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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 2002 or
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _______________.
No. 000-24601
------------------------
(Commission File Number)
PSB BANCORP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2930740
------------------------ ------------------------
(State of Incorporation) (IRS Employer ID Number)
11 Penn Center, Suite 2601
1835 Market Street, Philadelphia, PA 19103
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(215) 979-7900
-------------------------------
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of the Exchange
Act: none
Securities registered pursuant to Section 12(g) of the Exchange
Act: Common Stock, no par value per share.
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Number of shares outstanding as of September 30, 2002
Common Stock (no par value) 4,534,611
--------------------------- --------------------
(Title of Class) (Outstanding Shares)
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
PSB BANCORP, INC
STATEMENTS OF FINANCIAL CONDITION
(In thousands)
Sept. 30, 2002 Dec. 31, 2001
(unaudited) (audited)
------------- ------------
Assets
Cash and due from banks $ 3,290 $ 3,825
Interest earning deposits with banks 66,562 3,293
Federal funds sold 9,514 47,638
-------- --------
Total cash and cash equivalents 79,366 54,756
-------- -------
Loans held for sale 15,195 17,142
Investment securities available-
for-sale, at fair value 59,514 69,934
Investment securities held-to-maturity
(fair value $6,762 and $ 2,346) 6,667 2,310
Federal Home Loan Bank stock - at cost 2,121 1,093
Federal Reserve Bank stock - at cost 320 320
Loans 306,958 300,051
Less allowance for possible loan losses (2,773) (2,871)
-------- --------
Net loans 304,185 297,180
-------- --------
Accrued interest receivable 1,857 1,884
Premises and equipment, net 2,954 2,508
Bank owned life insurance (BOLI) 11,588 11,161
Other assets 4,665 9,356
-------- --------
21,064 24,909
-------- --------
Total assets 488,432 467,644
======== ========
Liabilities
Deposits
Non-interest bearing 34,920 25,983
Interest bearing 389,102 378,577
-------- --------
Total deposits 424,022 404,560
-------- --------
Securities sold under agreements to repurchase 13,312 13,298
Advances from borrowers for taxes and insurance 2,906 3,111
Accrued interest payable 32 42
Goodwill, net 0 1,679
Other liabilities 2,111 3,539
-------- --------
18,361 21,669
-------- --------
Total liabilities 442,383 426,229
-------- --------
Shareholders' equity
Common stock authorized,
15,000,000 shares no par value,
4,534,611 shares issued and outstanding
on Sept. 30, 2002 and December 31,2001 41,952 40,994
Retained earnings 4,823 1,768
Accumulated other comprehensive income 1,347 167
Employee stock ownership plan (1,695) (1,136)
Treasury stock, at cost,
72,325 shares on Sept. 30, 2002 and
December 31, 2001 (378) (378)
-------- -------
Total shareholders' equity 46,049 41,415
-------- --------
Total liabilities and shareholders' equity 488,432 467,644
======== ========
The accompanying notes are an integral part of these financial
statements.
PSB BANCORP, INC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended
September 30,
-------------------
(Unaudited)
2002 2001
---- ----
Interest Income
Loans, including fees $6,465 $7,004
Investment securities 1,036 1,574
Deposits with banks 308 105
------ ------
Total interest income 7,809 8,683
------ ------
Interest Expense
Interest on deposits 3,224 4,349
Interest on borrowings 49 160
------ ------
Total interest expense 3,273 4,509
------ ------
Net interest income 4,536 4,174
------ ------
Provision for Loan Losses 166 135
------ ------
Net interest income after provision
for loan losses 4,370 4,039
Non-Interest Income 666 330
------ ------
Non-Interest Expenses
Salaries and employee benefits 2,014 1,776
Occupancy and equipment 418 238
Other operating 1,703 1,261
------ ------
Total non-interest expenses 4,135 3,275
------ ------
Income before income taxes and
extraordinary gain 901 1,094
Income Taxes 296 145
------ ------
Net Income $ 605 $ 949
====== ======
Net Income per common share
Basic: $.15 $.23
Diluted: .14 .23
The accompanying notes are an integral part of these financial
statements.
PSB BANCORP, INC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Nine Months Ended
September 30,
--------------------
(Unaudited)
2002 2001
---- ----
Interest Income
Loans, including fees $19,529 $14,581
Investment securities 3,308 3,717
Deposits with banks 794 419
------- -------
Total interest income 23,631 18,717
------- -------
Interest Expense
Interest on deposits 9,960 9,571
Interest on borrowings 223 481
------- -------
Total interest expense 10,183 10,052
------- -------
Net interest income 13,448 8,665
======= =======
Provision for Loan Losses 597 135
------- -------
Net interest income after provision
for loan losses 12,851 8,530
Non-Interest Income 2,375 780
------- -------
Non-Interest Expenses
Salaries and employee benefits 6,205 3,662
Occupancy and equipment 1,221 853
Other operating 5,173 2,575
------- -------
Total non-interest expenses 12,599 7,090
======= =======
Income before income taxes and
extraordinary gain 2,627 2,220
Income Taxes 902 281
------- -------
Income before extraordinary gain 1,725 1,939
Extraordinary gain 1,329 0
------- -------
Net Income $ 3,054 $ 1,939
======= =======
Net Income per common share
Basic:
Income before extraordinary gain $.41 $.47
Extraordinary gain .32 .00
------- -------
Net Income $.73 $.47
======= =======
Diluted:
Income before extraordinary gain $.40 $.47
Extraordinary gain .32 .00
------- -------
Net Income $.72 $.47
======= =======
The accompanying notes are an integral part of these financial
statements.
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
--------------------
2002 2001
-------- --------
(Unaudited)
.......
CASH FLOWS BY OPERATING ACTIVITIES:
Net income $ 3,054 $ 1,939
------- --------
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Provisions for possible loan losses 597 45
Depreciation and amortization 446 232
Amortization of discounts and accretion of
premiums on investment securities 132 180
Extraordinary gain (1,329) 0
Write-down of equity investment 13 131
Write down of real estate owned 31 198
Originations/sale of loans held for sale 1,947 (4,360)
Deferred taxes 776 121
Compensation expense-Employee Stock Ownership Plan 399 24
Change in assets and liabilities:
Decrease in accrued interest receivable 27 202
Decrease (Increase) in other assets 1,606 (4,542)
(Decrease) in accrued interest payable (10) (375)
(Decrease)Increase in accrued expenses (1,428) 5,702
------- --------
Net cash provided by (used in) operating activities 6,195 (503)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities, available-for-sale (5,000) (11,764)
Proceeds from maturities and calls of investment securities 12,918 42,040
Acquisition costs of and proceeds from the sale of Federal
Home Loan Bank Stock (1,029) 1,157
Increase in loans, net (7,288) (25,221)
Proceeds from sale of real estate owned 423 671
Purchase of premises and equipment (892) (460)
Cash paid in Acquisition 0 (25,378)
------- --------
Net cash (used in) by investing activities 868 18,955
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 19,462 13,998
Change in advances for borrowers' taxes and insurance (205) (309)
Change in securities purchased under agreements to repurchase 14 107
Net (decrease) in borrowed funds (4,000)
------- --------
Net cash provided by financing activities 19,243 9,796
------- --------
NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS 24,610 (9,662)
Cash and cash equivalents, beginning of period 54,756 17,906
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $79,366 $ 8,244
======= ========
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
------------------ ----------------
2002 2001 2002 2001
------ ------ ------ ------
(Unaudited) (Unaudited)
Net Income $ 605 $ 949 $3,054 $1,939
Other comprehensive income, net of tax:
Accumulated comprehensive gain
investments available for sale 505 1,111 1,180 1,210
------ ------ ------ ------
Other comprehensive income 505 1,111 1,180 1,210
------ ------ ------ ------
Comprehensive Income $1,110 $2,060 $4,234 $3,149
====== ====== ====== ======
PSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2002
(UNAUDITED)
1. Basis of Presentation:
This quarterly report presents the consolidated financial
statements of PSB Bancorp, Inc.("PSB") and its subsidiaries.
PSB's financial statements reflect all adjustments and
disclosures that management believes are necessary for
a fair presentation of interim results. The result of
operations for the quarter presented does not necessarily
indicate the results that PSB will achieve for all of 2002.
You should read these interim financial statements in
conjunction with the consolidated financial statements and
accompanying notes that are presented in the PSB Bancorp,
Inc. Annual Report on Form 10-K for the year ended
December 31, 2001.
The financial information in this quarterly report has been
prepared in accordance with PSB's customary accounting
practices; these financial statements have not been audited.
Certain information and footnote disclosures required under
generally accepted accounting principles have been condensed
or omitted, as permitted by rules and regulations of the
Securities and Exchange Commission.
2. Business Combinations
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 adopted the
provisions of SFAS 142. On January 1, 2002, after the
revaluation of certain deferred assets relating to the
acquisition of Jade Financial Corp., PSB recognized an
extraordinary gain of $1.3 million which represented the
remaining unamortized portion of negative goodwill.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
PSB's results of operations depend primarily on its net
interest income, which is the difference between interest income
on interest-earning assets, and interest expense on its interest-
bearing liabilities. PSB's interest-earning assets consist
primarily of loans receivable, investment securities, and cash
equivalents, while its interest-bearing liabilities consist
primarily of deposits and borrowings. PSB's net income also is
affected by its provision for loan losses and its level of non-
interest income as well as its non-interest expense, such as
salary and employee benefits, occupancy costs and charges
relating to non-performing and other classified assets.
Net Income
PSB's net income totaled $605,000 and $949,000 for the three
months ended September 30, 2002 and 2001, respectively. Basic and
diluted earnings per share for the three months ended September
30, 2002 were $0.15 and $.0.14 respectively, compared to $0.23
and $0.23 per share for the three months ended September 30,
2001, respectively.
PSB's net income totaled $3.1 million (which included a $1.3
million extraordinary gain related to the acquisition of Jade
Financial Corp. in June 2001) and $1.9 million for the nine
months ended September 30, 2002 and 2001, respectively. Basic and
diluted earnings per share for the nine months ended September
30, 2002 were $0.41 and $.0.40 respectively before recognition of
an extraordinary gain related to the recognition of goodwill and
$0.73 and $0.72 after recognition of the extraordinary gain,
compared to $0.47 and $0.47 per share for the nine months ended
September 30, 2001, respectively.
Net Interest Income and Average Balances
Net interest income is a key component of PSB's
profitability and is managed in coordination with PSB's interest
rate sensitivity position. Net interest income for the third
quarter of 2002 was $4.5 million compared to $4.2 million, for
the third quarter of 2001, an increase of 8.67%. The increase in
net interest income can be attributed to an increase in the
volume of PSB's interest-earning assets and to a significant
decrease in the rates paid by PSB on its interest-bearing
liabilities.
Overall, average total interest-earning assets provided a
yield of 6.79% for the three months ended September 30, 2002,
compared to 8.36% for the same period in 2001. The decrease in
overall yield on interest-earning assets was primarily the result
of a significant decrease in the yield and an increase in volume
of our interest-earning deposits at banks along with a less
significant decrease in the yield on our net loans. The increase
in the yield on our investment and mortgage-backed securities
helped moderate the general decline in the yield on our overall
interest-earning assets. This overall decrease on interest-
earning assets is related to the general economic trend of
decreasing interest rates on interest-earning assets and the
prepayment of higher yielding loans caused by the lower interest
rate environment. Average total loans of $318.7 million for the
three months ended September 30, 2002, provided a yield of 8.11%
for the period, compared to average total loans of $295.4 million
for the three months ended September 30, 2001, which provided a
yield of 9.49% for the period. The increase in average total
loans was primarily due to PSB's decision to aggressively pursue
lending opportunities in the commercial and commercial real
estate markets.
Average total interest-bearing liabilities increased from
$391.0 million to $420.3 million or 7.49%, for the three months
ended September 30, 2002 compared to the corresponding quarter in
2001. The average rate on total interest-bearing liabilities
decreased 149 basis points from 4.61% for the three months ended
September 30, 2001 to 3.12% for the three months ended September
30, 2002. The general economic trend of decreasing rates has
resulted in lower rates being paid by PSB on the majority of its
interest-bearing liabilities.
Net interest income for the nine-month period ended
September 30, 2002 was $13.4 million compared to $8.7 million or
55.19% more than the same period in 2001. This increase in the
net interest income is related to the acquisition of the assets
of Jade Financial Corp. and an increase in volume of interest
earning assets, primarily in higher yielding net loans and a 63
basis point increase in the net interest spread caused by a
significant decline in the rates paid on interest-bearing
liabilities. The net interest margin for the nine months ended
September 30, 2002 as compared to the same period in 2001
decreased by 7 basis points reflecting the overall decline in
yields on interest-earning assets.
Overall, average total interest-earning assets provided a
yield of 6.93% for the nine months ended September 30, 2002,
compared to 8.35% for the same period in 2001. The average yield
for the nine months ended September 30, 2002 decreased primarily
due to a significant decline in the average yields on our
interest-earning deposits at banks and the prepayment of higher
yielding interest-earning assets. Average total loans of $319.0
million for the nine months ended September 30, 2002, provided a
yield of 8.16% for the period, compared to average total loans of
$203.7 million for the nine months ended September 30, 2001 that
provided a yield of 9.54% for the period. The increase in average
total loans was primarily due to the aggressive marketing of new
commercial and construction loans during the period and the
acquisition of the loan portfolio of Jade Financial Corp..
Average total interest-bearing liabilities increased from
$251.7 million for the nine months ended September 30, 2001 to
$413.6 million or 64.32% for the nine months ended September 30,
2002. The aggregate interest-bearing liabilities increased
significantly because of increases in PSB's savings deposit
accounts and certificate of deposit accounts and the acquisition
of the interest-bearing liabilities of Jade Financial Corp.
These increases reflect a shift of investor assets out of the
equity markets and into more conservative insured deposit
accounts.
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 tables present the
average daily balances of assets, liabilities and shareholders'
equity and the respective interest earned or paid on interest-
earning assets and interest-bearing liabilities, as well as
average rates for the periods indicated (in thousands):
Three Months Ended Sept 30,
-----------------------------------------------------------
2002 2001
---------------------------- ----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
(Dollars in Thousands) (Dollars in Thousands)
ASSETS
Interest-earning assets:
Interest-earning deposits $ 76,757 $ 308 1.61% $ 11,224 $ 105 3.74%
Investment securities 11,282 207 7.34% 36,356 493 5.42%
Mortgage-backed securities 53,232 829 6.23% 72,736 1,081 5.94%
Net loans 318,720 6,465 8.11% 295,367 7,004 9.49%
-------- ------ -------- ------
Total interest-earning assets 459,991 $7,809 6.79% 415,683 $8,683 8.36%
-------- ------ -------- ------
Noninterest-earning assets 29,484 32,682
Total assets $489,475 $448,365
======== ========
LIABILITIES
Interest-bearing liabilities:
Now checking accounts $ 15,273 $ 58 1.52% $ 14,536 $ 47 1.29%
Money market accounts 69,214 414 2.39% 25,691 184 2.86%
Savings deposits 94,944 474 2.00% 68,421 376 2.20%
Certificates 227,345 2,278 4.01% 267,170 3,742 5.60%
-------- ------ -------- ------
Total deposits 406,776 3,224 3.17% 375,818 4,349 4.63%
Borrowed money 13,488 49 1.45% 15,174 160 4.22%
-------- ------ -------- ------
Total interest-bearing
liabilities 420,264 3,273 3.12% 390,992 4,509 4.61%
-------- --------
Non-interest-bearing liabilities 23,768 19,351
Total liabilities 444,032 410,343
Retained earnings or shareholders'
equity 45,443 38,022
Total liabilities and retained
earnings or shareholders'
equity $489,475 $448,365
======== ========
Net interest income $4,536 $4,174
====== ======
Interest rate spread 3.67% 3.75%
Net yield on interest-earning
assets 3.94% 4.02%
Ratio of interest-earning assets to
interest-bearing liabilities 1.09x 1.06x
Nine Months Ended Sept 30,
-----------------------------------------------------------
2002 2001
---------------------------- ----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
(Dollars in Thousands) (Dollars in Thousands)
ASSETS
Interest-earning assets:
Interest-earning deposits $ 67,070 $ 794 1.58% $ 11,616 $ 419 4.81%
Investment securities 11,035 592 7.15% 29,301 1,143 5.20%
Mortgage-backed securities 57,704 2,716 6.28% 54,159 2,574 6.34%
Net loans 318,982 19,529 8.16% 203,729 14,581 9.54%
-------- ------- -------- -------
Total interest-earning assets 454,791 $23,631 6.93% 298,805 $18,717 8.35%
-------- ------- -------- -------
Noninterest-earning assets 29,701 16,049
Total assets $484,492 $314,854
======== ========
LIABILITIES
Interest-bearing liabilities:
Now checking accounts $ 14,242 $ 168 1.57% $ 16,340 $ 153 1.25%
Money market accounts 54,631 1,249 3.05% 17,955 390 2.90%
Savings deposits 103,848 1,489 1.91% 44,263 792 2.39%
Certificates 227,501 7,054 4.13% 159,795 8,236 6.87%
-------- ------- -------- -------
Total deposits 400,222 9,960 3.32% 238,353 9,571 5.35%
Borrowed money 13,367 223 2.22% 13,340 481 4.81%
-------- ------- -------- -------
Total interest-bearing
liabilities 413,589 10,183 3.28% 251,693 10,052 5.33%
-------- --------
Non-interest-bearing liabilities 26,999 25,139
Total liabilities 440,588 276,832
Retained earnings or shareholders'
equity 43,904 38,022
Total liabilities and retained
earnings or shareholders'
equity $484,492 $314,854
======== ========
Net interest income $13,448 $ 8,665
======= =======
Interest rate spread 3.65% 3.02%
Net yield on interest-earning
assets 3.94% 3.87%
Ratio of interest-earning assets to
interest-bearing liabilities 1.10x 1.19x
Provision for Loan Losses
The provision for loan losses represents the charge against
earnings that is required to fund the allowance for loan losses.
PSB determines the level of the allowance for loan losses through
a regular review of the loan portfolio. Management's evaluation
of the adequacy of the allowance for loan losses is based upon an
examination of the portfolio as well as such factors as declining
trends, the volume of loan concentrations, adverse situations
that may affect the borrowers ability to pay, prior loss
experience within the portfolio, current economic conditions and
the results of the most recent regulatory examinations. The
adequacy of the loan loss allowance is reviewed monthly by the
board of directors. See "Asset Quality - Allowance for Loan
Losses." PSB recorded a provision for loan losses of $166,000
and $597,000, respectively during the three and nine months ended
September 30, 2002 compared to $135,000 for both the three and
nine months ended September 30, 2001. Additionally, PSB had
charge-offs of $203,000 and $802,000 and recoveries of $30,000
and $107,000 against the allowance for loan losses during the
three and nine-month periods ended September 30, 2002,
respectively. In connection with our routine loan review
process, it was disclosed that loans to a former borrower of
First Bank of Philadelphia (predecessor bank) totaling $575,595,
did not have the indicated required real estate collateral.
Management believes that the issue may have a possible
implication of impropriety. Although the loans are presently
performing management is seeking alternatives to secure
collateral.
Non-interest Income
Non-interest income consists of gain on sale of loans, loan
fees, service charges, rental income and other income. Non-
interest income increased by $336,000, or 101.81%, to $666,000
for the three months ended September 30, 2002, from $330,000 for
the three months ended September 30, 2001. Non-interest income
increased by $1.6 million, or 208.46%, to $2.4 million for the
nine month period ending September 30, 2002 from $780,000 for the
nine month period ending September 30, 2001. The increase for
both the three and nine month periods ended September 30, 2002
was a result of increases in service fees, return check fees, and
the sale of loans. A portion of the increase in non-interest
income is attributable to the fees generated by the acquisition
of the assets of Jade Financial Corp. in June 2001, and the
related non-interest income generating assets.
Non-interest Expense
Non-interest expense principally consists of employees'
compensation and benefits, deposit insurance premiums and
occupancy costs. Non-interest expense increased by 26.26%, from
$3.3 million to $4.1 million for the three months ended
September 30, 2002 and for the nine months ended September 30,
2002 non-interest expense increased by 77.70%, to $12.6 million
from $7.1 million. The principal reason for the increase in non-
interest expense for the three month period ending September 30,
2002 was due to a significant expense related to the purchase and
installation of a new computer accounting system and the related
training and support costs. The increase in non-interest expense
for the nine-month period ending September 30, 2002 is related to
the increase in salary and employee benefit expense related to
the acquisition of Jade Financial Corp.
Provision for Income Taxes
Income tax provisions for the three and nine month periods
ended September 30, 2002 were $296,000 and $902,000,
respectively, compared to $145,000 and $281,000, respectively,
for the same periods in 2001. The increase in the income tax
provision is related the fact that the net operating losses
available to PSB that effectively reduced PSB's income tax
liability were fully utilized in 2001 and were not available in
2002.
Liquidity and Interest Rate Sensitivity
The maintenance of adequate liquidity and the mitigation of
interest rate risk are integral to the management of PSB's
balance sheet. Liquidity represents the ability to meet
potential cash outflows resulting from deposit customers who need
to withdraw funds or borrowers who need available credit.
Interest rate sensitivity focuses on the impact of fluctuating
interest rates and the re-pricing characteristics of rate
sensitive assets and liabilities on net interest income.
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, which includes
increases in core deposits, sales of certificates of deposits,
the amortization and prepayment of loans and mortgage-backed
securities, maturities of investment securities, and other short-
term investments. The liquidity position of PSB is also
strengthened by a $192.0 million credit facility with the Federal
Home Loan Bank ("FHLB"). Advances are secured by all FHLB stock
and qualifying mortgage loans. PSB had no outstanding borrowings
from the FHLB as of September 30, 2002.
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 nine months ended September 30, 2002, net
cash provided by operating activities was $6.3 million, compared
to net cash used in operating activities of $503,000 for the same
period of 2001. During the nine months ended September 30, 2002,
net cash used in investing activities was $899,000, compared to
net cash used in investing activities of $19.0 million for the
same period of 2001. Financing activities provided net cash of
$19.2 million during the nine months ended September 30, 2002,
compared to $9.8 million in net cash provided by financing
activities for the same period of 2001. The net result of these
items was a $24.6 million increase in cash and cash equivalents
for the nine months ended September 30, 2002 compared to cash and
cash equivalents at December 31, 2001.
Interest rate sensitivity is closely related to liquidity
since each is directly affected by the maturity of assets and
liabilities. Rate sensitivity also deals with exposure to
fluctuations in interest rates and its effect on net interest
income. The primary function of 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 PSB due to general changes in interest
rates.
The blending of fixed and floating rate loans and
investments to match the re-pricing and maturity characteristics
of the various funding sources is a continuous process in an
attempt to minimize fluctuations in net interest income. The
composition of the balance sheet is designed to minimize any
significant fluctuation in net interest income and to maximize
liquidity. Management believes that the accessibility to FHLB
borrowings will provide the flexibility to assist in keeping
fluctuations in net interest income under control and to maintain
an adequate liquidity position.
Capital Adequacy
On September 30, 2002, PSB's and First Penn Bank's
regulatory capital dollars and ratios were as set forth in the
following table. These ratios exceeded the requirements for
classification as a "well capitalized" institution, the
industry's highest capital category.
Well
Capitalized At Sept 30, At December 31,
Ratios 2002 2001
----------- --------------------- --------------------
PSB Bank PSB Bank
--------- --------- --------- --------
Tier I capital $ 44,674 $ 35,337 $ 41,212 $ 32,574
Tier II capital 2,778 2,778 2,871 2,871
-------- -------- -------- --------
Total qualifying capital $ 47,452 $ 38,115 $ 44,083 $ 35,445
Risk adjusted total assets $322,957 $319,737 $304,977 $303,527
Tier I risk based capital ratio 6.00% 13.83% 11.05% 13.51% 10.73%
Total risk based capital ratio 10.00% 14.69% 11.92% 14.45% 11.68%
Leverage ratio 5.00% 9.13% 7.23% 8.86% 7.03%
Average assets $489,447 $488,546 $465,071 $463,469
FINANCIAL CONDITION
General
PSB's total assets increased $20.8 million or 4.45% from
$467.6 million at December 31, 2001 to $488.4 million at
September 30, 2002. The increase in assets was primarily due to a
substantial increase in cash and cash equivalents and a moderate
increase in loans.
At September 30, 2002 the PSB's net loan portfolio totaled
$304.2 million compared to $297.2 million at December 31, 2001.
The 2.36% increase in the net loan portfolio is primarily
attributable to an increase of $40.2 million in the volume of
non-residential, commercial, and construction loans which was
offset by a $32.3 million decline in residential mortgages and
consumer and student loans as indicated in the table below.
The following tables summarize the loan portfolio of PSB by
loan category and amount at September 30, 2002 compared to
December 31, 2001. From time to time, TransNational Mortgage
Corp., a subsidiary of First Penn Bank, has originated and sold
mortgage loans to third party investors within PSB's financial
reporting periods. Similarly, student loans are frequently
originated and sold within PSB's financial reporting periods.
Such mortgage and student loans are not reflected in the
financial tables and financial statements pertaining to a
particular period to the extent that such loans were sold prior
to any period end. The loan categories correspond to PSB's
general classifications (in thousands, except for percentage):
At Sept 30, At December 31,
2002 2001
------------------ -----------------
Amount Percent Amount Percent Variance % Change
-------- ------- -------- ------- -------- --------
Real Estate Loans:
One-to four-family* $104,059 33.85% $126,484 42.08% $(22,425) -17.73%
Construction loans 37,842 12.31% 24,501 8.15% 13,341 54.45%
Five or more family residence 1,790 0.58% 2,201 0.73% (411) -18.67%
Nonresidential 79,044 25.71% 58,601 19.49% 20,443 34.89%
Commercial loans 30,320 9.86% 23,908 7.95% 6,412 26.82%
SBA loans 8,826 2.87% 9,934 3.30% (1,108) -11.15%
Consumer & student loans 45,540 14.82% 54,974 18.30% (9,434) -17.16%
-------- ------ -------- ------ ------- ------
Total loans $307,421 100.00% $300,603 100.00% $6,818 2.27%
====== ====== ======= ======
Less:
Unearned fees and discounts $ 463 $ 552
Allowance for loan losses 2,773 2,871
-------- --------
Net Loans $304,185 $297,180
======== ========
* Does not include loans held for sale
Total investment securities of PSB (including mortgage-
backed securities) decreased $6.0 million, or 8.39%, to $66.2
million at September 30, 2002, from $72.2 million at December 31,
2001.
Cash and cash equivalents, including interest-earning
deposits with banks, increased $24.6 million or 44.89% to $79.4
million at September 30, 2002, from $54.8 million at December 31,
2001. PSB experienced a large early amortization of its
mortgage-backed investments and prepayment of residential
mortgage loans due to the rapid decrease in overall interest
rates. The primary change in cash and cash equivalents was the
result of a decision by PSB not to utilize its cash and cash
equivalents for investments due to a concern over the potential
for rapid interest rate fluctuations and a desire to maintain
adequate liquidity.
Total liabilities increased $16.2 million or 3.80% to $442.4
million at September 30, 2002 from $426.2 million at December 31,
2001. The increase in total liabilities reflects additional
deposits generated by PSB due to an aggressive marketing and
pricing campaign and a recent preference by investors of not
investing in the declining equity markets but rather keeping
their savings in cash or cash equivalent investments.
Asset Quality
Delinquent Loans
When a borrower fails to make a required payment on a loan,
PSB attempts to cure the deficiency by contacting the borrower
and seeking payment. Contacts are generally made on the 15th day
after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency extends beyond 30 days, the loan and
payment history is carefully reviewed, additional notices are
sent to the borrower and efforts are made to collect the loan.
While PSB generally prefers to work with borrowers to resolve
such problems, when the account becomes 90 days delinquent, PSB
does institute foreclosure or other proceedings, as necessary, to
minimize any potential loss.
Non-Performing Assets
PSB's level of non-performing assets decreased $145,000, or
3.09% to $4.5 million at September 30, 2002, from $4.7 million at
December 31, 2001. As a matter of policy, the accrual of loan
interest is discontinued if management believes that, after
considering economic and business conditions and collection
efforts, the borrower's financial condition is such that
collection of interest becomes doubtful. This is normally done
when a loan reaches 90 days delinquent. At this time, all
accrued but unpaid interest is reversed. There are occasional
exceptions if the loans are in the process of collection and the
loan is fully secured.
The following table sets forth non-performing assets as of
September 30, 2002 and December 31, 2001 (dollars in thousands):
At Sept 30, At December 31,
2002 2001
----------- ---------------
Nonaccrual loans 4,330 4,130
Total nonperforming loans 4,330 4,130
Real estate owned (REO) 203 548
------ ------
Total nonperforming assets $4,533 $4,678
====== ======
Nonperforming loans to total
loans 1.34% 1.30%
Nonperforming assets to total
assets 0.93% 1.00%
Allowance for loan losses to
total loans 0.86% 0.91%
Allowance for loan losses to
nonperforming loans 64.04% 69.52%
Allowance for loan losses to
nonperforming assets 61.17% 61.37%
Net charge-offs as a percentage
of total loans 0.25% 0.25%
Allowance for Loan Losses
The provision for loan losses is an amount charged against
earnings to fund the allowance for possible future losses on
existing loans. In order to determine the amount of the
provision for loan losses, PSB conducts a monthly review of the
loan portfolio to evaluate overall credit quality. In
establishing its allowance for loan losses, management considers
the size and risk exposure for each segment of the loan
portfolio, past loss experience, current indicators such as the
present levels and trends of delinquency rates and collateral
values, and the potential losses for future periods. The
provisions are based on management's review of the economy,
interest rates, general market conditions, and in certain
instances, an estimate of net realizable value (or fair value) of
the collateral, as applicable, considering the current and
anticipated future operating environment. These estimates are
particularly susceptible to changes that may result in a material
adjustment to the allowance for loan losses. As adjustments
become identified, they are reported in earnings for the period
in which they become known. Management believes that it makes an
informed judgment based upon available information. The adequacy
of the allowance is reviewed quarterly by the Board of Directors.
It is the objective of PSB'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 PSB. As a general rule, special mention assets
will have a minimum reserve of 3.05%, substandard assets will
have a minimum reserve of 20%, and doubtful assets will have a
minimum reserve of 50%. Loans classified as losses are charged
off against the reserve. A general reserve allocation is applied
for pools of loans based on risk rating for all loans not
specifically reserved for as described previously.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in PSB's market risk
exposure since December 31, 2001.
Item 4 Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
PSB's principal executive officers and principal financial
officer have concluded that PSB's disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934, as amended), based on their evaluation of
these controls and procedures as of a date within (90) days prior
to the filing date of this Form 10-Q, are effective.
(b) Changes in Internal Controls. There have been no
significant changes in PSB's internal controls or in other
factors that could significantly affect these controls subsequent
to the date of the evaluation thereof, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Part II. OTHER INFORMATION
Item 1 Legal Proceedings
Incorporated by reference to PSB's Annual Report on
Form 10-K filed with Securities and Exchange Commission
on April 1, 2002.
Item 2 Changes in Securities
None
Item 3 Defaults upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information.
None
Item 6 Exhibits and Reports on Form 8-K
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. (incorporated herein by
reference to Exhibit 10.11 of PSB's
Annual Report on Form 10-K filed
on April 1, 2002).
10.12* Employment Agreement for Mario L.
Incollingo (incorporated herein by
reference to Exhibit 10.12 of PSB's
Annual Report on Form 10-K filed
on April 1, 2002).
10.13* PSB Bancorp, Inc. 2001 Stock
Incentive Plan (incorporated herein by
reference to Exhibit 10.13 of PSB's
Annual Report on Form 10-K filed
on April 1, 2002).
21 Schedule of Subsidiaries (incorporated
herein by reference to Exhibit 21 of
PSB's Annual Report on Form 10-K filed
on April 1, 2002).
99.1 Certification of Report by Co-Chief
Executive Officer. (filed herewith)
99.2 Certification of Report by Co-Chief
Executive Officer. (filed herewith)
99.3 Certification of Report by Chief
Financial Officer. (filed herewith)
____________
* Denotes a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K
(1) None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto dully authorized.
PSB BANCORP, INC
By:/s/Vincent J. Fumo
--------------------------------
Vincent J. Fumo,
Chairman of the Board, Co-Chief
Executive Officer & Director
By:/s/Anthony DiSandro
--------------------------------
Anthony DiSandro,
President, Co-Chief Executive
Officer & Director
By:/s/John Carrozza
--------------------------------
John Carrozza
(Principal Financial Officer and
Chief Accounting Officer)
November 14, 2002
CERTIFICATIONS
I, Vincent J. Fumo, Co-Chief Executive Officer of PSB
Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
PSB Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/Vincent J. Fumo
--------------------------------
Vincent J. Fumo
Co-Chief Executive Officer
I, Anthony DiSandro, Co-Chief Executive Officer of PSB
Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
PSB Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/Anthony DiSandro
--------------------------------
Anthony DiSandro
Co-Chief Executive Officer
I, John Carrozza, Chief Financial Officer of PSB Bancorp,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
PSB Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ John Carrozza
--------------------------------
John Carrozza
Chief Financial Officer