ended June 30, 1999 and 1998 of $277,000 and $165,000,
respectively, generally reflect the Bank's pre-tax income at
rates then in effect. The income tax provision for the second
quarter was $144,000 in 1999 and $90,000 in 1998.
Liquidity and Capital Resources
At June 30, 1999, the Bank was in compliance with regulatory
capital requirements as follows:
<TABLE>
<CAPTION>
June 30, 1999
Required Actual
% Amount % Amount Excess
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Tangible Equity ratio >3.00% $3,841 25.28% $32,364 $28,523
Leverage capital ratio 6.00 7,683 25.28% 32,364 24,681
Total risk-based capital ratio 8.00 6,573 39.76% 32,668 26,095
Tier 1 risk-based capital ratio 4.00 3,287 39.39% 32,364 29,077
<CAPTION>
December 31, 1998
Required Actual
% Amount % Amount Excess <PAGE 15>
(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 62.97% as of June 30, 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 management objectives. Short-term
interest-earning deposits with the FHLB of Pittsburgh amounted to
$10.99 million at June 30, 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.
<PAGE 16>
Disclosure Regarding Year 2000 Compliance
The Company and the 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 Company and the Bank:
1. The Banking transactions of the 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 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 Bank
experiencing a deposit outflow prior to December 31, 1999.
3. A number of the 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
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 Bank.
4. Certain utility services, such as electrical power and
telecommunications services could be disrupted if those services
experience Y2K related problems.
The Company and 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 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 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 Bank outsources all major data processing applications
related to customers' banking transactions to Intrieve,
Incorporated ("Intrieve"). Under the agreement with Intrieve,
Intrieve is obligated to incur all software related costs to make
its system Y2K compliant. Intrieve prepared a detailed schedule
of functions to be performed in its compliance project. As of
March 31, 1999, Intrieve had completed their "awareness",
<PAGE 17> "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 Bank
conducted testing in-house using Intrieve's data processing
system. The 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 Bank is obligated to incur only the
hardware costs associated with implementing the changes required
by Intrieve. These hardware costs are not expected to be
material.
The Bank does not expect any of its outside vendors to be
noncompliant; however, the 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 Bank is either not practical or not
possible. In those cases, contingency plans are being designed
that specify how the Bank will deal with each such potential
situation. The Bank has developed a contingency plan which will
address failure of the data processing service bureau system.
The Bank has determined that if the service bureau system were to
fail, the Bank would implement manual systems until such systems
could be re-established. The Bank does not anticipate that such
short-term manual systems would have a material impact upon the
operations of the 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 June 30,
1999, the 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 Bank in the period incurred.
The costs of the project and the date on which the 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 18>
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 PSB
Bancorp, Inc. (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 PSB Bancorp, Inc.
(incorporated herein by reference to
Exhibit 3.2 of the SB-2 Registration
Statement of PSB Bancorp, Inc. filed
October 9, 1997).
10.1* 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 Bank 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).
<PAGE 19>
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).
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 Schedule
____________________________________
* Denotes a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K
None.
<PAGE 20>
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.
August 10, 1999
PSB Bancorp, Inc.
(Registrant)
By /s/ Anthony DiSandro
Anthony DiSandro
President and Chief Operating
Officer
<PAGE 21>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,712
<INT-BEARING-DEPOSITS> 10,986
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,087
<INVESTMENTS-CARRYING> 72,444
<INVESTMENTS-MARKET> 70,361
<LOANS> 88,452
<ALLOWANCE> 304
<TOTAL-ASSETS> 182,926
<DEPOSITS> 133,200
<SHORT-TERM> 0
<LIABILITIES-OTHER> 19,870
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 30,077
<TOTAL-LIABILITIES-AND-EQUITY> 182,926
<INTEREST-LOAN> 3,653
<INTEREST-INVEST> 1,663
<INTEREST-OTHER> 536
<INTEREST-TOTAL> 5,853
<INTEREST-DEPOSIT> 2,734
<INTEREST-EXPENSE> 2,850
<INTEREST-INCOME-NET> 3,003
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,620
<INCOME-PRETAX> 918
<INCOME-PRE-EXTRAORDINARY> 918
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 641
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 3.83
<LOANS-NON> 1,452
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 304
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 304
<ALLOWANCE-DOMESTIC> 304
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
