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 September 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 19103
1835 Market Street, Philadelphia, PA (Zip Code)
(Address of Principal Executive Offices
(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 September 30, 2000
COMMON STOCK (No Par Value) 4,455,007
(Title of Class) (Outstanding Shares)
PSB Bancorp, Inc.
FORM 10-QSB
For the Quarter Ended September 30, 2000
Contents
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Statement of Financial
Condition as of September 30, 2000
(Unaudited) and December 31, 1999 3
Consolidated Statement of Income
(Unaudited) for the Three Month and
Nine Month Periods Ended September 30,
2000 and 1999. 5
Consolidated Statement of Comprehensive
Income (Unaudited) for the Three Month
and Nine Month Periods Ended September 30,
2000 and 1999. 7
Consolidated Statement of Cash Flows
(Unaudited) for the Nine Month Periods
Ended September 30, 2000 and 1999. 9
Note to Consolidated Financial Statements 11
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 15
Item 2. OTHER INFORMATION
Exhibits and Reports on Form 8-K
PART II.
Item 6. 27
Part I Financial Information
Item I Financial Statements
PSB BANCORP, INC
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(In thousands)
September 30, December 31,
2000 1999
(unaudited) (audited)
ASSETS
Cash and due from banks $ 5,185 $ 7,921
Interest bearing deposits with banks 7,887 9,354
Investment securities -
available-for-sale, at fair value 23,934 22,685
Mortgage-backed securities
available-for-sale, at fair value 42,843 45,951
Mortgage-backed securities
held-to-maturity (fair value of
$943 and $1,032) 943 1,006
Investment securities
held-to-maturity (fair value of
$3,836 and $3,779) 4,000 4,000
Investment in BankZip.Com 1,250 2,500
Investment in Iron Bridge 1,663 1,250
Loans, less allowance for loan
losses of $1,349 and $1,231,
respectively 160,820 167,787
Loans held for sale 7,927 8,221
Property acquired through loan
foreclosure actions, net 1,169 1,047
Premises and equipment, net 1,817 1,692
Accrued interest receivable 2,551 2,446
Prepaid corporate taxes 773 784
Deferred tax asset 2,426 1,459
Other assets 1,123 1,505
TOTAL ASSETS $266,311 $279,608
======== ========
LIABILITIES
Deposits
Non-interest bearing 16,301 14,720
Interest bearing 159,090 178,490
175,391 193,210
Borrowed Funds 38,000 34,000
Securities purchased under
agreements to resell 13,340 15,640
Income taxes payable 695 45
Accrued interest payable 646 515
Other liabilities 887 151
Total liabilities 228,959 243,561
SHAREHOLDERS' EQUITY
Common stock-authorized, 15,000,000
shares no par value issued and
outstanding, 4,455,007 0 0
Treasury Stock (489) 0
Additional paid-in capital 40,829 40,873
Employee stock ownership plan (1,239) (1,359)
Accumulated earnings/deficit 630 (1,136)
Accumulated other comprehensive
income (loss) (2,379) (2,331)
Total shareholders' equity 37,352 36,047
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $266,311 $279,608
======== ========
________________________________________________________________
The accompanying notes are an integral part of these financial
statements.
PSB BANCORP, INC
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30,2000 September 30, 1999
(unaudited) (unaudited)
<S> <C> <C>
INTEREST INCOME
Loans, including fees $3,878 $3,421
Investment securities 1,183 1,207
Deposits with banks 65 138
Total interest income 5,126 4,766
INTEREST EXPENSE
Interest on deposits 1,937 2,120
Interest on borrowings 765 185
Interest - other 0 0
Total interest expense 2,702 2,305
Net interest income 2,424 2,461
PROVISION FOR LOAN LOSSES 0 0
Net interest income after provision
for loan losses 2,424 2,461
NON-INTEREST INCOME 144 302
NON-INTEREST EXPENSE
Salaries and employee benefits 1,063 893
Occupancy and equipment 303 323
Other operating 677 652
Total non-interest expense 2,043 1,868
Loss on investment in Iron Bridge 23 0
Income before income taxes 502 895
INCOME TAXES 175 104
NET INCOME FOR PERIOD $ 327 $ 791
====== ======
Net income per common share
Basic $ .08 $ .17
Diluted .07 .14
</TABLE>
The accompanying notes are an integral part of these financial
statements.
PSB BANCORP, INC
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
September 30, 2000 September 30, 1999
(unaudited) (unaudited)
<S> <C> <C>
INTEREST INCOME
Loans, including fees $12,019 $ 9,551
Investment securities 3,672 2,919
Deposits with banks 108 798
Total interest income 15,799 13,268
INTEREST EXPENSE
Interest on deposits 5,859 6,236
Interest on borrowings 1,917 301
Interest - other 0 0
Total interest expense 7,776 6,537
Net interest income 8,023 6,731
PROVISION FOR LOAN LOSSES 100 0
Net interest income after provision
for loan losses 7,923 6,731
NON-INTEREST INCOME 468 866
NON-INTEREST EXPENSE
Salaries and employee benefits 3,218 2,611
Occupancy and equipment 867 936
Other operating 1,961 1,912
Total non-interest expense 6,046 5,459
Loss on Investment in Iron Bridge 87 0
Income before income taxes 2,258 2,138
INCOME TAXES 650 221
NET INCOME FOR PERIOD $1,608 $ 1,917
====== =======
Net income per common share
Basic $ .37 $ .42
Diluted .33 .33
</TABLE>
The accompanying notes are an integral part of these financial
statements.
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
Nine Months Ended Three Months Ended
September 30, September 30,
2000 1999 2000 1999
(unaudited) (unaudited)
Net Income for Period $ 1,608 $ 1,917 $ 327 $ 791
Other comprehensive
income, net of tax:
Change in accumulated
Other comprehensive
income (loss) (48) ( 1,754) (266) (504)
Total comprehensive
income $ 1560 $ 163 $ 61 $ 287
PSB BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,608 $1,917
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of premium/discount on mortgage-backed
Securities 52 38
Depreciation and amortization 149 247
Write-down and expenses of real estate owned 153 358
Gain (loss) on sale of real estate owned 0 0
Gain (loss) on sale of loans 119 (391)
Provision for losses on loans 100 0
Loan loss recovery 18 0
Increase in deferred taxes (359) (1,835)
Compensation expense-Employee Stock Ownership Plan 120 105
Decrease in allowance to reduce investments to market (332) 0
Change in assets and liabilities:
Decrease (increase) in loans held for sale 294 (1,094)
(Increase) in accrued interest receivable (105) (304)
(Increase) in prepaid expenses and other assets (226) (1,077)
Decrease in prepaid corporate taxes 11 67
Increase in corporate taxes payable 650 28
Increase (decrease) in accrued interest payable 131 (91)
Increase in accrued expenses & other liabilities 736 438
Total Adjustments 1,511 (3,511)
Net cash provided (used) by operating activities 3,119 (1,594)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage-backed securities, available for sale 0 (28,905)
Purchase of investment securities, available-for-sale (413) (6,597)
Maturities of investment securities, available-for-sale 0 1,000
Mortgage-backed security maturities and principal repayments 3,949 2,515
Acquisition costs of and proceeds from the sale of Federal
Home Loan Bank stock (550) 249
Proceeds from sale of real estate owned net of improvements 352 582
Property acquired through loan foreclosure action (626) (6)
Capital expenditures (275) (153)
Decrease (increase) in total loans receivable, net 6,849 (42,722)
Net cash provided (used) by investing activities 9,286 (74,037)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease Increase in deposits, net (17,526) 12,166
Decrease in employee stock ownership plan 0 (234)
Change in advances for borrowers' taxes and insurance (293) (320)
Proceeds from borrowed funds 4,000 10,000
Purchase of treasury stock (489) 0
Change in securities purchased under agreements to resell (2,300) 13,530
Net cash provided (used) by financing activities (16,608) 35,142
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,203) (40,489)
Cash and Cash equivalents, beginning of period 17,275 47,526
CASH AND CASH EQUIVALENTS, END OF PERIOD 13,072 7,037
====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $7,776 $6,537
====== ======
Income taxes $ 650 $ 221
====== ======
Non-cash Activities S 626 $ 0
</TABLE>
PSB BANCORP, INC.
NOTE TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. Basis of Presentation
The consolidated financial statements include the accounts
of PSB Bancorp, Inc. ("PSB") and its wholly-owned subsidiary,
First Penn Bank. Significant inter-company accounts and
transactions have been eliminated. The information contained in
this interim report is unaudited and subject to year-end
adjustment and audit. However, in the opinion of management, the
information reflects all adjustments necessary to present fairly
the financial condition and results of operations for the periods
presented. All such adjustments were of a normal recurring
nature. Operating results for the nine months ended
September 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 Company's Annual Report on form 10K for
the year ended December 31, 1999.
2. Mergers
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 PSB 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, PSB merged Pennsylvania Savings
Bank, which held a state savings bank charter, with and into
First Bank, which held a state commercial bank charter. The
resulting operating subsidiary operates under the name of First
Penn Bank (the "Bank") and holds a commercial bank charter. This
provides the Bank with greater lending flexibility, particularly
with respect to commercial loans. The Bank operates 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.
On November 2, 2000 PSB Bancorp, Inc. and Jade Financial
Corp announced the execution of a definitive Agreement & Plan of
Merger pursuant to which PSB will acquire Jade Financial Corp.
and its wholly-owned subsidiary, IGA Federal Savings Bank in a
cash transaction valued at approximately $24.1 million. Pursuant
to the agreement, PSB will purchase all of the outstanding shares
of Jade Financial Corp. that PSB does not already own or that are
not owned by the JADE Employee Stock Ownership Plan ("ESOP")for
$13.55 per share in cash. The Jade ESOP may receive cash, PSB
stock or a combination of both. PSB will purchase its own shares
in open market and privately-negotiated transactions in order to
provide shares for exchange with the ESOP.
In connection with the transaction, Jade's wholly-owned
subsidiary IGA Federal Savings Bank will merge with and into
PSB's wholly-owned subsidiary, First Penn Bank with the
commercial bank charter of First Penn Bank surviving the merger.
3. 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 PSB 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 PSB.
4. 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 of commercial real estate,
construction, commercial business and student loans which
generally bear higher interest rates and have shorter terms than
residential mortgage loans.
5. 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 note. On September 15, 2000, an involuntary
bankruptcy petition was filed against ZipFinancial.Com, Inc. by
one of its vendors, the petition was subsequently dismissed on
October 23, 2000. On November 2, 2000, BankZip completed
$410,000 in additional financing and is seeking additional
financing of $1.5 to $2.0 million. The company has entered into
a term sheet with a strategic investor to provide a $1.0 million
line of credit. The ability to draw on the line of credit will
be dependent on sales. The continued viability of the company is
dependent on its ability to raise additional capital. No
assurances can be given that the company will be able to raise
additional capital. To reflect the uncertainty surrounding this
investment, as of September 30, 2000, PSB has established an
equity account valuation reserve pursuant to SFAS 115 of 50% or
$1.25 million while BankZip seeks additional financing.
6. Earnings 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 and nine months ended
September 30, 2000:
Three Months Ended Income Shares Per-Share
September 30, 2000 (Numerator) (Denominator) Amount
Basic EPS:
Income available to
common shareholders $327,000 4,455,007
Uncommitted Shares (138,241)
4,316,766 $.08
====
Effect of Dilutive
Securities:
Options 391,728
Diluted EPS:
Income available to
common shareholders $327,000 4,708,494 $.07
====
Nine Months Ended Income Shares Per-Share
September 30, 2000 (Numerator) (Denominator) Amount
Basic EPS:
Income available to
common shareholders $1,608,000 4,455,007
Uncommitted Shares (138,241)
4,316,766 $.37
====
Effect of Dilutive
Securities:
Options 487,705
Diluted EPS:
Income available to
common shareholders $1,608,000 4,804,471 $.33
====
The following table reconciles the numerators and
denominators of the basic and diluted EPS computations for the
Bank's net income for the three and nine months ended
September 30, 1999:
Three Months Ended Income Shares Per-Share
September 30, 1999 (Numerator) (Denominator) Amount
Basic EPS:
Income available to
common shareholders $791,000 4,538,222
Uncommitted Shares (156,078)
4,382,144 $.18
====
Effect of Dilutive
Securities:
Options 630,482
Diluted EPS:
Income available to
common shareholders $791,000 5,012,626 $.16
====
Nine Months Ended Income Shares Per-Share
September 30, 1999 (Numerator) (Denominator) Amount
Basic EPS:
Income available to
common shareholders $1,917,000 4,538,222
Uncommitted Shares (156,078)
4,382,144 $.44
====
Effect of Dilutive
Securities:
Options 612,061
Diluted EPS:
Income available to
common shareholders $1,917,000 4,994,205 $.39
====
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 $327,000 and $791,000 for the
three months ended September 30, 2000 and 1999, respectively. The
Bank's net income totaled $1.6 million and $1.9 million for the
nine months ended September 30, 2000 and 1999, respectively. The
decrease was due largely to the increase in interest on
borrowings and income taxes. The Company's earnings per share for
the three months ended September 30, 2000 was $0.08 basic and
$.0.07 diluted respectively, and $0.37 basic and $0.33 diluted
per share for the nine months ended September 30, 2000,
respectively, compared to $0.17 basic and $0.14 diluted for the
three months ended September 30, 1999 and $0.42 basic and $0.33
diluted for the nine months ended September 30, 1999.
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 third quarter of 2000 was $2.4 million, or 1.5% greater
than the third quarter of 1999, and was $8.0 million, or 19.2%
greater for the nine months ended 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. The increase also reflects an improving
yield on the Bank's loan portfolio and an 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 nine
months ended September 30, 2000 was 4.02% and 4.29%,
respectively. These margins compare to net interest margin for
the three and nine months ended September 30, 1999 of 4.06% and
4.08%, 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
nine months ended September 30, 2000 was 3.27% and 3.38%,
respectively. These spreads compare to net interest spread for
the three and nine months ended September 30, 1999 of 3.07% and
3.35%, 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>
Three Months Ended September 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 $ 4,005 $ 65 6.49% $ 10,311 $ 138 5.35%
Investment securities 31,905 440 5.52% 29,231 389 5.32%
Mortgage-backed securities 44,183 743 6.73% 47,692 818 6.86%
Net loans 161,331 3,878 9.62% 155,256 3,421 8.81%
Total interest-earning assets 241,424 $ 5,126 8.49% 242,490 $4,766 7.86%
Noninterest-earning assets 18,473 11,879
Total assets $ 259,897 $254,369
========= ========
LIABILITIES
Interest-bearing liabilities:
Now checking accounts $ 14,108 $ 108 3.06% $ 13,762 $ 98 2.85%
Money market accounts 10,410 98 3.77% 17,593 163 3.71%
Savings deposits 28,994 212 2.92% 33,797 245 2.90%
Certificates 107,100 1,519 5.67% 113,985 1,614 5.66%
Total deposits 160,612 1,937 4.82% 179,137 2,120 4.73%
Borrowed money 46,259 765 6.61% 13,208 185 5.60%
Total interest-bearing liabilities 206,871 2,702 5.22% 192,345 2,305 4.79%
Non-interest-bearing liabilities 15,280 25,857
Total liabilities 222,151 218,202
Retained earnings or shareholders'
equity 37,746 36,167
Total liabilities and retained
earnings or shareholders' equity $259,897 $254,369
======= =======
Net interest income $2,424 $2,461
===== =====
Interest rate spread 3.27% 3.07%
Net yield on interest-earning assets 4.02% 4.06%
Ratio of interest-earning assets to
interest-bearing liabilities 1.24x 1.26x
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 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 $ 2,275 $ 108 6.33% $ 19,650 $ 798 5.41%
Investment securities 31,440 1,429 6.06% 24,556 1,061 5.76%
Mortgage-backed securities 45,292 2,243 6.60% 42,264 1,858 5.86%
Net loans 170,448 12,019 9.40% 133,416 9,551 9.55%
Total interest-earning assets 249,455 $15,799 8.44% 219,886 $13,268 8.05%
Noninterest-earning assets 15,926 27,286
Total assets $ 265,381 $247,172
========= ========
LIABILITIES
Interest-bearing liabilities:
Now checking accounts $ 12,911 $ 258 2.66% $ 11,581 $ 232 2.67%
Money market accounts 11,928 328 3.67% 15,297 417 3.63%
Savings deposits 29,267 632 2.88% 30,563 665 2.90%
Certificates 110,534 4,641 5.60% 120,973 4,922 5.42%
Total deposits 164,640 5,859 4.74% 178,414 6,236 4.66%
Borrowed money 40,087 1,917 6.38% 7,046 301 5.70%
Total interest-bearing liabilities 192,807 7,776 5.06% 185,460 6,537 4.70%
Non-interest-bearing liabilities 25,579 25,470
Total liabilities 228,306 210,930
Retained earnings or shareholders'
equity 37,075 36,242
Total liabilities and retained
earnings or shareholders' equity $265,381 $247,172
======= =======
Net interest income $8,023 $6,731
===== =====
Interest rate spread 3.38% 3.35%
Net yield on interest-earning assets 4.29% 4.08%
Ratio of interest-earning assets to
interest-bearing liabilities 1.29x 1.19x
</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. 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 nine months ended September 30, 2000, no
additional provision was provided for the three months ended
September 30, 2000,. Additionally, the Bank did not have any
charge-offs against the allowance for loan losses during such
period. During the nine month and three month periods ended
September 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 September 30, 2000, non-interest income decreased by
$158,000 to $144,000 or 52.3% from $302,000 for the same period
in 1999. Non-interest income decreased by $398,000, or 45.9% for
the same period in 1999. The principal reasons for the decrease
in non-interest income was a $272,000 decrease in gain on sale of
loans to $119,000 in 2000 from $391,000 in 1999, due to a
decrease in number of loans sold by Transnational Mortgage Corp.
in 2000. For the nine months ended September 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 September 30, 2000, total non-interest
expense increased $175,000 or 9.4% to $2,043,000, compared to
$1,868,000 for the same period in 1999. Total non-interest
expense increased by $587,000, or 10.8%, to $6,046,000 for the
nine months ended September 30, 2000, from $5,459,000 for the
nine months ended September 30, 1999 The principal reasons for
the increase was an increase in compensation and employee
benefits due to normal salary increases and accrual of bonuses.
Non-interest expense also has increased due to costs associated
with the Bank's expansion strategy, including the merger of
Pennsylvania Savings Bank and First Bank of Philadelphia.
Loss on Investment
PSB accounts for it's ownership interest in Iron Bridge
Holdings, Inc. using the equity method (see Financial Condition
for description of equity method). PSB's ownership interest in
Iron Bridge Holdings, Inc. reflected a $23,000 and $87,000 loss
for the three and nine months ended September 30, 2000.
Provision for Income Taxes
Income tax provisions for the nine months ended
September 30, 2000 and 1999 of $650,000 and $221,000,
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 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 September 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 nine months ended September 30, 2000, net
cash provided by operating activities was $3.1 million, compared
to net cash used by operating activities of $1.6 million for the
same period of 1999. During the nine months ended September 30,
2000, net cash provided by investing activities was $9.3 million,
compared to net cash used by investing activities of $74.0
million for the same period of 1999. Financing activities used
net cash of $16.6 million during the nine months ended
September 30, 2000, compared to $35.1 million in net cash
provided in financing activities for the same period of 1999.
The net result of these items was a $4.2 million decrease in cash
and cash equivalents for the nine months ended September 30,
2000, compared to a $40.5 million decrease in cash and cash
equivalents for the same period of 1999.
Interest rate sensitivity is closely related to liquidity
because 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.
In light of these requirements, and regulatory mandates, the
Bank will utilize a co-sourced ALM simulation model and adopt
rate shock scenario tests of net interest income (NII), net
income (NI), and economic value of equity (EVE) related
performance as its primary IRR assessment methodology. The rate
shock IRR test is consistent with good industry practices with
respect to IRR assessment, and its outputs are comparatively
straightforward to interpret. NII/NI and EVE IRR are assessed to
measure potential risk in all time domains in the balance sheet
(NII/NI measures mainly short term IRR while EVE measures longer
range IRR).
EVE IRR assessment is conducted by calculating base case
(current rates remain constant) financial performance and
comparing this benchmark value to values calculated under
alternate +/-100 bp, +/-200 bp, and +/-300 bp rate shock
scenarios (instantaneous parallel and lasting shifts of the yield
curve). Regulatory focus with respect to EVE is normally on the
+/-200 bp rate shock scenarios; the +/-300 bp scenarios are
produced for advanced diagnostic purposes. As of September 30,
2000 the Bank's EVE performance is slightly asset sensitive in
the near term. EVE decreases in the +200 bp regulatory rate
scenario by 17.42% and increases by 11.65% in the comparable -200
bp rate scenario.
Normal regulatory focus for NII (and NI) is on exposures in
the +/-200 bp rising and declining rate scenario. As of September
30, 2000, the Bank's NII performance is slightly liability
sensitive in the near term. NII decreases in the rising rate
scenario by -1.37% and increases by 0.31% in the declining rate
scenario.
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 September 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 September 30, 2000, were 20.5% and 21.3%,
respectively, and the Bank's Tier I leverage ratio was 12.9%.
These ratios exceed the requirements for classification as a
"well capitalized" institution, the industry's highest capital
category.
On September 30, 2000, the Bank was in compliance with
regulatory capital requirements as follows:
<TABLE>
<CAPTION>
September 30, 2000
Minimum Well
Capital Capital
Actual Requirements Requirements
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk
weighted assets 33,093 20.50% 6,457 4.00% 9,685 6.00%
Total capital to risk
weighted assets 34,442 21.33% 12,913 8.00% 16,141 10.00%
Leverage to average assets 33,093 12.86% 10,287 4.00% 12,859 5.00%
<CAPTION>
December 31, 1999
Minimum Well
Capital Capital
Actual Requirements Requirements
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
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 $13.3 million or 4.8% from
$279.6 million at December 31, 1999 to $266.3 million at
September 30, 2000. The decrease in assets was primarily the
result of a decrease in net loans, loans held for sale and
investments.
Total loans decreased to $170.6 million at September 30,
2000, from $177.6 million at December 31, 1999. The decrease of
$7.0 million, or 4.1%, was the result of payoffs of the 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. A decrease in construction, commercial and non-
residential loans were also contributing factors. Increased loan
origination of other loan products such as commercial real
estate, SBA 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 September 30, At December 31,
2000 1999
(In Thousands) (In Thousands)
Amount Percent Amount Percent Variance % Change
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
1
One-to-four family(1) $ 64,619 37.88% $ 63,937 35.99% $ 682 1.07%
Construction loans 21,304 12.49% 23,528 13.25% (2,224) -9.45%
Five or more family
Residence 2,237 1.31% 2,712 1.53% (475) -17.51%
Nonresidential 25,212 14.78% 27,117 15.27% (1,905) -7.03%
Commercial loans 9,376 5.50% 10,682 6.01% (1,306) -12.23%
SBA loans 8,003 4.69% 6,682 3.76% 1,321 19.77%
Student loans held for
sale 37,139 21.77% 40,509 22.80% (3,370) -8.32%
Consumer loans 2,715 1.59% 2,468 1.39% 247 10.01%
Total loans $170,605 100.00% $177,635 100.00% $(7,030) -3.96%
======== ====== ======== ====== ======= =====
Less:
Unearned fees and
discounts $ 509 $ 389
Undisbursed loan proceeds - 7
Allowance for loan losses 1,349 1,231
Net Loans $168,747 $176,008
======== ========
</TABLE>
(1) Includes loans held for sale
Total investment securities (including mortgage-backed
securities and excluding BankZip and other investments) decreased
$1.9 million, or 2.6%, to $71.7 million at September 30, 2000,
from $73.6 million at December 31, 1999.
On January 29, 1999, PSB purchased 1,600,000 shares of
Series A Convertible Preferred Stock, $.01 par value per share,
of Iron Bridge Holdings, Inc. ("Iron Bridge"). PSB purchased the
shares for a total cost of $1.25 million. On February 25, 2000,
PSB purchased 347,750 shares of Series A Convertible Preferred
Stock, $.01 par value per share of Iron Bridge for a total cost
of $500,000. PSB owns 100% of Iron Bridge's Series A Convertible
Preferred Stock. Iron Bridge is the holding company for McGuire
Performance Solutions, Inc., a nationally recognized firm
delivering cost-effective solutions for high performance total
balance sheet management to banks, thrifts, credit unions and
other financial institutions. PSB accounts for it's ownership
interest in Iron Bridge using the equity method which initially
records an investment in stock at cost, and adjusts the carrying
amount of the investment to recognize the investor's share of the
earnings or losses of the investee after the date of acquisition.
As of September 30, 2000, PSB had an ownership interest of 49% of
Iron Bridge and adjusted it's investment to recognize an $87,000
loss.
On November 16, 1999, PSB purchased a convertible debenture
in the amount of $2.5 million with an initial rate of 5.45% from
ZipFinancial.Com.Inc (d/b/a Bankzip.com). BankZip aggregates and
provides Internet-based services to community financial
institutions. This menu of Internet services has two dimensions-
an external consumer dimension and an internal bank operations
dimension. From a consumer banking perspective, the aggregated
services, such as online applications, instant online loan
decisions, full call center support and marketing support, enable
community financial institutions to provide a complete online
banking solution for existing customers and attract new
customers. BankZip's menu of Internet services also allows
community financial institutions to convert back-office processes
to a more cost-effective online environment. By converting back-
office processes to an online environment, financial institutions
can convert fixed expense to variable expense. As a result,
financial institutions realize significant cost savings and
efficiencies while simultaneously enhancing their ability to
deliver products and services to online and offline customers.
On September 15, 2000, an involuntary bankruptcy petition
was filed against ZipFinancial.Com, Inc. by one of its vendors,
the petition was subsequently dismissed on October 23, 2000. On
November 2, 2000, BankZip completed $410,000 in additional
financing and is seeking additional financing of $1.5 to $2.0
million. The company has entered into a term sheet with a
strategic investor to provide a $1.0 million line of credit. The
ability to draw on the line of credit will be dependent on sales.
The continued viability of the company is dependent on its
ability to raise additional capital. No assurances can be given
that the company will be able to raise additional capital. To
reflect the uncertainty surrounding this investment, as of
September 30, 2000, PSB has established an equity account
valuation reserve pursuant to SFAS 115 of 50% or $1.25 million
while BankZip seeks additional financing.
Cash and cash equivalents, including interest-bearing
deposits with banks, decreased $4.2 million or 24.3% to $13.1
million at September 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 $229.0 million at September 30, 2000. This
$14.6 million, or 6.0% decrease, was primarily due to a $17.8
million decrease in total deposits due to a run off of
certificate of deposits, and a decrease in securities purchased
under agreements to resale. Due to rising interest rates and the
competitive market, the Bank has reduced it's primary source of
funds (deposits), and utilized 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 $1.3
million or 41.9%, during the nine months ended September 30,
2000, from $3.1 million at December 31, 1999 to $4.4 million at
September 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
September 30, 2000 and December 31, 1999 (dollars in thousands):
At September 30, At December 31,
2000 1999
Loans past due 90 days or
more as to interest or
principal and accruing
interest $ - $ 180
Nonaccrual loans 3,194 1,878
Loans restructured to provide
a reduction or deferral of
interest or principal - -
Total nonperforming loans 3,194 2,058
Real estate owned (REO) 1,169 1,047
Total nonperforming assets $ 4,363 $ 3,105
======== =========
Nonperforming loans to total
loans 1.87% 1.16%
Nonperforming assets to
total assets 1.63% 1.11%
Allowance for loan losses
to total loans 0.79% 0.69%
Allowance for loan losses
to nonperforming loans 42.24% 59.82%
Allowance for loan losses to
nonperforming assets 30.92% 39.65%
Net charge-offs as a percentage
of total loans - -
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 nine month and three month
periods ended September 30, 2000 of $100,000 and $0,
respectively. The Bank recorded no provisions for the nine month
and three month periods September 30, 1999. The Bank recorded no
charge-offs for the nine month and three month periods ended
September 30, 2000 and 1999. The Bank recorded a recovery of
$18,000 and $0 for the nine month and three month periods
September 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 - On November 3, 2000, a Form 8-
K was filed by PSB announcing the signing of an Agreement and
Plan of Merger with Jade Financial Corp.
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/Karen Washington
Karen Washington
(Principal Financial Officer and
Chief Accounting Officer)
November 13, 2000
