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, 2000 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, 2000
COMMON STOCK (No Par Value) 4,455,007
(Title of Class) (Outstanding Shares)
Page 1 of 22 Pages
Exhibit Index on Page 20
PSB Bancorp, Inc.
FORM 10-QSB
For the Quarter Ended June 30, 2000
Contents
Page No.
PART I FINANCIAL INFORMATION.
Item 1. Financial Statements
Consolidated Statement of Financial
Condition as of June 30, 2000 (Unaudited)
and December 31, 1999 3
Consolidated Statement of Income (Unaudited)
for the Three Month and Six Month Periods
Ended June 30, 2000 and 1999. 5
Consolidated Statement of Three Month and
Comprehensive Income (Unaudited) for the
Six Month Periods Ended June 30, 2000 and 1999 7
Consolidated Statement of Cash Flows
(Unaudited) for the Six Month Periods Ended
June 30, 2000 and 1999. 9
Note to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Part I Financial Information
Item I Financial Statements
PSB BANCORP, INC
BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30 December 31,
2000 1999
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,142 $ 7,921
Interest bearing deposits with banks 4,975 9,354
Investment securities -
available-for-sale, at fair value 23,376 22,685
Mortgage-backed securities
available-for-sale, at fair value 43,621 45,951
Mortgage-backed securities held-to-maturity
(fair value of $973 and $1,032) 958 1,006
Investment securities held-to-maturity
(fair value of $3,801 and $3,779) 4,000 4,000
Investments, Other 4,250 3,750
Loans, less allowance for loan losses of
$1,349 and $1,231, respectively 150,785 167,787
Loans held for sale 7,522 8,221
Property acquired through loan foreclosure actions, net 1,003 1,047
Premises and equipment, net 1,894 1,692
Accrued interest receivable 2,334 2,446
Prepaid corporate taxes 934 784
Deferred tax asset 994 1,459
Other assets 1,783 1,505
TOTAL ASSETS $252,571 $279,608
LIABILITIES
Deposits
Non-interest bearing $ 15,045 $ 14,720
Interest bearing 158,759 178,490
173,804 193,210
Borrowed Funds 26,500 34,000
Securities purchased under agreements to resell 13,427 15,640
Income taxes payable 520 45
Accrued interest payable 498 515
Other liabilities 594 151
Total Liabilities 215,343 243,561
SHAREHOLDERS' EQUITY
Common stock-authorized, 17,999,500 shares no par value
issued and outstanding, 4,455,007 0 0
Treasury Stock (489) 0
Additional paid-in capital 40,845 40,873
Accumulated deficit 264 (1,136)
Employee stock ownership plan (1,279) (1,359)
Unrealized loss, investments available for sale (2,113) (2,331)
Total shareholders' equity 37,228 36,047
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $252,571 $279,608
</TABLE>
The accompanying notes are an integral part of these financial
statements.
PSB BANCORP, INC
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended
6/30/00 6/30/99
(unaudited) (unaudited)
INTEREST INCOME
Loans, including fees $ 4,007 $ 3,234
Investment securities 1,230 978
Deposits with banks 16 218
Total interest income 5,253 4,430
INTEREST EXPENSE
Interest on deposits 1,911 2,044
Interest on borrowings 582 111
Interest - other 0 0
Total interest expense 2,493 2,155
Net interest income 2,760 2,275
PROVISION FOR LOAN LOSSES 0 0
Net interest income after provision
for loan losses 2,760 2,275
NON-INTEREST INCOME 167 294
NON-INTEREST EXPENSES
Salaries and employee benefits 1,079 870
Occupancy and equipment 293 292
Other operating 724 706
Total non-interest expenses 2,096 1,868
Income before income taxes 831 701
INCOME TAXES 240 44
NET INCOME$ 591 $ 657
Net income per common share
Basic $ .14 $ .15
Diluted .13 .13
The accompanying notes are an integral part of these financial
statements.
PSB BANCORP, INC
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Six months ended
6/30/00 6/30/99
(unaudited) (unaudited)
INTEREST INCOME
Loans, including fees $ 8,141 $ 6,131
Investment securities 2,489 1,676
Deposits with banks 43 696
Total interest income 10,673 8,503
INTEREST EXPENSE
Interest on deposits 3,922 4,115
Interest on borrowings 1,152 116
Interest - other 0 0
Total interest expense 5,074 4,231
Net interest income 5,599 4,272
PROVISION FOR LOAN LOSSES 100 -
Net interest income after provision
for loan losses 5,499 4,272
NON-INTEREST INCOME 324 564
NON-INTEREST EXPENSE
Salaries and employee benefits 2,155 1,718
Occupancy and equipment 564 613
Other operating 1,284 1,261
Total non-interest expense 4,003 3,592
Income before income taxes 1,820 1,244
INCOME TAXES 475 117
NET INCOME$ $ 1,345 $ 1,127
Net income per common share
Basic $ .31 $ .26
Diluted .28 .23
The accompanying notes are an integral part of these financial
statements.
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Three Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Income $1,345 $1,127 $ 591 $ 657
Other comprehensive income, net of tax:
Change in unrealized gain (loss),
investments available
for sale 218 (1,253) 342 (242)
Other comprehensive income 218 (1,253) 342 (242)
Comprehensive Income $1,563 (126) 933 415
</TABLE>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,345 $1,126
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of premium/discount on
mortgage-backed securities 23 26
Depreciation and amortization 43 173
Write-down and expenses of real estate owned 96 159
Gain (loss) on sale of real estate owned (151) 20
Gain (loss) on sale of loans 82 (258)
Provision for losses on loans 118 0
Deferred taxes (668) (160)
Compensation expense-Employee Stock Ownership Plan 80 75
Change in assets and liabilities:
Decrease (increase) in loans held for sale 699 (1,767)
Decrease (increase) in accrued interest receivable 112 (222)
Decrease (increase) in prepaid expenses and other assets 113 (421)
(Increase) in prepaid corporate taxes (150) (89)
Increase in corporate taxes payable 475 277
(Decrease) in accrued interest payable (17) (94)
Increase in accrued expenses 443 995
Total Adjustments 1,298 (1,286)
Net cash provided for operating activities 2,643 (160)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage-backed securities, available for sale 0 (29,691)
Purchase of investment securities, held-to-maturity 0 0
Purchase of investment securities, available-for-sale (500) (6,250)
Maturities of investment securities, available-for-sale 0 1,000
Maturities of investment securities, held-to-maturity 0 0
Mortgage-backed security maturities and
principal repayments 2,482 1,682
Acquisition costs of and proceeds from the sale of
Federal Home Loan Bank stock (150) (249)
Proceeds from sale of real estate owned net of
improvements 164 367
Property acquired through loan foreclosure action (304) 0
Capital expenditures (245) (138)
Decrease (increase) in total loans receivable, net 16,884 (19,035)
Net cash provided (used) in investing activities 18,331 (52,314)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits, net (19,293) 9,407
Decrease in employee stock ownership plan 0 (234)
Change in advances for borrowers' taxes and
insurance (126) (221)
Proceeds from borrowed funds (7,500) 2,500
Change in securities purchased under agreements to resell (2,213) 13,741
Net cash provided by financing activities (29,132) 25,193
NET INCREASE IN CASH AND CASH EQUIVALENTS (8,158) (27,281)
Cash and Cash equivalents, beginning of period 17,275 47,526
CASH AND CASH EQUIVALENTS, END OF PERIOD 9,117 20,245
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $ 3,922 $4,115
Income taxes $ 475 $ 117
Noncash activities
Loans transferred to real estate owned $ 304 $ 381
Unrealized gain (loss) on investment and
mortgage-backed securities available-for-sale,
net of taxes $ (2,113) $(1,250)
</TABLE>
PSB BANCORP, INC.
NOTE TO FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
Basis of Presentation:
The consolidated financial statements include the accounts
of PSB Bancorp, Inc. ( the "Company") and its wholly-owned
subsidiary, First Penn Bank. Significant inter-company 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, 2000 are not
necessarily indicative of the results that may be expected for
the full fiscal year. For further information, refer to the
financial statements and footnotes thereto included in the Bank's
Annual Report on form 10K for the year ended December 31, 1999.
Merger:
On October 12, 1999, the Company completed its acquisition
of First Bank of Philadelphia ("First Bank"). In connection with
the acquisition, each outstanding share of First Bank was
exchanged for .857 shares of PSBI common stock. In addition,
options to acquire 1,612,500 shares of First Bank have been
converted into options to acquire 1,381,912 shares of the
Company's common stock.
As part of the transaction, PSBI merged Pennsylvania Savings
Bank, which held a state savings bank charter, with and into
First Bank, which holds a state commercial bank charter. The
resulting operating subsidiary will operate under the name of
First Penn Bank (the "Bank") and will hold a commercial bank
charter. This will provide the Bank with greater lending
flexibility, particularly with respect to commercial loans. The
Bank will operate seven branches including two in Center City
Philadelphia, and one in Montgomery County, Pennsylvania.
The transaction was accounted for as a pooling of interests
for financial reporting purposes, and as a tax-free
reorganization for tax purposes.
Stock Buyback Program
Consistent with the commitment to enhance shareholder value,
the Board of Directors of PSB Bancorp, Inc approved a stock
buyback program on March 16, 2000 under which PSBI may acquire a
maximum of 5.0%, or 218,532 shares, of its common stock in open
market and privately negotiated transactions. To date 87,500 of
authorized shares have been repurchased and retired by PSBI.
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, commercial real
estate loans, commercial business loans, construction loans and
student loans, mortgage-backed securities and other liquid
investment securities. 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 lending
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 student loans
which generally bear higher interest rates and have shorter terms
than residential mortgage loans.
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."
Investment Valuation
PSB, together with three other financial institutions
participated in the initial capitalization of BankZIP.com, an
Internet banking company. The total capitalization of BankZIP was
$13.9 million and PSB contributed $2.5 million in the form of a
convertible subordinated note. BankZIP is in the process of
seeking an additional $20 million of capital. They have informed
PSB that they expect to complete all or a substantial part of
this financing before September 30, 2000 and has advised legal
counsel and the outside auditors in writing that they do not
believe at this time that the investment is impaired. PSB
management has agreed with BankZIP's assessment however, the
continued viability of BankZIP, and therefore the value of the
PSB investment, may be dependent upon BankZIP's ability to raise
capital.
Earning Per Share
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 and six months ended
June 30, 2000:
<TABLE>
<CAPTION>
___________________________________________________________________________
Three Months Ended Income Shares Per Share
June 30, 2000 (Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS:
Income available to common
shareholders $ 591,000 4,455,007
Uncommitted Shares (166,910)
4,288,097 $.14
Effect of Dilutive Securities:
Options 531,571
Diluted EPS:
Income available to common
shareholders $ 591,000 4,819,668 $.13
<CAPTION>
___________________________________________________________________________
Six Months Ended Income Shares Per-Share
June 30, 2000 (Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS:
Income available to common
shareholders $1,345,000 4,455,007
Uncommitted Shares (166,910)
4,288,097 $.31
Effect of Dilutive Securities:
Options 531,571
Diluted EPS:
Income available to common
shareholders $1,345,000 4,819,668 $.28
</TABLE>
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 and six months ended
June 30, 1999:
<TABLE>
<CAPTION>
__________________________________________________________________________
Three Months Ended Income Shares Per-Share
June 30, 1999 (Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS:
Income available to common
shareholders $657,000 4,538,222
Uncommitted Shares (186,790)
4,351,432 $.15
Effect of Dilutive Securities:
Options 613,291
Diluted EPS:
Income available to common
shareholders $657,000 4,964,723 $.13
<CAPTION>
___________________________________________________________________________
Six Months Ended Income Shares Per-Share
June 30, 1999 (Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS:
Income available to common
shareholders $1,127,000 4,538,222
Uncommitted Shares (186,790)
4,351,432 $.26
Effect of Dilutive Securities:
Options 653,744
Diluted EPS:
Income available to common
shareholders $1,127,000 5,005,176 $.23
</TABLE>
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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 borrowings. The Bank's net income is also affected by its
provision for loan losses and its level of non-interest income as
well as its non-interest expense, such as salary and employee
benefits, occupancy costs and charges relating to non-performing
and other classified assets.
Net Income
The Bank's net income totaled $591,000 and $657,000 for the
three months ended June 30, 2000 and 1999, respectively. The
Bank's net income totaled $1.3 million and $1.1 million for the
six months ended June 30, 2000 and 1999, respectively. The
increase was due largely to the increase in interest earning
assets. The Company's earnings per share for the three months
ended June 30, 2000 was $0.14 and $.0.13 respectively, and $0.31
and $0.28 per share for the six months ended June 30, 2000,
respectively, compared to $0.15 and $0.13 for the three months
ended June 30, 1999 and $0.26 and $0.23 for the six months ended
June 30, 1999. The increase in earnings per share reflects the
increased earnings of the Company and improving net interest
margin
Net Interest Income and Average Balances
Net interest income is a key component of the Bank's
profitability structure and is managed in coordination with the
Bank's interest rate sensitivity position. Net interest income
for the second quarter of 2000 was $485,000, or 21.3% greater
than the second quarter of 1999, and was $1.3 million, or 31.0%
greater for the first half of 2000 as compared to the same period
in 1999. The increase generally reflected management's strategy
of pursuing diversification of the Bank's loan composition while
maintaining adequate margins over minimum required capital levels
and an improving yield on the Bank's loan portfolio and a
increase in mortgage-backed and investment securities.
The Bank's net interest margin (net interest income divided
by total average interest-earning assets) for the three and six
months ended June 30, 2000 was 4.52% and 4.49%, respectively.
These margins compare to net interest margin for the three and
six months ended June 30, 1999 of 3.94% and 3.77%, respectively.
The Bank's net interest spread (the difference between the yield
on interest-earning assets and the rates paid on interest-bearing
liabilities) for the three and six months ended June 30, 2000 was
3.69% and 3.76%, respectively. These spreads compare to net
interest spread for the three and six months ended June 30, 1999
of 2.94% and 2.73%, respectively.
Average Balance Sheets and Rate/Yield Analysis
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):
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
Average Interest/ Yield/ Average Interest/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning deposits $ 1,372 $ 43 6.27% $ 33,630 $ 696 4.13%
Investment securities 31,192 940 6.03% 23,054 669 5.80%
Mortgage-backed securities 44,807 1,549 6.91% 33,587 1,007 6.00%
Net loan 172,034 8,141 9.46% 136,604 6,131 8.98%
Total interest-earning assets 249,405 $10,673 8.56% 226,875 $8,503 7.50%
Noninterest-earning assets 15,362 9,315
Total assets $264,767 $236,190
LIABILITIES
Interest-bearing liabilities:
Now checking accounts $ 12,312 $ 126 2.05% $ 8,340 $ 123 2.95%
Money market accounts 12,687 230 3.63% 14,150 254 3.59%
Savings deposits 29,403 420 2.86% 29,448 420 2.85%
Certificates 115,053 3,146 5.47% 118,381 3,218 5.61%
Total deposits 169,455 3,922 4.63% 170,317 4,115 4.83%
Borrowed money 41,884 1,152 5.50% 7,084 116 3.27%
Total interest-bearing
liabilities 211,339 5,074 4.80% 177,401 4,231 4.77%
Non-interest-bearing liabilities 16,750 22,735
Total liabilities 228,089 200,136
Retained earnings or shareholders'
equity 36,678 36,054
Total liabilities and retained
earnings or shareholders'
equity $264,767 $236,190
Net interest income $ 5,599 $4,272
Interest rate spread(3) 3.76% 2.73%
Net yield on interest-earning
assets(4) 4.49% 3.77%
Ratio of interest-earning assets to
interest-bearing liabilities 1.18x 1.28x
</TABLE>
Average Balance Sheets and Rate/Yield Analysis
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):
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
Average Interest/ Yield/ Average Interest/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning deposits $ 981 $ 16 6.52% $ 25,153 $ 218 3.47%
Investment securities 31,564 478 6.06% 23,857 360 6.04%
Mortgage-backed securities 45,218 752 6.65% 38,681 618 6.39%
Net loan 166,447 4,007 9.63% 143,138 3,234 9.04%
Total interest-earning assets 244,210 $5,253 8.60% 230,829 $4,430 7.68%
Noninterest-earning assets 13,136 10,556
Total assets $257,346 $241,385
LIABILITIES
Interest-bearing liabilities:
Now checking accounts $ 12,302 $ 92 2.99% $ 8,323 $ 77 3.70%
Money market accounts 11,606 108 3.72% 14,858 135 3.63%
Savings deposits 29,217 210 2.88% 29,677 214 2.88%
Certificates 111,813 1,501 5.37% 119,801 1,618 5.40%
Total deposits 164,938 1,911 4.63% 172,659 2,044 4.74%
Borrowed money 38,005 582 6.13% 9,378 111 4.73%
Total interest-bearing
liabilities 202,943 2,493 4.91% 182,037 2,155 4.74%
Non-interest-bearing liabilities 17,409 23,689
Total liabilities 220,352 205,726
Retained earnings or shareholders'
equity 36,994 35,659
Total liabilities and retained
earnings or shareholders'
equity $257,346 $241,385
Net interest income $2,760 $2,275
Interest rate spread(3) 3.69% 2.94%
Net yield on interest-earning
assets(4) 4.52% 3.94%
Ratio of interest-earning assets
to interest-bearing liabilities 1.20x 1.27x
</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 regular 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 declining 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 loan loss allowance is
reviewed monthly by the Board of Directors. See "Asset Quality -
Allowance for Loan Losses." The Bank provided a loan loss
allowance of $100,000 and a recovery of $18,000 for the six
months ended June 30, 2000, no additional provision was provided
for the three months ended June 30, 2000. Additionally, the Bank
did not have any charge-offs against the allowance for loan
losses during such period. During the six month and three month
periods ended June 30, 1999, the Bank did not provide a loan loss
allowance and had no recovery or charge-offs against the
allowance for loan losses.
Non-interest Income
Non-interest income consists of gain on sale of loans,
service charges, rental income and other income. For the three
months ended June 30, 2000 non-interest income decreased by
$127,000 to $167,000 or 43.2% from $294,000 for the same period
in 1999. Non-interest income decreased by $240,000, or 42.6%, to
324,000 for the six months ended June 30, 2000, from $564,000 for
the six months ended June 30, 1999. The principal reasons for
the decrease in non-interest income was a $176,000 decrease in
gain on sale of loans to $82,000 as of June 30, 2000 from
$258,000 as of June 30, 1999, due to a decrease in the number of
loans sold by Transnational Mortgage Corp. in 2000. For the six
months ended June 30, 2000, 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.
Non-interest Expense
Non-interest expense principally consists of employees'
compensation and benefits, deposit insurance premiums and
premises and occupancy costs and other operating expenses. .
For the three months ended June 30, 2000, total non-interest
expense increased $228,000 to $2.1 million, compared to $1.9
million for the same period in 1999. Total non-interest expense
increased by $411,000, or 11.4%, to $4.0 million for the six
months ended June 30, 2000, from $3.6 million for the six months
ended June 30, 1999 The principal reasons for the increase was a
increase in compensation and employee benefits due to normal
salary increases and accrual of bonuses. Non-interest expense has
increased due to cost associated with the Bank's expansion
strategy through the merger of Pennsylvania Savings Bank and
First Bank of Philadelphia.
Provision for Income Taxes
Income tax provisions for the six months ended June 30,
2000 and 1999 of $475,000 and $117,000, respectively, generally
reflect the Bank's pre-tax income in accordance with the
principles of SFAS No. 109, "Accounting for Income Taxes."
Liquidity and Interest Rate Sensitivity
The maintenance of adequate liquidity and the mitigating of
interest rate risk is integral to the management of the Bank's
balance sheet. 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 re-pricing 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,
the amortization and prepayment of loans and mortgage-backed
securities, maturities of investment securities and other short-
term investments. The liquidity position of the Bank is also
strengthened by a $50 million credit facility with the Federal
Home Loan Bank (FHLB). Advances are secured by all FHLB stock
and qualifying mortgage loans. The Bank was in a borrowing
position as of June 30, 2000.
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 the six months ended June 30, 2000, net cash
provided by operating activities was $2.8 million, compared to
net cash used by operating activities of $160,000 for the same
period of 1999. During the six months ended June 30, 2000, net
cash provided by investing activities was $18.3 million, compared
to net cash used by investing activities of $52.3 million for the
same period of 1999. Financing activities used net cash of $29.3
million during the six months ended June 30, 2000, compared to
$25.2 million in net cash provided in financing activities for
the same period of 1999. The net result of these items was a
$8.2 million decrease in cash and cash equivalents for the six
months ended June 30, 2000, compared to a $27.3 million decrease
in cash and cash equivalents for the same period of 1999.
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.
The blending of fixed and floating rate loans and
investments to match the re-pricing 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.
Another tool used by management to gauge the structure of
the balance sheet is a "gap" analysis which categorizes assets
and liabilities on the basis of maturity date, the date of next
re-pricing, 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 June 30, 2000, the Bank had a one-
year liability gap of $95.2 million and a gap ratio of 0.48 or
37.7% of total assets as of that date. This compares with a one-
year liability gap of $93.4 million and a gap ratio of 0.55 or
33.4% of total assets at December 31, 1999.
The following table shows the interest rate sensitive data
at June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Balance
No Stated at
0 -3 Mo's 3-12 Mo's 1-5 Yrs >5 Yrs Maturity 6/30/00
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits with
banks $ 4,975 $ 4,975
Investment securities $ 8,867 $ 7,286 $ 51,492 $ 8,560 76,205
Real estate loans 5,324 4,887 21,766 59,591 91,568
Commercial loans 7,023 326 2,448 9,797
Consumer loans 203 455 829 1,487
Student loans 25,618 25,618
Construction loans 14,814 7,962 416 23,192
SBA loans 6,852 1,142 7,994
Other assets 11,735 11,735
Total assets $ 64,606 $ 23,387 $ 32,371 $111,912 $ 20,295 $252,571
Non interest bearing deposits $ 15,045 $ 15,045
NOW accounts $ 11,272 11,272
Money market accounts 10,932 10,932
Savings accounts 29,235 29,235
Time deposits 35,150 $ 56,637 $ 12,451 $ 3,082 107,320
Borrowed funds 39,927 39,927
Other liabilities 1,612 1,612
Total liabilities 126,516 56,637 12,451 3,082 16,657 215,343
Shareholder's equity 37,228 37,228
Total liabilities and
shareholder's equity $126,516 $ 56,637 $ 12,451 $ 3,082 $ 53,885 $252,571
GAP $(61,910) $(33,250) $ 19,920 $108,830 $(33,590) $ 0
Cumulative GAP $(61,910) $(95,160) $(75,240) $ 33,590 $ 0 $ 0
Cumulative GAP Ratio 0.51 0.48 0.62 1.17 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. 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. At June 30, 2000, the
Bank was required to have a 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 June 30, 2000, were 25.3% and 26.3%,
respectively, and the Bank's Tier I leverage ratio was 12.95%.
These ratios exceed the requirements for classification as a
"well capitalized" institution, the industry's highest capital
category.
On June 30, 2000, the Bank was in compliance with regulatory
capital requirements as follows:
<TABLE>
<CAPTION>
June 30, 2000
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 32,608 25.28% 5,160 4.00% 7,740 6.00%
Total capital to risk weighted assets 33,957 26.32% 10,320 8.00% 12,900 10.00%
Leverage to average assets 32,608 12.95% 10,071 4.00% 12,589 5.00%
December 31, 1999
Minimum Well
Actual Capital Requirements Capital Requirements
Amount Ratio Amount Ratio Amount Ratio
Tier I capital to risk weighted assets 31,348 17.90% 7,006 4.00% 10,510 6.00%
Total capital to risk weighted assets 32,579 18.60% 14,013 8.00% 17,516 10.00%
Leverage to average assets 31,348 11.48% 10,927 4.00% 13,659 5.00%
</TABLE>
FINANCIAL CONDITION
General
The Bank's total assets decreased $27.0 million or 9.7% from
$279.6 million at December 31, 1999 to $252.6 million at June
30, 2000. The decrease in assets was primarily the result of a
decrease in net loans and loans held for sale.
Total loans decreased to $158.3 million at June 30, 2000
from $176.0 million at December 31, 1999. The decrease of $17.7
million, or 10.1%, was primarily the result of payoffs of Bank's
student loan program. This program was an existing program of
First Bank of Philadelphia and now appears in the Company's
consolidated results because of the merger. 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. 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 were
also a factor as illustrated by the following loan composition
table:
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999
Amount Percent Amount Percent Variance %Change
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family (1) 62,694 39.14% $ 63,937 35.99% $ (1,243) (1.94%)
Construction loans 23,192 14,48% 23,528 13,25% (336) (1.43%)
Five or more family residence 2,263 1.41% 2,712 1.53% (449) (16.56%)
Non residential 25,703 16.05% 27,117 15.27% (1,414) (5.21%)
Commercial loans 9,898 6.18% 10,682 6.01% (784) (7.34%)
SBA loans 7,993 4.99% 6,682 3.76% 1,311 19.62%
Student loans held for sale 25,618 15.99% 40,509 22.80% (14,891) (36.76%)
Consumer loans 2,810 1.75% 2,468 1.39% 342 13.86%
Total loans $160,171 100.00% $177,635 100.00% $(17,464) (9.83%)
Less:
Unearned fees and discounts $ 515 $ 389
Undisbursed loan proceeds - 7
Allowance for loan losses 1,349 1,231
Net loans $158,307 $176,008
</TABLE>
(1) Includes loans held for sale
Total investment securities (including mortgage-backed
securities) decreased $1.1 million, or .1.4%, to $76.2 million at
June 30, 2000, from $77.3 million at December 31, 1999.
On January 29, 1999, PSBI purchased 1,600,000 shares of
Series A Convertible Preferred Stock, $.01 par value per share,
of McGuire Performance Solutions, Inc. (MPS). PSBI purchased the
shares for a total cost of $1.25 million. On February 25, 2000,
PSBI purchased 500,000 shares of Series A Convertible Preferred
Stock, $.01 par value per share of MPS for a total cost of
$500,000. PSBI 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.
On March 31, 1999, PSBI purchased a convertible debenture in
the amount of $2.5 million with a rate of 5.45% from
ZipFinancial.Com.Inc. (d/b/a Bankzip.com). The Company, which
spun off in December 1999 from Patriot Bank of Pottstown, is
building a national network of community banks through which
BankZip would offer an end-to-end internet services, such as
opening an account, account balances and transferring funds. In
addition to software, BankZip is proposing to give participating
community institutions access to customer service through a call
center it would operate and marketing that would be conducted on
a national scale. Alliance Partners (community banks), also
offer a national portfolio of Bankzip.com co-branded financial
service products, including brokerage and insurance. Once an
Alliance Partner is signed up, the service can be deployed in as
few as thirty days. Fully developed, Bankzip.com will support
over 300 banks with as many as 4,000 branches and 5,000 ATMs
across the nation within five years.
Cash and cash equivalents, including interest-bearing
deposits with banks, decreased $8.2 million or 47.4% to $9.1
million at June 30, 2000, from $17.3 million at December 31,
1999. This decrease was the result of the redemption of
certificate of deposits and disbursements of loan proceeds.
Total liabilities decreased from $243.6 million at
December 31, 1999 to $215.3 million at June 30, 2000. This $28.3
million, or 11.6% decrease, was primarily due to a $19.0 million
decrease in total deposits due to a run off of certificate of
deposits, a decrease in securities purchased under agreements to
resale and a $7.4 million decrease in borrowed funds. Due to
rising interest rates and the competitive market, the Bank has
replaced it's primary source of funds deposits with borrowed
funds which yield a lower interest rate.
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 is due. In most cases, deficiencies are
cured promptly. If a delinquency extends beyond 30 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 non-performing assets increased $435,000
or 14.0%, during the six months ended June 30, 2000, from $3.1
million at December 31, 1999 to $3.5 million at June 30, 2000. 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 reaches 90 days
delinquent. At this time, all accrued but unpaid interest is
reversed. There are occasional exceptions if the loans are in
the process of collection and the loan is fully secured.
The following table sets forth non-performing assets as of
June 30, 2000 and December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999
<C> <C> <C>
Loans past due 90 days or more as to interest
or principal and accruing interest $ - $ 180
Nonaccrual loans 2,537 1,878
Loans restructured to provide a reduction or
deferral of interest or principal - -
Total nonperforming loans 2,537 2,058
Real estate owned (REO) 1,003 1,047
Total nonperforming assets $3,540 $3,105
Nonperforming loans to total loans 1.59% 1.16%
Nonperforming assets to total assets 1.40% 1.11%
Allowance for loan losses to total loans 0.85% 0.69%
Allowance for loan losses to nonperforming loans 53.17% 59.82%
Allowance for loan losses to nonperforming assets 38.11% 39.65%
Net charge-offs as percentage of total loans - -
</TABLE>
Allowance for loan losses
The provision for loan losses is an amount charged against
earnings to fund the allowance for possible future 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 net realizable value (or 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,
special mention assets will have a minimum reserve of 5%,
substandard assets will have a minimum reserve of 10%, and
doubtful assets will have a minimum reserve of 50%. 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
provisions for loan losses during the six month and three month
periods ended June 30, 2000 of $100,000 and $0, respectively. The
Bank recorded no provisions for the six month and three month
periods June 30, 1999. The Bank recorded no charge-offs for the
six month and three month periods ended June 30, 2000 and 1999.
The Bank recorded a recovery of $18,000 and $0 for the six month
period June 30, 2000 and 1999.
Part II. OTHER INFORMATION
Item 2 Legal Proceedings
None
Item 3 Changes in Securities
None
Item 4 Defaults upon Senior Securities
None
Item 5 Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto dully authorized.
PSB BANCORP, INC
By:/s/Anthony Disandro
Anthony DiSandro, President,
Chief Executive Officer & Director
By:/s/Karen Washington
Karen Washington
(Principal Financial Officer and Chief
Accounting Officer)
August 21, 2000
