PSB BANCORP INC - 10-K Annual Report

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, for the fiscal year ended
December 31, 2001, or

( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (no fee required), for the
transition period from _______________ to ______________.

Commission file number: 000-24601

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

Pennsylvania 23-2930740
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

11 Penn Center, Suite 2601
1835 Market Street
Philadelphia, PA 19103
(Address of principal executive offices)

(215)979-7900
Registrant's telephone number, including area code:

Securities registered pursuant to Section 12 (b) of the Act:
None

Securities registered pursuant to Section 12 (g) of the Act:
Common Stock (no par value)

Indicate by checkmark whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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 ____

Indicate by checkmark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)

The aggregate market value of common stock of the
Registrant held by nonaffiliates, based on the average between
the closing bid and the closing asked prices as of March 28,
2002 was $33,669,487. As of March 28, 2002, the Registrant had
4,534,611 shares of common stock outstanding.

Documents incorporated by reference: None

PSB BANCORP, INC.

FORM 10-K

For the Year Ended December 31, 2001

Table of Contents

Page No.

PART I
Item 1. Description of Business 4
Item 2. Description of Property 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Securities Holders 14

PART II
Item 5. Market for Common Equity
and Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16
Item 7A Quantitative and Qualitative
Disclosures about Market Risk 39
Item 8. Financial Statements 39
Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure 40

PART III
Item 10. Directors, Executive Officers, Promoters
and Control Persons; Compliance With
Section 16(a) of the Exchange Act 40
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain
Beneficial Owners and Management 54
Item 13. Certain Relationships and Related
Transactions 56
Item 14. Exhibits and Reports on Form 8-K 56

PART I

Item 1 Business

PSB Bancorp, Inc. ("PSB")was organized as a Pennsylvania
business corporation on October 3, 1997 for the purpose of
becoming a holding company for First Penn Bank (the "Bank").
PSB is subject to regulation by the Federal Reserve Bank of
Philadelphia, and its principal business is the ownership of
First Penn Bank. At December 31, 2001, PSB had total assets of
$467.6 million, total deposits of $404.6 million and
shareholders' equity of $41.4 million.

On October 12, 1999, PSB completed its acquisition of First
Bank of Philadelphia. In connection with the acquisition, each
outstanding share of First Bank of Philadelphia was exchanged
for .857 shares of PSB common stock ("Common Stock"). In
addition, options to acquire 1,612,500 shares of First Bank of
Philadelphia were converted into options to acquire 1,381,912
shares of Common Stock. Subsequent to the conversion of the
options, 1,371,200 of the original First Bank of Philadelphia
options were determined by PSB to be invalid and were voided.
Certain of the purported optionholders are contesting this
determination. See "Legal Proceedings".

As part of the transaction, PSB merged Pennsylvania Savings
Bank, which held a state savings bank charter, with and into
First Bank of Philadelphia, which held a state commercial bank
charter. The resulting operating subsidiary operates under the
name of First Penn Bank and holds a state commercial bank
charter. This provides the Bank with greater lending
flexibility.

On June 29, 2001, PSB acquired Jade Financial Corp.
("Jade") and its wholly-owned subsidiary, IGA Federal Savings
Bank ("IGA"), in a cash transaction valued at approximately
$25 million. As part of that transaction, IGA which held a
federal thrift charter was merged into the Bank. The Bank
operates 12 full-service offices, eight of the offices are
located in Philadelphia, Pennsylvania, one office is located in
Montgomery County, Pennsylvania, one office in Bucks County,
Pennsylvania, one office in Delaware County, Pennsylvania and
one office in Chester County, Pennsylvania.

The Bank is primarily engaged in the business of attracting
deposits from the general public in the Bank's market area and
investing the deposits in loans secured by residential mortgage
loans, commercial real estate loans, commercial business loans,
construction loans, student loans and mortgage-backed
securities. The Bank's deposits are insured by the Savings
Association Insurance Fund of the FDIC to the extent that such
deposits were assumed from the mutual savings bank in the 1995
mutual holding company reorganization. Deposits accepted by the
Bank after the mutual holding company reorganization are insured
by the FDIC's Bank Insurance Fund.

Historically, the Bank has focused its lending activities
primarily on the origination of loans secured by first mortgages
on owner-occupied, one- to four-family residences for retention
in the Bank's portfolio. As part of a strategy to diversify its
loan portfolio, achieve a higher net interest margin and reduce
interest rate risk, the Bank has increased its origination of
construction loans, commercial real estate loans, commercial
business loans, multifamily real estate loans, consumer loans,
and student loans. The Bank is continuing to pursue its
strategy of increasing its concentration in commercial lending.

The addition of the IGA loan portfolio with a high
concentration of consumer loans, particularly automobile and
personal loans has helped diversify the Bank's loan portfolio.
The acquisition of Jade also provided the Bank with an
additional five branch offices in Philadelphia and the counties
surrounding the Philadelphia metropolitan area which increased
the Bank's geographical reach and provide access to a larger
customer base.

Through the Bank's subsidiary, Transnational Mortgage
Company, the Bank has conducted a mortgage banking operation
since 1989. Mortgage banking consists primarily of the
origination, purchase, sale and servicing of first mortgage
loans secured by one- to four-family homes. Such loans are sold
either as individual loans, as mortgage-backed securities, or as
participation certificates issued or guaranteed by FNMA or
FHLMC. Loans may be sold either on a servicing retained or
servicing released basis.

The Bank's principal sources of funds are deposits and the
principal and interest payments on loans, investment securities
and mortgage-backed securities. The Bank has available credit
with the Federal Home Loan Bank of Pittsburgh ("FHLB"). At
December 31, 2001, The Bank had no advances outstanding with the
FHLB. The principal source of income is interest received from
loans, investment securities and mortgage-backed securities.
The Bank's principal expenses are the interest paid on deposits
and borrowings and the cost of employee compensation and
benefits.

Business Strategy

PSB'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, PSB 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. PSB'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 primarily the origination of commercial real
estate, construction, commercial business loans, and consumer
loans that generally bear higher interest rates and have shorter
terms than residential mortgage loans.

Subsidiaries

PSB has three subsidiaries: First Penn Bank, Jade Abstract
Company, and Jade Insurance Company. Jade Abstract Company is
engaged in the business of issuing title insurance for
residential and commercial real estate properties. Jade
Insurance Company is an inactive corporation that was formed by
Jade to act as an insurance agency. First Penn Bank owns three
direct subsidiaries and one indirect subsidiary as follows:
Transnational Mortgage Corp. is engaged in a mortgage banking
business, PSA Service Corp. conducts real estate appraisals,
processes credit applications and provides other services in
connection with the origination of loans, PSA Financial Corp.
primarily originates business loans and commercial real estate
loans. PSA Financial Corp.'s subsidiary, PSA Consumer Discount
Company, primarily originates consumer loans.

Personnel

As of December 31, 2001, PSB and the Bank had 130 full-time
and 15 part-time employees. The Bank is not a party to any
collective bargaining agreements.

Competition

In the Philadelphia metropolitan market area, the banking
business is highly competitive. The Bank competes with local
commercial banks as well as numerous regionally-based commercial
banks that have assets, capital and lending limits significantly
larger than those of the Bank. The Bank also competes with
thrift institutions, savings institutions, credit unions,
issuers of commercial paper, other securities and other non-
depository institutions. The Bank seeks to be competitive with
respect to interest rates paid and charged, and for service
charges on customer accounts.

Among the advantages many of the Bank's competitors have
over the Bank are larger asset and capital bases, and the
ability to finance wide-ranging advertising campaigns and to
allocate their deposits and other funding to geographic regions
offering highest yield and demand. Many international banking
services are indirectly offered through correspondent
relationships. By virtue of their greater capital base, most
competitors have a substantially higher lending limit than the
Bank.

Although the Bank is at some disadvantage when competing
with larger banks, the Bank believes that its philosophy of
providing high-quality service to small and mid-size customers
offsets much of the bigger banks' advantages and provides a
unique opportunity to add to the growth of the Bank.

Regulation of First Penn Bank

As a state-chartered bank, the Bank is subject to
regulation, supervision and regular examination by the
Pennsylvania Department of Banking (the "Department") and is
subject to the applicable provisions of the Pennsylvania Banking
Code of 1965, as amended (the "Banking Code"). The Bank is a
member of the Federal Reserve System and is subject to
regulation, supervision, reporting requirements and regular
examinations by the Federal Reserve Board. In addition, First
Penn Bank's deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC") up to a maximum of $100,000
per insured account holder. The FDIC has the authority to
increase its insurance premiums to cover losses and expenses.
Some aspects of the lending and deposit business that are
regulated by the Federal Reserve Board and the FDIC include
personal lending, commercial lending, mortgage lending, reserve
requirements against certain deposit accounts and the
maintenance of the requisite capital to asset ratios. The Bank
is also subject to numerous federal, state and local laws and
regulations that set forth specific restrictions and procedural
requirements with respect to the extension of credit, credit
practices, the disclosure of credit terms and discrimination in
credit transactions. As a consequence of the extensive
regulation of commercial banking activities in the United
States, the Bank's business is particularly susceptible to
changes in federal and state legislation and regulation that may
negatively affect the cost of doing business.

In December of 1992, the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") was enacted.
Among other things, FDICIA provided increased funding for the
FDIC Bank Insurance Fund ("BIF") and provides for expanded
regulation of depository institutions and their affiliates,
including parent holding companies. FDICIA provides the federal
banking agencies with broad powers to take corrective action to
resolve problems of insured depository institutions. The extent
of these powers depends upon whether the institutions in
question are categorized as "well-capitalized," "adequately
capitalized," "undercapitalized, "significantly
undercapitalized" or "critically undercapitalized." A depository
institution's capital tier will depend upon where its capital
levels are in relation to various relevant capital measures,
which will include a risk-based capital measure, a leverage
ratio and certain other factors. A bank is deemed to be "well
capitalized" if it has a total risk-based capital ratio of 10.0%
or greater, a tier 1 risk-based capital ratio of 6.0% or
greater, and a leverage ratio of 5.0% or greater. At
December 31, 2001, First Penn Bank was "well-capitalized" under
these regulations.

Regulation of PSB

PSB is a bank holding company subject to supervision and
regulation by the Federal Reserve under the Bank Holding Company
Act of 1956, as amended. As a bank holding company, PSB's
activities and those of its subsidiaries are limited to the
business of banking and activities closely related or incidental
to banking, and PSB may not directly or indirectly acquire the
ownership or control of more than 5% of any class of voting
shares or substantially all of the assets of any company,
without prior approval of the Federal Reserve.

Under Federal Reserve policy, PSB is expected to act as a
source of financial strength to the Bank and to commit resources
to support the Bank, i.e., to downstream funds to the Bank.
This support may be required at times, when absent such policy,
PSB might not otherwise provide such support. Any capital loans
by PSB to the Bank are subordinate in right of payment to
deposits and to certain other indebtedness of the Bank. In the
event of PSB's bankruptcy, any commitment by PSB to a federal
bank regulatory agency to maintain the capital of the Bank will
be assumed by the bankruptcy trustee and entitled to a priority
of payment.

PSB is subject to restrictions under federal law that limit
its ability to receive funds from the Bank, whether in the form
of loans, other extensions of credit, investments and asset
purchases. Such transfers by the Bank to PSB are generally
limited in amount to 10% of the Bank's capital and surplus.
Furthermore, such loans and extensions of credit are required to
be secured in specific amounts, and all transactions are
required to be on an arm's length basis. The Bank has never made
any loan or extension of credit to PSB nor has it purchased any
assets from PSB.

Financial Holding Company Legislation

Landmark legislation in the financial services area was
signed into law on November 12, 1999. The Gramm-Leach-Bliley Act
dramatically changed certain banking laws that had been in
effect since the early part of the 20th century. The most
radical changes are that the separation between banking and the
securities businesses mandated by the Glass-Steagall Act has now
been removed, and the provisions of any state law that prohibits
affiliation between banking and insurance entities have been
preempted. Accordingly, the legislation now permits firms
engaged in underwriting and dealing in securities, and insurance
companies, to own banking entities, and permits bank holding
companies (and in some cases, banks) to own securities firms and
insurance companies. The provisions of federal law that
preclude banking entities from engaging in non-financially
related activities, such as manufacturing, have not been
changed. For example, a manufacturing company cannot own a bank
and become a bank holding company, and a bank holding company
cannot own a subsidiary that is not engaged in financial
activities, as defined by the regulators.

The new legislation created a new category of bank holding
company called a "financial holding company." In order to avail
itself of the expanded financial activities permitted under the
new law, a bank holding company must notify the Federal Reserve
that it elects to be a financial holding company. A bank
holding company can make this election if it, and all its bank
subsidiaries, are well-capitalized, well-managed, and have at
least a satisfactory Community Reinvestment Act rating, each in
accordance with the definitions prescribed by the Federal
Reserve and the regulators of the subsidiary banks. Once a bank
holding company makes such an election, and provided that the
Federal Reserve does not object to such election by such bank
holding company, the financial holding company may engage in
financial activities (i.e, securities underwriting, insurance
underwriting, and certain other activities that are financial in
nature as determined by the Federal Reserve) by simply giving a
notice to the Federal Reserve within thirty days after beginning
such business or acquiring a company engaged in such business.
This makes the regulatory approval process to engage in
financial activities much more streamlined than it was under
prior law.

The intent and scope of the act is positive for the
financial services industry, and is an attempt to modernize
federal banking laws and make U. S. institutions competitive
with those from other countries. While the legislation made
significant changes in U. S. banking law, such changes will not
directly affect PSB's business unless it decides to avail itself
of new opportunities available under the law. PSB does not
expect any of the provisions of the Act to have a material
adverse effect on the Bank's existing operations, or to
significantly increase its costs.

Interstate Acquisitions

On September 29, 1994, the United States Congress enacted
the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Banking Law"), which amended various
federal banking laws to provide for nationwide interstate
banking, interstate bank mergers and interstate branching. The
Interstate Banking Law currently allows the acquisition by a
bank holding company of a bank located in another state,
interstate bank mergers and branch purchase and assumption
transactions. Only a few states have "opted-out" of the merger
and purchase and assumption provisions by enacting laws that
specifically prohibit such interstate transactions.

Pursuant to the Interstate Banking Law, states also may
enact legislation to allow for de novo interstate branching by
out of state banks.

National Monetary Policy

As previously indicated, the earnings and growth of the
Bank are, and will continue to be, affected by the policies of
the regulatory authorities, including the Pennsylvania
Department of Banking ("PDOB"), the Federal Reserve and the
FDIC. In addition to the supervisory and regulatory duties as
they are related to operation of a bank, the Federal Reserve is
also responsible for the regulation of the United States money
supply and additional credit conditions. This controlling
influence is undertaken in response to national and
international economic developments. Among the means available
to the Federal Reserve to implement these objectives are open
market operations in U.S. government securities, establishing
the interest rate on temporary loans made to banks (i.e., the
discount rate) and other measures. Alternatives to controlling
economic conditions are used in varying combinations to
influence overall growth and credit distribution, lending,
investing and savings. The effect of these various controlling
influences may affect interest rates charged on loans or paid on
deposits.

Bank profitability is significantly dependent on interest
rate differentials. In general, the difference between the
interest paid by a bank on its deposits and borrowed money and
the interest received by a bank on securities held in its
investment portfolio and loans originated and maintained by the
bank comprise the major portion of a bank's earnings. Thus, the
earnings and growth of a bank will be subject to the influence
of economic conditions, both domestic and foreign, and on the
levels of and changes in interest rates. The monetary policies
and regulations of the Federal Reserve have had a significant
effect on the operating results of commercial banks in the past
and are expected to continue to do so in the future. The
effects of such policies upon the future business, earnings and
growth of the Bank cannot be predicted.

Dividend Limitations

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

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

Transactions with Affiliates

Extensions of credit by the Bank to executive officers,
trustees, and principal shareholders and related interests of
such persons are subject to Sections 22(g) and 22(h) of the FRA
and the Federal Reserve's Regulation O. These rules limit the
aggregate amount of loans to any such individual and their
related interests, and require that all such loans be pre-
approved by the full Board of the Bank, voting without such
person being present. These rules also provide that no
institution shall make any loan or extension of credit in any
manner to any of such persons, unless such loan or extension of
credit is made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, does not involve
more than the normal risk of repayment or present other
unfavorable features, and the institution follows underwriting
procedures that are not less stringent than those applicable to
comparable transactions by the institution with persons who are
not executive officers, trustees, principal shareholders, or
employees of the institution. Loans can be made to employees,
including executives and trustees, on more favorable terms than
to the general public, if all employees are eligible for such
preferential terms. Regulation O also sets forth additional
limitations on extensions of credit by an institution to its
executive officers. Management believes that the Bank is in
compliance with Sections 22(g) and 22(h) of the FRA and the
Federal Reserve's Regulation O.

Item 2 Description of Property

As of December 31, 2001, the Bank conducted its business
through an executive/administrative office and 12 full-service
branch offices. The aggregate net book value of the Bank's
office premises and equipment was $2.5 million as of
December 31, 2001. The Bank is leasing its center city
Philadelphia, Pennsylvania full-service office and executive
office for a term of eleven years, it's 1632 Walnut Street,
Philadelphia, Pennsylvania office for ten years, its Media,
Pennsylvania office for a term of four years and its
Chesterbrook, Pennsylvania office for a term of five years.
Lease expense for the years ended December 31, 2001, 2000, and
1999 was $520,000, $468,000, and $424,000, respectively.

Item 3 Legal Proceedings

In the fourth quarter of 2001, PSB declared 1,371,200
options issued by First Bank of Philadelphia to be void because
PSB believes, among other reasons, that these options were
unlawfully and improperly granted.

On March 6, 2002, certain of the purported optionholders
brought an action in United States District Court for the
Eastern District of Pennsylvania to have the voided options
declared valid and enforceable, or, alternatively, seeking
aggregate damages of not less than $4.3 million.

Management of PSB strongly believes that the options are
invalid and intends to vigorously defend the action. However,
there can be no assurance regarding the eventual outcome of any
litigation.

Periodically, there have been various claims and lawsuits
involving the Bank, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds
security interests, claims involving the making and servicing of
real property loans and other issues incident to the Bank's
business.

Item 4 Submission of Matters to a Vote of Securities Holders

PSB's annual meeting of shareholders was held on
February 7, 2002. The following matters were voted upon and
approved by the vote indicated.

Matter No. 1

The election of two Class III directors to hold office for
three years from the date of election, following are the results
of those elections:

Nominee Voting Results

Vincent J. Fumo For: 3,502,025
Withheld: 720,847

Thomas J. Finley For: 3,503,996
Withheld: 718,876

The following directors were not subject to reelection and
continue to serve as directors of PSB: Anthony DiSandro,
Rosanne Pauciello, John J. O'Connell, James W. Eastwood,
Mario L. Incollingo and Stephen Marcus.

Matter No. 2

The approval of the 2001 PSB Bancorp, Inc. Stock Incentive
Plan:

The votes cast for Matter No. 2 were:

For: 2,221,851
Against: 983,840
Abstain: 2,871

PART II

Item 5 Market for Common Equity and Related Stockholder Matters

The common stock of PSB is traded over-the-counter on the
National Association of Securities Dealers Automated Quotation
System ("Nasdaq") under the symbol "PSBI". The following table
sets forth the high and low bid prices for PSB's common stock,
as reported by Nasdaq. The following quotes reflect inter-dealer
prices without retail mark-up, markdown or commission and may
not necessarily represent actual transactions. As the table
indicates, PSB did not declare any cash dividends for the
periods indicated.

2001 2000 Cash
Bid Prices Bid Prices Dividend
High Low High Low Declared

First Quarter 5.188 4.063 5.625 4.00 -
Second Quarter 5.15 4.188 5.625 4.00 -
Third Quarter 6.16 4.90 4.625 4.00 -
Fourth Quarter 6.17 5.28 4.375 4.00 -

Item 6 Selected Financial Data

The selected financial and operating information set forth
below should be read in conjunction with "Management's
Discussion and Analysis of the Financial Condition and Results
of Operations" of PSB and the financial statements of PSB
included elsewhere herein (dollars in thousands, except for per
share data).

Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations

The following discussion and analysis of the financial
condition and results of operations of PSB should be read in
conjunction with the consolidated financial statements of PSB,
including the related notes thereto, included elsewhere herein.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001,
2000, AND 1999

General

PSB's results of operations depend primarily on the Bank's
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 by its non-interest expense, such as salary
and employee benefits, occupancy costs and charges relating to
non-performing and other classified assets.

Performance Overview

PSB's net income for 2001 was $3.05 million or $0.72 on a
diluted per share basis compared to net income of $165,000 or
$0.04 per diluted share for 2000 and net income of $2.08 million
or $0.47 per diluted share for 1999. The significant decrease
in net income from 1999 to 2000 was the result of a one-time
charge taken by PSB to reflect the write-off of a $2.5 million
investment in BankZip.com, an aggregator of Internet banking
services that ceased operations. PSB's net income for 2000,
without the one-time charge, would have been $2.7 million or
$0.68 on a diluted per share basis. The overall increase in
PSB's revenue from 2000 to 2001 was primarily due the
acquisition of the income producing assets of Jade.

Net Interest Income and Average Balances

Net interest income is the key component of the Bank's
profitability structure and is managed in coordination with the
Bank's interest rate sensitivity position. Net interest income
in 2001 of $12.9 million was $2.4 million or 22.84% higher than
2000's net interest income of $10.5 million. The Bank's net
interest income of $10.5 million in 2000 was 12.56% higher than
1999's net interest income of $9.3 million. Net interest income
of $12.9 million in 2001 was 22.85% higher than net interest
income of $10.5 million in 2000. In 2001, total interest income
increased $5.8 million to $26.9 million compared to an increase
in 2000 of $2.6 million to $21.1 million from $18.6 million in
1999. The Bank had an increase in total interest expense in
2001 of $3.4 million compared to an increase in 2000 of
$1.4 million.

The Bank's net interest margin, net interest income divided
by total average interest-earning assets, decreased 87 basis
points from 4.16% in 2000 to 3.29% in 2001, primarily due to an
increase in the volume of our variable rate loan portfolio. In
2000, the net interest margin increased 27 basis points to 4.16%
from 3.89% for 1999. The improvement in the Bank's net interest
margin in 2000 reflected an improvement in the Bank's yield on
interest earning assets, a lower cost of funds and the
resolution of a significant portion of the Bank's non-
performing assets portfolio and subsequent conversion of those
assets to a performing basis.

The Bank's net interest spread, the difference between the
yield on interest-earning assets and the rates paid on interest-
bearing liabilities, decreased 37 basis points to 2.80% in 2001;
in 2000, the Bank experienced an increase of 51 basis points to
3.17% from 2.66% for 1999. Although in 2001, the Bank
experienced an overall increase in interest-bearing liabilities,
the rate paid on those liabilities decreased by 115 basis points
to 4.05% from 5.20% in 2000, while the yield earned on interest-
earning assets decreased a greater 152 basis points, resulting
in the spread compression. The increase in the net interest
spread to 3.17% in 2000 from 2.66% in 1999 was primarily due to
increases on the interest rate for mortgage-backed securities
and the loan portfolio.

The Bank's yield on average interest-earning assets
decreased to 6.85% for 2001 compared to 8.37% in 2000. In 1999,
the Bank's yield on average interest-earning assets was 7.73%.
Average loans of $276.0 million at December 31, 2001 represented
70% of total interest-earning assets, providing an average yield
of 7.77%, average loans of $167.0 million at December 31, 2000,
represented 66% of total average interest-earning assets, and
provided an average yield of 9.60%, compared to average loans of
$150.0 million at December 31, 1999, representing 63% of total
average interest-earning assets, and providing an average yield
of 8.96%. The substantial decrease in the yield on the loan
portfolio in 2001 was due to the general decrease in overall
interest rates due to numerous and rapid decreases in the
federal funds rate made by the Federal Reserve. Average
investments and interest bearing deposits with banks increased
$32.0 million or 37.36% at December 31, 2001 from December 31,
2000. At December 31, 2000, average investments and interest
bearing deposits with banks decreased $4.6 million or 5.1% to
$85.4 million, from $90.0 million at December 31, 1999.

At December 31, 2001, total average-interest bearing
liabilities increased $141.4 million or 69.24% to $345.8 million
compared to $204.3 million at December 31, 2000. Total average
interest-bearing liabilities increased $22.2 million or 12.18%
at December 31, 2000, from $182.1 million at December 31, 1999.
Total interest expense increased $3.4 million at December 31,
2001 to $14.0 million as compared to a total interest expense
increase of $1.4 million to $10.6 million at December 31, 2000
from $9.2 million for 1999. The Bank's cost of funds over the
last three years was 5.06% in 1999, 5.20% in 2000 and 4.05% in
2001.

Average Balance Sheets and Rate/Yield Analysis

Net interest income is affected by changes in both average
interest rates and average volumes of interest-earning assets
and interest-bearing liabilities. The following table presents,
on a tax equivalent basis, the average daily balances of assets,
liabilities and shareholders' equity and the respective interest
earned or incurred on interest-earning assets and interest-
bearing liabilities, as well as average rates for the period
indicated:

The following table presents the extent to which changes in
interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected the Bank's
interest income and interest expense during the periods
indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes
attributable to changes in rate (changes in rate multiplied by
prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the
changes due to rate (in thousands):

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 borrower's ability to
pay, prior loss experience within the portfolio, current
economic conditions and the results of the most recent
regulatory examinations. The Bank allocated $270,000, $100,000,
and $200,000 as additions to the allowance for loan loss and had
charge-offs against the allowance of $788,000, $0 and $0 for the
years ended December 31, 2001, 2000 and 1999, respectively.

Although management utilizes its best judgment in providing
for loan losses, there can be no assurance that the Bank will
not have to increase its provision for loan losses in the future
as a result of possible future increases to its non-performing
loans or for other reasons based on changes in facts and
circumstances. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the Bank's allowance for loan losses and the carrying value of
its non-performing assets. Such agencies may require the Bank
to recognize additions to its allowance for loan losses based on
their judgments about information available to them at the time
of their examination.

Non-Interest Income

The following table provides a summary of non-interest
income, by category of income, for the three years ended
December 31, 2001, 2000, and 1999 (in thousands):

Year Ended December 31,
2001 2000 1999

Service fees on deposit accounts $1,074 $412 $479
Loss on write down of investment - (2,500) -
Loss on sale of loans and ORE - - (392)
Other 480 174 434
Total 1,554 (1,914) 521

The major source of non-interest income is gain on sale of
loans, investment gains and losses, and other income and service
fees on deposit accounts. Without giving effect to the one-time
extraordinary loss on investments of $2.5 million reflecting the
write off of the BankZip.com investment in 2000, non-interest
income increased $968,000 or 165.18% in 2001 which followed an
increase of $65,000 or 12.48% in 2000. The increase in the
volume of non-interest income in 2001 is attributable to the
acquisition of the fee-bearing deposit accounts of Jade and the
income associated with the Bank Owned Life Insurance investment
acquired from Jade.

Non-Interest Expense

The following table provides a summary of non-interest
expense, by category of expense, for the three years ended
December 31, 2001, 2000 and 1999 (in thousands):

Year Ended December 31,
2001 2000 1999

Salaries and employment benefits $ 5,053 $4,383 $3,601
Rent and occupancy expense 1,154 1,162 1,290
Professional fees 385 381 1,064
FDIC insurance expense 38 37 87
General insurance 138 139 157
Advertising 66 129 140
Data processing fees 594 356 237
Director fees 282 246 215
Other operating expense 2,684 1,493 1,015
Total $10,394 $8,326 $7,806

Total non-interest expense for 2001 increased $2.1 million
to $10.4 million or 24.84% compared to a modest increase of
$520,000 or 6.66% to $8.3 million in 2000 from $7.8 million in
1999. The increase in other operating expense which accounts
for a significant portion of the increase in the Bank's non-
interest expense is related to expenses incurred in the
acquisition of Jade, including a $670,000 increase in salaries
and employment benefits related to the acquisition.

Income Taxes

The Company had an income tax provision of $755,000, an
income tax provision of $10,000, and an income tax credit of
$227,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. The 1999 credit resulted from net operating loss
carry forwards that were held by First Bank of Philadelphia and
used by PSB.

Liquidity and Interest Rate Sensitivity

Integral to the management of PSB's balance sheet is the
maintenance of adequate liquidity and the ability to evaluate
and control interest rate risk. Liquidity represents the
ability to meet potential cash outflows resulting from deposit
customers who need to withdraw funds or borrowers who need
available credit. Interest rate sensitivity focuses on the
impact of fluctuating interest rates and the repricing
characteristics of rate sensitive assets and liabilities on net
interest income.

PSB'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 that include increases
in core deposits, sales of certificates of deposits, loan
principal repayments and loan maturities and cash received on
maturities or amortization of investment securities.

The liquidity position of PSB is also strengthened by the
availability of a $208 million credit facility with the Federal
Home Loan Bank of Pittsburgh (FHLB). Advances are secured by
FHLB stock and qualifying mortgage loans. There were no advances
outstanding against this line at December 31, 2001 or at
December 31, 2000.

Maximizing cash flow over time is crucial to the
maintenance of adequate liquidity. PSB's total cash flow is a
product of its operating activities, investing activities and
financing activities. During the twelve month period ended
December 31, 2001, net cash used by operating activities was
$1.6 million, compared to net cash provided by operating
activities of $3.6 for the same period of 2000. During the
twelve month period ended December 31, 2001, net cash provided
by investing activities was $19.6 million, compared to net cash
provided by investing activities of $24.6 million for the same
period of 2000. Financing activities provided net cash of $18.9
million during the twelve months ended December 31, 2001,
compared to $27.5 million in net cash used in financing
activities for the same period of 2000. The net result of these
items was a $36.9 million increase in cash and cash equivalents
for the twelve month period ended December 31, 2001, compared to
a $631,000 increase in cash and cash equivalents for the same
period of 2000. The increase in cash and cash equivalents in
2001 is primarily due to the proceeds received from maturing
investments of $35.1 million, the cash acquisition of Jade, net
of cash acquired and debt assumed of $17.0 million, and an
increase in deposits of $17.7 million.

During 2000, net cash provided by operating activities was
$3.6 million compared to net cash used by operating activities
of $1.0 million in 1999. During 2000, PSB's investing
activities provided $24.6 million in net cash and PSB's
financing activities used $27.5 million in net cash. In 1999,
PSB's investing activities used $82.6 million in net cash and
PSB's financing activities provided $53.4 million in net cash.
The major components within these two categories during 2000
were an increase in total loans receivable of $21.2 million and
a decrease in investments purchased of $38.9 million. The net
result of these items was a $631,000 increase in cash and cash
equivalents for 2000, compared to a net decrease of $30.2
million for 1999. This significant increase in cash and cash
equivalents in 2000 is due to a significant decrease in
investments purchased and a decrease in loans receivable.

Interest rate risk management is closely related to
liquidity management because each is directly affected by the
maturity of assets and liabilities. Interest rate risk
management monitors the effect that fluctuations in interest
rates have on net interest income. The primary function of
PSB'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 net interest margin of a bank that does not have a
relatively close relationship between the quantity of assets
that mature or re-price within a given time period and the
quantity of liabilities that mature or re-price within the same
time period will fluctuate more widely than a bank that has a
closer match. Furthermore, a bank that has liabilities that
reprice earlier than its assets will have a decline in its net
interest margin as interest rates rise.

The blending of fixed and floating rate loans and
investments to match their pricing and maturity characteristics
against those of the various funding sources is a continuous
process in an attempt to minimize fluctuations in net interest
income caused by changes in interest rates. The composition of
the balance sheet is designed to minimize any significant
fluctuation in net interest income and to maximize liquidity.
Management believes that the accessibility to FHLB borrowings
will provide the flexibility to assist in keeping fluctuations
in net interest income under control and to maintain an adequate
liquidity position.

One tool used by management to gauge the structure of the
balance sheet is a "gap" analysis that 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 December 31, 2001,
PSB had a one-year liability sensitive gap of $8.8 million and a
gap ratio of 0.43 or 1.88% of total assets as of that date.

The following table shows the interest rate sensitive data
at December 31, 2001 (in thousands):

Interest Rate Sensitivity Analysis

A plus or minus 300 basis point rate shock test for the
internal rate of return indicates at most limited economic value
sensitivity to changes in interest rates. A rate shock internal
rate of return test indicates internal rate of return reductions
as rates rise and larger losses as rates decline. The Bank's
largest exposure is a 33.73% reduction in the internal rate of
return in a minus 300 basis point scenario and a loss of 22.30%
in a plus 300 basis point 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. At
December 31, 2001, the Bank was required to have minimum Tier I
and total capital ratios of 4.0% and 8.0%, respectively, and a
minimum Tier I leverage ratio of 4.0%. The Bank's actual Tier I
and total capital ratios at December 31, 2001 were 10.73% and
11.68%, respectively, and the Bank's Tier I leverage ratio was
7.03%. These ratios exceed the requirements for classification
as a "well-capitalized" institution, the industry's highest
capital category. Capital ratios decreased during 2001 over
2000 due to a 106.8% increase in total risk adjusted assets due
to the cash acquisition of Jade and a decrease in Tier 1 and
total capital from 2000 to 2001. The increase in capital ratios
during 2000 over 1999 was due to a 16.9% decrease in total risk
adjusted assets from 1999 to 2000. Following are the Bank's
capital ratios at December 31, 2001, 2000 and 1999 (dollars in
thousands):

2001 2000 1999
Tier I Capital $ 32,574 $ 34,183 $ 31,348
Tier II Capital 2,871 1,349 1,231
Total Qualifying Capital $ 35,445 $ 35,532 $ 32,579

Risk Adjusted Total Assets $303,527 $146,793 $175,163

Tier I Risk Based Capital
Ratio 10.73% 23.29% 17.90%
Total Risk Based Capital
Ratio 11.68% 24.21% 18.60%
Leverage Ratio 7.03% 13.21% 11.48%

Average Assets $463,469 $258,709 $273,174

Management is confident that the Bank will remain "well
capitalized".

FINANCIAL CONDITION

General

PSB's total assets increased $212.8 million or 83.1% to
$467.6 million at December 31, 2001 from $254.8 million at
December 31, 2000. The increase in assets was primarily the
result of the acquisition of the assets of Jade.

Net loans increased to $297.2 million at December 31, 2001,
from $145.8 million at December 31, 2000. The increase of
$151.4 million, or 103.8%, was primarily the result of the
acquisition of the loan portfolio of Jade.

Investment Activities

The Bank's investment portfolio is comprised of mortgage-
backed securities, investment securities, and cash and cash
equivalents. The carrying value of the Bank's investment
securities and mortgaged-backed securities portfolio totaled
$72.2 million at December 31, 2001 compared to $67.7 million at
December 31, 2000. The Bank's cash and cash equivalents,
consisting of cash and due from banks, and interest-earning
deposits with other financial institutions, totaled $54.7
million at December 31, 2001 compared to $17.9 million at
December 31, 2000. The majority of the Bank's mortgage-backed
securities are issued or guaranteed by the United States
Government or agencies thereof. At December 31, 2001, mortgage-
backed securities totaled $66.5 million compared to $43.1
million at December 31, 2000. The majority of this amount
represents securities that were issued or guaranteed by either
FNMA, FHLMC or the Government National Mortgage Association
("GNMA"). The Bank historically maintains high levels of
interest-earning deposits as part of its strategy for meeting
liquidity requirements and improving interest sensitivity.

The Bank is required under federal regulations to maintain
a minimum amount of liquid assets that may be invested in
specified short-term securities and certain other investments.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
The Bank generally has maintained a portfolio of liquid assets
that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other
opportunities and its expectation of the level of yield that
will be available in the future, as well as management's
projections as to the short-term demand for funds to be used in
the Bank's loan origination and other activities.

Pursuant to SFAS No. 115, which the Bank adopted in 1994,
the Bank classifies its investment securities and mortgage-
backed securities as either held-to-maturity, available-for-sale
or trading. Available-for-sale and trading securities are
carried at market value, while held-to-maturity securities are
carried at amortized cost. At December 31, 2001, $2.3 million
of the Bank's investment securities and mortgaged-backed
securities were classified held-to-maturity and $69.9 million of
the Bank's investment securities and mortgaged-backed securities
were classified available-for-sale. The Bank did not carry any
trading securities at December 31, 2001.

The Bank's Board of Directors has also adopted an
investment policy that identifies acceptable types of
investments for the Bank and establishes criteria to guide
management in classifying investments as prescribed by SFAS
No. 115. The policy also authorizes the Bank's investment
officer to make investments of up to $1 million. Under the
investment policy, the Bank may invest in certain AAA rated
derivative securities. As of December 31, 2001, the Bank had no
collateralized mortgage obligations. The Bank may not invest in
high-risk collateralized mortgage obligations ("CMOs") and the
Bank's investment officer must periodically analyze the risk of
any CMO held by Bank to determine that such securities are not
within the high-risk category.

On January 29, 1999, PSB purchased 1,600,000 shares of
Series A Convertible Preferred Stock, $.01 par value per
share,(the "Preferred Stock") of McGuire Performance Solutions,
Inc. ("MPS"). PSB purchased the shares for $.78125 per share for
a total cost of $1,250,000. In 2000, MPS changed its name to
Iron Bridge Holdings, Inc. ("Iron Bridge")and formed two new
subsidiaries, one adopting the MPS name and Avanti Capital, Inc,
a registered investment advisory company. During the year ended
December 31, 2001 and 2000, PSB purchased an additional 375,000
shares and 500,000 shares, respectively, of the Preferred Stock
for $1.00 per share for a total cost $875,000. PSB owns 100% of
the Iron Bridge Preferred Stock which represents a 48.17% fully
diluted ownership interest in Iron Bridge. The Iron Bridge
subsidiary, 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 November 16, 1999, PSB invested $2,500,000 in a two
year convertible debenture issued by ZipFinancial.com, Inc.,
doing business as BankZip, a start-up internet banking company
for community banks. Because the company ceased operations, PSB
elected to write off this investment as of December 31, 2000 and
take an after-tax charge to earnings of $1.5 million.

Carrying and Market Value of Investment and Mortgage-Backed
Securities.

The following table sets forth certain information
regarding the carrying and market values of the Bank's
investment securities and mortgage-backed securities in the
Bank's held-to-maturity and available-for-sale portfolio at
December 31, 2001, 2000 and 1999 (In thousands).

There were no sales of investment securities in 2001, 2000
and 1999.

The amortized cost and fair value of the Company's
investment securities at December 31, 2001, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties (in thousands).

Investment Portfolio Maturities.

The following table sets forth the scheduled maturities,
carrying values, and weighted-average yields for the Bank's
investment securities and mortgage-backed securities portfolios.
Adjustable-rate, mortgage-backed securities are included in the
period in which interest rates are next scheduled to adjust (in
thousands except for yields).

Loan Portfolio

Historically, the principal lending activity of the Bank
has been the origination, for retention in its portfolio, of
fixed-rate and, to a much lesser extent, adjustable-rate
mortgage loans secured by one- to four-family residential real
estate located in its market area. The Bank and its
subsidiaries also originate loans secured by multifamily
residential and commercial real estate, construction loans,
commercial business loans and consumer loans.

One- to four-family residential mortgage loans originated
for resale in the secondary market are underwritten according to
standards that conform to Federal National Mortgage Association
("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC")
guidelines. One- to four-family residential mortgage loans
originated and held in portfolio are generally underwritten to
conform to secondary market standards but from time to time the
Bank does originate nonconforming loans if, in the Bank's
judgment, the borrower does not present an unreasonable risk of
default. The Bank and Transnational Mortgage Corp. ("TNMC"),
its mortgage banking subsidiary, have sold in the secondary
market a limited amount of fixed-rate residential mortgage
loans. The Bank has primarily been a portfolio lender and at
any one time the Bank holds only a nominal amount of loans that
may be sold.

At December 31, 2001 the Bank's net loan portfolio totaled
$297.2 million, representing 63.5% of total assets at that date,
compared to $145.9 million representing 57.2% of total assets at
December 31, 2000. As of December 31, 2001, one- to four-family
residential loans totaled $126.5 million representing 42.1% of
the loan portfolio, compared to $54.5 million representing 39.9%
of the loan portfolio at December 31, 2000. At December 31, 2001
construction loans totaled $24.5 million representing 8.1% of
the total loan portfolio. This compares to $23.3 million
representing 15.8% of the loan portfolio at December 31, 2000.

The following table summarizes the loan portfolio of the
Bank by loan category and amount at December 31 for the past
three years, including data regarding the portion of the Bank's
loans that bear fixed and adjustable interest rates,
respectively. The loan categories correspond to the Bank's
general classifications (in thousands, except for percentage):

* Does not include loans held for sale

Loan Maturities

The following table sets forth the maturity or period of
re-pricing of the Bank's loan portfolio at December 31, 2001.
Demand loans and loans having no stated schedule of repayments
and no stated maturity are reported as due in one year or less.
Adjustable and floating-rate loans are included in the period in
which interest rates are next scheduled to adjust rather than
the period in which they contractually mature, and fixed-rate
loans are included in the period in which the final contractual
repayment is due (in thousands).

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 60 days, the loan and payment history is carefully
reviewed, additional notices are sent to the borrower and
efforts are made to collect the loan. While the Bank generally
prefers to work with borrowers to resolve such problems, when
the account becomes 90 days delinquent, the Bank institutes
foreclosure or other proceedings, as necessary, to minimize any
potential loss.

Non-Performing Assets

In 2001, the Bank's level of non-performing assets
increased $537,000 or 12.97% to $4.7 million compared to an
increase of $1.4 million or 33.36% to $4.1 million at
December 31, 2000 from $3.1 million at December 31, 1999. The
increase in 2001 was primarily due to a new risk rating system
implemented in September of 2001 that caused new items to be
classified as non-accrual.

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 backed out of interest income. There are
occasional exceptions if the loans are well secured and in the
process of collection. The Bank did not have any material
restructured loans within the meaning of SFAS No. 15 in 2001.

The following table sets forth information regarding loans
90 or more days delinquent and still accruing interest, non-
accrual loans, and real estate owned held by the Bank at the
dates indicated (dollars in thousands):

Other real estate owned

Real estate acquired by the Bank as a result of foreclosure
is classified as other real estate owned ("REO") until it is
sold. The REO is initially recorded at the lower of the related
loan balance or fair value of the property at the date acquired.
If the value of the property is less than the loan, less any
related specific loan loss provisions, the difference is charged
against the allowance for loan losses. Any subsequent write-down
of REO is charged against earnings. The Bank had $548,000 and
$1.0 million of property acquired as a result of foreclosure at
December 31, 2001 and 2000.

Classified Assets

As part of the Bank's loan review procedures which
ultimately results in the establishment of the Bank's allowance
for loan losses, the Bank identifies and classifies its problem
assets into three classifications: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses
and are characterized by the distinct possibility that the bank
will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with
the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is
a high possibility of loss. An asset classified as loss is
considered uncollectible and of such little value that
continuance as an asset of the Bank is not warranted. The Bank
charges-off that portion of an asset as soon as it is classified
as a loss. Exclusive of the Bank's $548,000 of REO, the Bank's
classified assets at December 31, 2001 consisted of $3.5
million of loans classified as substandard, compared to $1.0
million classified as substandard at December 31, 2000. This
increase was due to the implementation of the previously
discussed new risk-rating system.

Allowance for loan losses

The provision for loan losses is an amount charged against
earnings to fund the allowance for loan losses on existing
loans. In order to determine the amount of the provision for
loan losses, the Bank conducts a monthly review of the loan
portfolio to evaluate overall credit quality. In establishing
its allowance for loan losses, management considers the size and
risk exposure for each segment of the loan portfolio, past loss
experience, current indicators such as the present levels and
trends of delinquency rates and collateral values, and the
potential losses for future periods. The provisions are based
on management's review of the economy, interest rates, general
market conditions, and in certain instances, an estimate of fair
value of the collateral, as applicable, considering the current
and anticipated future operating environment. These estimates
are particularly susceptible to changes that may result in a
material adjustment to the allowance for loan losses. As
adjustments become identified, they are reported in earnings for
the period in which they become known. Management believes that
it makes an informed judgment based upon available information.
The adequacy of the allowance is reviewed monthly by the Board
of Directors.

It is the objective of the Bank's evaluation process to
establish the following components of the allowance for loan
losses. A specific allocation for certain identified loans, a
general allocation for pools of loans based on risk rating and a
general allocation for inherent loan portfolio losses.
Management performs current evaluations of its criticized and
classified loan portfolios and assigns specific reserves that
reflects the current risk to the Bank. As a general rule,
special mention assets will have a minimum reserve of 5%,
substandard assets will have a minimum reserve of 15%, and
doubtful assets will have a minimum reserve of 50%. Due to the
fact that most of the Bank's problem loans are secured by real
estate, management has allocated a majority of the allowance for
loan losses to these real estate collateralized loans. A
general reserve allocation is applied for pools of loans based
on risk rating for all loans not specifically reserved for as
described previously.

The following table summarizes the changes in the Bank's
allowance for loan losses for each of the past three years
(dollars in thousands):

Deposits

Deposits are the primary source of the Bank's funds for
lending and other investment purposes. The Bank's current
deposit products include statement savings accounts, passbook
savings accounts, NOW accounts, personal and commercial demand
deposit accounts, money market accounts, and certificates of
deposit accounts. Included among these deposit products are
Individual Retirement Account certificates and Keogh retirement
certificates. In addition to deposits, the Bank derives funds
from the amortization and prepayment of loans and mortgage-
backed securities, the maturity of investment securities and, if
needed, advances from the FHLB.

The Bank's deposits are obtained primarily from residents
in its primary market area. The principal methods used by the
Bank to attract deposit accounts include offering a wide variety
of services and accounts, no service charges for maintaining
minimum balance accounts, competitive interest rates and
convenient office hours. The Bank operates in a highly
competitive banking environment competing against large regional
banks as well as other community banks. The Bank relies upon
certificates of deposit as its primary funding source, but it
has instituted a program that emphasizes the gathering of more
stable, core deposits through traditional marketing methods to
attract new customers and savings deposits.

The following tables present the average balances and rates
paid on deposits for each of the years ended December 31, 2001,
2000 and 1999 (dollars in thousands):

As of December 31, 2001, the Bank had total certificates of
deposit of approximately $230.2 million. The following table
summarizes the composition of these deposits (dollars in
thousands):

Amount Percentage
Certificates of deposit in
excess of $100,000 $ 45,597 20%
Individual retirement accounts 28,260 12%
Other certificates of deposit 156,357 68%
$230,214 100%

The Bank's certificates of deposit in excess of $100,000,
which totaled $45.6 million at December 31, 2001, mature as
follows: $10.5 million within three months, $23.7 million
between three and twelve months; and $11.4 million after twelve
months.

The ability of the Bank to attract and maintain deposits
and the Bank's cost of funds on these deposit accounts have
been, and will continue to be, significantly affected by
economic and competitive conditions.

Borrowings

The Bank is a member of the Federal Home Loan Bank System,
which consists of 12 regional FHLBs subject to supervision and
regulation by the Federal Housing Finance Board. The FHLBs
provide a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB of Pittsburgh,
is required to hold shares of common stock in that FHLB in an
amount at least equal to 1% of the aggregate principal amount of
its unpaid residential mortgage loans, home purchase contracts,
and similar obligations at the beginning of each year, or 5% of
its advances (borrowings) from the FHLB of Pittsburgh, whichever
is greater. The Bank had a $1.1 million investment in the stock
of the FHLB at December 31, 2001, which was in compliance with
this requirement. At December 31, 2001, the Bank had no
outstanding borrowings from the FHLB of Pittsburgh.

Impact of Inflation

The financial statements and related financial data
presented herein have been prepared in accordance with generally
accepted accounting principles which require the measurement of
financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing
power of money over time due to inflation. The primary impact
of inflation on the operation of the Bank is reflected in
increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's
performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or
in the same magnitude as the price of goods and services.

Recently Issued Accounting Standards

On July 20, 2001, SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Intangible Assets" were issued.

SFAS No. 141 is effective for all business combinations
completed after June 30, 2001.

SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001; however, certain provisions of this Statement
apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS No. 142. PSB has
elected to adopt the provisions of SFAS 142 as of January 1,
2002.

In August 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 retains the existing requirements to recognize and measure
the impairment of long-lived assets to be held and used or to be
Disposed of by sale. However, SFAS 144 makes changes to the
scope and certain measurement requirements of existing
accounting guidance. SFAS No. 144 also changes the requirements
relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS No. 144 is
effective for financial statements issued for fiscal years
beginning after December 15, 2001 and interim periods within
those fiscal years. The adoption of this statement is not
expected to have a significant impact on the financial condition
or results of operations of the Bank.

On July 6, 2001, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 102, Selected
Loan Loss Allowance Methodology and Documentation Issues. SAB
No. 102 provides guidance on the development, documentation, and
application of a systematic methodology for determining the
allowance for loan loses in accordance with US GAAP and was
effective upon issuance. The adoption of SAB No. 102 did not
have a material impact on the Bank's financial position or
results of operations.

Item 7A Quantitative and Qualitative Disclosures about Market
Risk

For information regarding the market risk of PSB's
financial instruments, see "Interest Rate Sensitivity" in the
MD&A. PSB's principal market risk exposure is to interest rate
changes.

Item 8 Financial Statements

The audited financial statement of PSB Bancorp, Inc. as of
December 31, 2001 and 2000 and for the years ended December 31,
2001, 2000, and 1999, including the report of Grant Thorton, LLP
as of December 31, 2001 and for the year ended December 31, 2001
and the report of PSB's former auditors as of December 31, 2000
and 1999 and for the years ended December 31, 2000 and 1999,
which are included as Exhibit 99 to this Annual Report on Form
10-K, are incorporated herein by reference.

Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure

On October 23, 2001, PSB terminated the engagement of
Stockton Bates, LLP ("SB") as PSB's independent auditors,
effective immediately as of that date. This change in
accountants was approved and ratified by PSB's Board of
Directors.

SB's report on PSB's consolidated financial statement for
the past two years did not contain any adverse opinion,
disclaimer of opinion and was not qualified or modified as to
any uncertainty of the audit's scope or accounting principles.

There were no disagreements between PSB and SB for PSB's
two most recent fiscal years or for the subsequent interim
periods ending March 31, 2001 and June 30, 2001, on any matter
of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements,
if not resolved to such accountant's satisfaction, would have
caused such accountant to make reference to the subject matter
of the disagreement in connection with its report on the
consolidated financial statements of PSB.

PART III

Item 10 Directors, Executive Officers, Promoters and Control
Person; Compliance with Section 16 (a)

The following table sets forth information, as of
December 31, 2001, with respect to the current directors of PSB.

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

Class I directors (Term expiring 2002)

Anthony DiSandro, 54 1997 President of PSB
Director, President PSB Bancorp, Inc.
and Chief Operating
Officer

Rosanne Pauciello, 57 1997 Corporate Secretary of
Director and PSB Bancorp, Inc;
Corporate Secretary Philadelphia School
District Home and
School Visitor.

John J. O'Connell 66 2001 Vice President,
Director Marketing for PSB
Vice President of Bancorp, Inc.; Formerly
Marketing Chairman and Chief
Executive Officer of
Jade Financial Corp.(1)

Class II directors (Term expiring 2003)

James W. Eastwood, 56 1997 President of Granary
Director Associates, Inc.
(project management
and consulting firm)

Stephen Marcus 69 2000 Chairman, Emerging
Director Growth Equities, Inc. (a
venture capital and
private investment
fund); Founder, CEO of
MARS Graphic Services,
Inc.

Mario L. Incollingo 63 2001 Chief Operating Officer,
Chief Operating Officer, First Penn Bank; Former
Director President of Jade
Financial Corp. (1)

Class III directors (Term expiring 2004)

Vincent J. Fumo, 58 1997 Chairman and Chief
Chairman and Chief Executive Officer of
Executive Officer PSB Bancorp, Inc. and
Pennsylvania State
Senator.

Thomas J. Finley, 81 1997 Retired.
Jr., Director
_____________________________

(1) Jade Financial Corp. was acquired by PSB on June 30, 2001.

Section 16(a) Beneficial Ownership Reporting Compliance

Based upon a review of the information provided to PSB for
the twelve month period ended December 31, 2001, no director,
officer, or beneficial owner of more than ten percent of Common
Stock has failed to file a required Form 3, 4, or 5.

Item 11 Executive Compensation

The following table sets forth for the years ended
December 31, 2001, 2000 and 1999 certain information as to the
total remuneration paid by the Bank to executive officers who
received salary and bonuses in excess of $100,000 during such
fiscal year.

*Mr. O'Connell and Mr. Incollingo were not officers of PSB or
the Bank during the years ended December 31, 2000 and December
31, 1999.

(1) Includes the portion of salary deferred by the executive
pursuant to the 401(k) Plan.

(2) Consists of lease payments paid by the Bank with respect to
a vehicle provided by the Bank for the executive's use.

(3) Mr. Fumo, Mr. DiSandro and Mr. Polimeno hold 56,137 shares,
56,136 shares and 2,750 shares of restricted stock,
respectively, which as of December 31, 2001, had a fair
market value of $342,436, $342,430 and $16,775. Of such
shares, 26,137, 26,136, and 2,750 shares of each of
Messrs. Fumo, DiSandro, Polimeno wer awarded in 1996,
30,000 and 30,000 shares of Messrs. Fumo and DiSandro,
respectively, were awarded on October 31, 1999. All shares
awarded vest over a five (5) year period at a rate of 20%
per year and no dividends have been paid on the restricted
stock.

(4) Includes directors fees of $16,400 and $24,400 paid to
Mr. Fumo and Mr., DiSandro, respectively, for the year
ended December 31, 2001, and directors fees paid by the
Bank's subsidiaries to Mr. Fumo, Mr. DiSandro and
Mr. Polimeno of $8,100, $8,100 and $8,100, respectively,
for the year ended December 31, 2001. Includes directors'
fees of $15,600 and $24,800 paid to Mr. Fumo and
Mr. DiSandro, respectively, for the year ended December 31,
2000, and directors fees paid by the Bank's subsidiaries to
Mr. Fumo, Mr. DiSandro and Mr. Polimeno of $8,400, $8,400,
and $8,400, respectively, for the year ended December 31,
2000. Includes directors fees of $13,650 and $19,950 paid
to Mr. Fumo and Mr. DiSandro, respectively, for the year
ended December 31, 1999, and directors fees paid by the
Bank's subsidiaries to Mr. Fumo, Mr. DiSandro and
Mr. Polimeno of $8,400, $8,400 and $8,400, respectively,
for the year ended December 31, 1999.

The following table provides certain information with
respect to the number of shares of Common Stock represented by
outstanding options held by the named executive officers at
December 31, 2001. Also included in the table are the values
for "in-the-money" options that represent the positive
difference between the exercise price of any such options and
closing sale price of the common stock at December 31, 2001.

FISCAL YEAR-END OPTION/SAR VALUES

* Based on the market value of the underlying stock at the
fiscal year end, minus the exercise price. The market price
on December 31, 2001 was $6.10.

Employment Agreements. PSB and the Bank have entered into
employment agreements (the "Employment Agreements") with
Vincent J. Fumo, Chairman and Chief Executive Officer of PSB,
Anthony DiSandro, President of PSB and the Bank, John J.
O'Connell, Vice President of Marketing, and Mario Incollingo,
Chief Operating Officer of the Bank. Under the terms of his
Employment Agreement for 2002, Mr. Fumo serves as Chairman and
Chief Executive Officer of PSB and the Bank at a base salary of
$223,000. Under the terms of their Employment Agreements for
2002, Mr. DiSandro serves as President of PSB and the Bank at a
base salary of $247,000. Mr. O'Connell serves as the Vice
President of Marketing of PSB at a base salary of $176,000.
Mario L. Incollingo serves as the Chief Operating Officer of the
Bank at a base salary of $170,000. Each Employment Agreement
provides for an initial term of three years, which will
thereafter be automatically renewed for an additional year on
each anniversary date unless terminated pursuant to its terms by
the respective parties.

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

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

Compensation Committee Report on Executive Compensation

Under rules established by the Securities and Exchange
Commission ("SEC"), PSB is required to provide certain
information regarding the compensation and benefits provided to
PSB's Chief Executive Officer and other executive officers of
PSB. The disclosure requirements for the Chief Executive
Officer and other executive officers include the use of tables
and a report explaining the rationale and considerations that
led to fundamental compensation decisions affecting those
individuals. In fulfillment of this requirement, the Committee,
at the direction of the Board of Directors, has prepared the
following report for inclusion in this annual report.

The compensation committee of the Board of Directors (the
"Committee") has established a policy for executive
compensation, taking into account both subjective performance
criteria and certain specified objective performance measures.
The purpose of the policy is to: (i) provide compensation
opportunities that are competitive with other financial services
companies; (ii) support PSB's goal setting and strategic
planning process; (iii) motivate the executive management of PSB
to achieve profit and other key goals of the institution,
including but not limited to PSB's commitment to the communities
it serves, to its employees, customers and investors;
(iv) motivate the executive management to operate PSB in a safe
and sound manner and in compliance with all pertinent
governmental and regulatory requirements; and (v) minimize
potential overhead by designating a portion of the annual
compensation of executives as variable rather than fixed.

During the course of 2001, the Committee took into account
a variety of objective and subjective criteria in evaluating the
performance of the executive management of PSB. The Committee
assessed in detail the various challenges facing PSB and the
significant competitive pressures within PSB's market area.

In the course of this assessment of competitive salary
ranges among other similarly situated companies, it was noted
that competitive executive compensation packages vary in
relationship to these various subjective and objective factors.
A variety of resources were utilized that provided peer data
regarding executive compensation and financial performance of
PSB, that included but was not limited to the "SNL Executive
Compensation Review 2001" for both commercial banks and thrifts,
an assessment that reviews executive compensation and company
performance for publicly traded banks and thrifts. Comparisons
were made with institutions located within Southeastern
Pennsylvania, the Middle Atlantic trading area, and relative to
national averages. The peer groups considered in these analyses
are not necessarily comprised of the same institutions used in
the peer group for the stock performance graph.

In determining executive compensation for 2001, the
Committee established certain specific objectives for executive
management, which included the execution of the strategic
business plan and identifying and completing acquisition
opportunities.

Additionally, the Committee utilized a number of subjective
elements as part of the decision making process regarding
executive compensation. The individual skills and talents of
the executive managers of PSB, including but not limited to
experience, leadership ability, planning and organizational
skills, administrative talent, vision for the future, and work
ethic were given consideration in establishing executive
compensation.

Mr. Vincent J. Fumo was the Chairman and Chief Executive
Officer and Mr. Anthony DiSandro was the President and Chief
Operating Officer of PSB for 2001. Messrs. Fumo's and
DiSandro's salaries and bonuses for 2001 were determined by the
Committee after review of the recent compensation practices of
similarly sized institutions.

Compensation Committee Interlocks and Insider Participation

The following individuals are members of the compensation
committee of the board of directors:

James W. Eastwood, Chairman of Compensation Committee
and Director of PSB

Anthony DiSandro, President and Director of PSB

Thomas J. Finley, Jr., Director of PSB

Rosanne Pauciello, Secretary and Director of PSB

Stephen Marcus, Director of PSB

Stock Performance Graph.

The following graph shows a comparison of total shareholder
return on the common stock, based on the market price of the
common stock, with the cumulative total return of companies on
The Nasdaq Stock Market (U.S.) Index and The Nasdaq Banking
Index (U.S.) for the period beginning on December 31, 1997,
through December 31, 2001.

[GRAPHIC]

In the printed version of the document, a line graph
appears that depicts the following plot points:

Comparison of Cumulative Total Returns for PSB Bancorp,
Inc., The Nasdaq Stock Market (U.S.) Index and The Nasdaq
Banking Index.

SUMMARY

Notes:

A. The lines represent annual index levels derived from
compounded daily returns that include all dividends.

B. The indexes are reweighed daily, using the market
capitalization on the previous trading day.

C. If the fiscal year-end is not a trading day, the preceding
trading day is used.

D. The index level for all the series was set to 100.00 on
December 31, 1997.

Compensation of Officers and Directors Through Benefit Plans

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

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

Years of Service Percentage Vested

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

The following table indicates the annual retirement benefit
that would be payable under the Retirement Plan upon retirement
at age 65 in calendar year 2000, expressed in the form of a
single life annuity for the final average salary and benefit
service classifications specified below.

Years of Service and Benefits Payable at Retirement

______________

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

As of December 31, 2001, Mr. Fumo, Mr. DiSandro, and
Mr. Polimeno had 26, 24 and 26 years of credited service (i.e.
benefit service), respectively.

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

Under the 401(k) Plan, participants are permitted to make
pre-tax salary reduction contributions to the plan equal to a
percentage of up to 15% of compensation. Additional after-tax
contributions of up to 10% of compensation may be made to the
Plan. For these purposes, "compensation" includes total
compensation (including salary reduction contributions made
under the 401(k) Plan sponsored by the Bank), but does not
include compensation in excess of the Code Section 401(a)(17)
limits (presently $170,000). The Bank may also annually make a
discretionary profit sharing contribution to the 401(k) Plan. A
participant must complete 1,000 hours of service during the plan
year and be employed on the last day of the plan year to receive
an allocation of the profit sharing contribution. For the 2001,
2000, 1999, 1998, and 1997 plan years, the Bank made no profit
sharing contributions.

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

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

First Penn Bank Profit Sharing Plan. The Bank also
maintains the First Penn Bank Profit Sharing Plan, which is a
qualified plan pursuant to Section 401(a) of the Code.
Employees who have completed at least two years of service
during which they have worked 1,000 hours or more and who have
attained age 21 are eligible to participate in the Profit
Sharing Plan. Pursuant to the Profit Sharing Plan the Bank, in
its discretion, makes contributions to the accounts of eligible
employees. Employee contributions are neither permitted nor
required. Benefits under the Profit Sharing Plan become 100%
vested upon entry to the Plan. For the 2001, 2000, 1999, 1998,
and 1997 plan years, the Bank made profit sharing contributions
of $44,516, $0, $0, $0, and $0 respectively

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

In connection with the conversion and reorganization, the
ESOP borrowed $1,288,540 from PSB to purchase an additional
128,854 shares of PSB Bancorp, Inc. common stock. PSB also lent
sufficient funds to the ESOP to enable the ESOP to repay the
1995 Loan which had an outstanding principal balance of $234,000
at December 31, 1998. The loan by PSB to the ESOP will be
repaid principally from the Bank's contributions to the ESOP and
dividends payable on Common Stock held by the ESOP over the
anticipated 10-year term of the loan. The interest rate for the
ESOP loan is 8.5%. On July 1, 2001, the IGA Federal Employee
Stock Ownership Plan was merged into the ESOP. The merger of
the plans resulted in an additional 375,717 shares of Common
Stock being added to the ESOP holdings.

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

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

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

Benefits under the ESOP generally become 100% vested after
the third year of service or upon normal retirement (as defined
in the ESOP), disability or death of the participant. If a
participant terminates employment for any other reason prior to
fully vesting, his non-vested account balance will be forfeited.
Forfeitures will be reallocated among remaining participating
employees in the same proportion as contributions. Benefits may
be payable upon death, retirement, early retirement, disability
or separation from service. The Bank's contribution to the ESOP
will not be fixed, so benefits payable under the ESOP cannot be
estimated.

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

Pursuant to SOP 93-6, compensation expense for a leveraged
ESOP is recorded at the fair market value of the ESOP shares
when committed to be released to participants' accounts.

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

1995 Stock Option and Incentive Plan. In 1995, the Bank
adopted the 1995 Stock Option Plan. Options for all shares
reserved for issuance under the 1995 Stock Option Plan have been
granted to officers and employees of the Bank. In connection
with the conversion and reorganization from a mutual holding
company to a stock holding company structure, the 1995 Stock
Option Plan was assumed by the PSB and appropriate adjustments
were made to the exercise price and the number of shares
underlying each option to reflect the exchange ratio.

Under the 1995 Stock Option Plan, grants of 42,683, 42,683
and 6,876 were made to Messrs. Fumo, DiSandro and Polimeno.
There was no exercise of options under the 1995 Stock Option
Plan at and for the fiscal year ended December 31, 2001.

1995 Management Development and Recognition Plans. In
1995, the Bank adopted a Management Development and Recognition
Plans (the "1995 MRP") for officers, employees and non-employee
directors of the Bank. All shares under the 1995 MRP have been
awarded. In connection with the conversion and reorganization,
the shares awarded to the 1995 MRP participants were treated in
the same manner as shares held by other minority shareholders.

1998 Employee Stock Option Plan. This option plan provides
for the grant of (i) options to purchase common stock intended
to qualify as incentive stock options under Section 422 of the
Code, and (ii) options that do not so qualify nonqualified stock
options. Pursuant to the option plan, up to 161,073 shares of
common stock (subject to adjustment) are reserved for issuance
by PSB upon exercise of stock options to be granted to certain
officers and employees of PSB from time to time under the option
plan. The purpose of the option plan is to give certain
officers and employees an opportunity to acquire common stock
and to thereby help PSB attract, retain and motivate key
employees and officers.

Under this plan, option grants have been made to Messrs.
Fumo and DiSandro for 80,537 and 80,536 shares, respectively.
There has been no exercise of options granted under this plan
for the year ended December 31, 2001.

1998 Management Recognition Plan. The 1998 Management
Recognition Plan (the "MRP") is a method of providing certain
senior executive officers of PSB with a proprietary interest in
PSB, to reward such officers for their service and to encourage
such persons to remain in the service of PSB. Pursuant to the
MRP, PSB will award certain senior executive officers of PSB
"plan share awards" representing the right to earn shares of
common stock over a period of five years from the date of the
plan share award. PSB will contribute sufficient funds to the
MRP to enable the MRP to purchase common stock representing up
to 4% of the aggregate number of shares outstanding.(i.e., up to
124,046 shares of common stock).

Under this plan, share awards have been made to Messrs.
Fumo and DiSandro for 30,000 shares each.

1999 Director Stock Option Plan. The 1999 Director Stock
Option Plan (the "1999 Plan") was adopted by the Board of
Directors to provide an incentive program to attract and retain
qualified individuals as directors on both the boards of PSB and
the Bank. Grants under the 1999 Plan can only be made to non-
employee directors of PSB or the Bank and are limited to grants
totaling 24,999 options. Under the 1999 Plan, individual option
grants of 2,857 shares per director have been made to
Mr. Eastwood, Mr. Finley, Mr. Marcus, Mr. Tumini, Mr. Kenney,
Mr. Palermo, and Mr. DeRita. A grant of 4,999 options has been
made to Ms. Pauciello.

2001 PSB Bancorp Stock Incentive Plan. The 2001 Plan
authorizes the Board of Directors of PSB the right to grant
stock options or restricted stock of up to 1,375,000 shares of
Common Stock. Aggregate grants of restricted stock are limited
to a maximum of 350,000 shares. Under the 2001 Plan, incentive
stock options (as defined in Section 422 of the Internal Revenue
Code of 1986, as amended) nonqualified stock options and
restricted stock may be granted to directors, officers and
employees providing services to PSB and its affiliates. Grants
must be approved by a majority of the Board present at a
meeting.

There have been no grants made under the 2001 PSB Bancorp
Stock Incentive Plan.

Item 12 Security Ownership of Certain Beneficial Owners and
Management

The following table sets forth certain information
furnished to the Bank as of December 31, 2001, with respect to
the beneficial ownership of Common Stock by (i) each shareholder
known to PSB to be the beneficial owner of five percent (5%) or
more of the outstanding shares of Common Stock; (ii) each
director of PSB; (iii) the executive officer named in the
Summary Compensation Table on page 13 herein, and (iv) all
current executive officers and directors as a group. Except as
indicated in the footnotes to the table, the persons and
entities named have sole voting and investment power with
respect to all shares of Common Stock of which they are the
respective beneficial owners.

Amount and Percent of
Nature of Outstanding
Beneficial Shares of
Name of Beneficial Owner Ownership Common Stock

5% Shareholders

First Penn Bank 613,057 13.51%
Employee Stock Ownership Plan
11 Penn Center, Suite 2601
1835 Market Street
Philadelphia, PA 19103

Investors of America, LP 230,003 5.07%
135 North Meramec
Clayton, Missouri 63105

Directors

Anthony DiSandro 285,273(1) 6.12%

James W. Eastwood 33,805(3) *

Thomas J. Finley, Jr. 21,372(3) *

Vincent J. Fumo 434,717(2) 9.46%

Stephen Marcus 69,657(3) 9.33%

Rosanne Pauciello 15,902(3) *

John J. O'Connell 31,000 *

Mario J. Incollingo 26,300 *

Named Executive Officers

Gary Polimeno 42,477 *

All executive officers and
directors as a group (9 persons) 960,505 20.00%
______________

* Ownership percentage is less than 1%.

(1) Amount includes 50,510 shares held indirectly through the
401(k) Plan, 25,723 shares held through the Profit Sharing
Plan, 26,135 shares held by the 1995 Management Recognition
Plan and 30,000 shares held by the 1998 Management
Recognition Plan that have been awarded to Mr. DiSandro,
13,960 shares held in the ESOP, 15,726 shares held by
Mr. DiSandro directly and 123,219 shares subject to
immediately exercisable options. Mr. DiSandro is a trustee
of the First Penn Bank ESOP and as such votes 613,057
shares of the ESOP. The ESOP voting provisions require the
holders of allocated shares to direct the trustee as to how
to vote their shares on any and all matters presented to
the shareholders of PSB. The trustee is required to vote
the unallocated shares in proportion to the direction
received from the holders of the allocated shares.

(2) Amount includes 46,302 shares held through the 401(k) Plan,
13,504 shares held through the Profit Sharing Plan, 181,225
shares held by Mr. Fumo directly, 26,138 shares held by the
1995 MRP and 30,000 shares held by the 1998 Management
Recognition Plan that have been awarded to Mr. Fumo, 13,578
shares held in the ESOP, 750 shares held on behalf of the
daughter of Vincent Fumo and 123,220 shares subject to
immediately exercisable options. Mr. Fumo is a trustee of
the First Penn Bank ESOP and as such votes 613,057 shares
of the ESOP. The ESOP voting provisions require the
holders of allocated shares to direct the trustee as to how
to vote their shares on any and all matters presented to
the shareholders of PSB. The trustee is required to vote
the unallocated shares in proportion to the direction
received from the holders of the allocated shares.

(3) James W. Eastwood, Thomas J. Finley, Jr., Stephen Marcus
and Rosanne Pauciello hold immediately exercisable options
granted pursuant to the 1998 Director Stock Option Plan to
acquire 2,857, 2,857, 2,857 and 4,999 shares, respectively,

Item 13 Certain Relationships and Related Transactions

Certain directors and executive officers of PSB, and
associates of such persons (including corporations of which such
persons are officers or 10% beneficial owners), were customers
of and had transactions with PSB and its subsidiaries in the
ordinary course of business during 2001. All loans made to such
persons were made in the ordinary course of business on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than
the normal risks of collectibility or present other unfavorable
features. It is expected that any other transactions with
directors and officers and their associates in the future will
be conducted on the same basis.

Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K

The consolidated financial statements listed below are from
Exhibit 99 to the Registrant's 2001 Form 10-K.

PSB Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Cash Flow
Notes to Consolidated Statements
Reports of Independent Public Accountants

The following reports on Form 8-K were filed in the last
quarter of 2001:

Form 8-K filed October 29, 2001/Change in Registrant's
Certifying Accountant.

(a) Exhibits: The exhibits listed below are filed
herewith or incorporated by reference to other filings.

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 S-4
Registration Statement of PSB Bancorp,
Inc. filed June 25, 1999)

2.2 Agreement and Plan of Reorganization,
dated as of November 2, 2000, between
PSB Bancorp, Inc., PSB Merger Sub,
Inc. and Jade Financial Corp.
(incorporated herein by reference to
Registration Statement of PSB Bancorp,
Inc. filed on January 16, 2001.)

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* First Penn Bank's 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* First Penn Bank's 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* First Penn Bank's Profit Sharing Plan
(incorporated herein by reference to
Exhibit 10.3 of the SB-2 Registration
Statement of PSB Bancorp, Inc filed
October 9, 1997).

10.4* Employment Agreement with Vincent J.
Fumo (incorporated herein by reference
to Exhibit 7.1 of the SB-2
Registration Statement of PSB Bancorp,
Inc filed October 9, 1997).

10.5* Employment Agreement with Anthony
DiSandro (incorporated herein by
reference to Exhibit 7.2 of the SB-2
Registration Statement of PSB Bancorp,
Inc filed October 9, 1997).

10.6* First Penn Bank's Employee Stock
Ownership Plan (incorporated herein by
reference to Exhibit 10.4 of the SB-2
Registration Statement of PSB Bancorp,
Inc. filed on October 9, 1997).

10.7 Lease Agreement between Eleven
Colonial Penn Plaza Associates and
First Penn 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
First Penn 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 on May 5, 1998).

10.9* First Penn Bank's Stock Option Plan
(incorporated herein by reference to
Exhibit 10.9 of the S-4 Registration
Statement of PSB Bancorp, Inc. filed
June 25, 1999).

10.10* First Penn Bank's Management
Recognition Plan (incorporated herein
by reference to Exhibit 10.10 of the
S-4 Registration Statement of PSB
Bancorp, Inc. filed June 25, 1999).

10.11* Employment Agreement for John J
O'Connell. (filed herewith)

10.12* Employment Agreement for Mario L.
Incollingo (filed herewith)

10.13* PSB Bancorp, Inc. 2001 Stock
Incentive Plan (filed herewith)

21 Schedule of Subsidiaries (filed
herewith)

99 Financial Statements (filed herewith)

____________

* Denotes a management contract or compensatory plan or
arrangement.

(b) Reports on Form 8-K

Form 8-K filed October 29, 2001/Change in Registrant's
Certifying Accountant.

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 duly authorized.

April 1, 2002 PSB BANCORP, INC.

By /s/ Anthony DiSandro
Anthony DiSandro
President and Chief Operating
Officer

In accordance with the Securities Exchange Act of 1934,
this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.

Signature Title Date

/s/ Vincent J. Fumo Chairman and Chief April 1, 2002
Vincent J. Fumo Executive Officer,
Director

/s/ Anthony DiSandro President, April 1, 2002
Anthony DiSandro Director

/s/ Gary Polimeno Vice President and April 1, 2002
Gary Polimeno Treasurer (Principal
Accounting and
Financial Officer)

/s/ James W. Eastwood Director April 1, 2002
James W. Eastwood

/s/ Thomas J. Finley, Jr. Director April 1, 2002
Thomas J. Finley, Jr.

/s/ Rosanne Pauciello Corporate Secretary April 1, 2002
Rosanne Pauciello and Director

/s/ Stephen Marcus Director April 1, 2002
Stephen Marcus

/s/ John J. O'Connell Director April 1, 2002
John J. O'Connell

/s/ Mario L. Incollingo Director April 1, 2002
Mario L. Incollingo

Exhibit Index.

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 S-4
Registration Statement of PSB Bancorp,
Inc. filed June 25, 1999).

2.2 Agreement and Plan of Reorganization,
dated as of November 2, 2000, between
PSB Bancorp, Inc., PSB Merger Sub,
Inc. and Jade Financial Corp.
(incorporated herein by reference to
Registration Statement of PSB Bancorp,
Inc. filed on January 16, 2001.)

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* First Penn Bank's 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* First Penn Bank's 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* First Penn Bank's Profit Sharing Plan
(incorporated herein by reference to
Exhibit 10.3 of the SB-2 Registration
Statement of PSB Bancorp, Inc filed
October 9, 1997).

10.4* Employment Agreement with Vincent J.
Fumo (incorporated herein by reference
to Exhibit 7.1 of the SB-2
Registration Statement of PSB Bancorp,
Inc filed October 9, 1997).

10.5* Employment Agreement with Anthony
DiSandro (incorporated herein by
reference to Exhibit 7.2 of the SB-2
Registration Statement of PSB Bancorp,
Inc filed October 9, 1997).

10.6* First Penn Bank's Employee Stock
Ownership Plan (incorporated herein by
reference to Exhibit 10.4 of the SB-2
Registration Statement of PSB Bancorp,
Inc. filed on October 9, 1997).

10.7 Lease Agreement between Eleven
Colonial Penn Plaza Associates and
First Penn 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
First Penn 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 on May 5, 1998).

10.9* First Penn Bank's Stock Option Plan
(incorporated herein by reference to
Exhibit 10.9 of the S-4 Registration
Statement of PSB Bancorp, Inc. filed
June 25, 1999).

10.10* First Penn Bank's Management
Recognition Plan (incorporated herein
by reference to Exhibit 10.10 of the
S-4 Registration Statement of PSB
Bancorp, Inc. filed June 25, 1999).

10.11* Employment Agreement for John J
O'Connell. (filed herewith)

10.12* Employment Agreement for Mario L.
Incollingo (filed herewith)

10.13* PSB Bancorp, Inc. 2001 Stock
Incentive Plan (filed herewith)

21 Schedule of Subsidiaries (filed herewith).

99 Financial Statements (filed herewith).
____________

* Denotes a management contract or compensatory plan or
arrangement.