PSB BANCORP INC - 10-Q Quarterly Report

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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 March 31, 2003 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.
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(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
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(Registrant's Telephone Number)

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 [ ]

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act.) Yes [ ]
No [X]

Number of shares outstanding as of May 14, 2003.

Common Stock (no par value) 4,534,611
- --------------------------- --------------------
(Title of Class) (Outstanding Shares)

PSB Bancorp, Inc.
FORM 10-Q

For the Quarter Ended March 31, 2003

Table of Contents

Page

PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements

Consolidated Statements of Financial Condition
as of March 31, 2003 (Unaudited) and
December 31, 2002 1

Consolidated Statements of Income (Unaudited)
for the Three Month Periods Ended March 31, 2003
and 2002 3

Consolidated Statements of Cash Flows (Unaudited)
for the Three Month Periods Ended March 31, 2003
and 2002 5

Consolidated Statements of Comprehensive Income
(Unaudited) for the Three Month Periods Ended
March 31, 2003 and 2002 7

Notes to Consolidated Financial Statements 8

Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12

PART II. Other Information 25

Item 1 Legal Proceedings 25

Item 2 Changes in Securities 25

Item 3 Defaults upon Senior Securities 25

Item 4 Submission of Matters to a Vote of Security Holders 25

Item 5. Other Information. 25

Item 6. Exhibits and Reports on Form 8-K 25

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PSB BANCORP, INC
STATEMENTS OF FINANCIAL CONDITION
(In thousands)

The accompanying notes are an integral part of these financial
statements.

PSB BANCORP, INC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

The accompanying notes are an integral part of these financial
statements.

PSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

PSB BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands)

Three Months Ended
March 31,
------------------
2003 2002
----- -------
(Unaudited)
Net income $469 $1,674
Other comprehensive loss, net of tax:
Accumulated comprehensive loss,
investments available for sale (59) (132)
---- ------
Other comprehensive loss (59) (132)
---- ------
Comprehensive income $410 $1,542
==== ======

PSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003

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 results of
operations for the quarter presented do not necessarily
indicate the results that PSB will achieve for all of 2003.
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, 2002.

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 June 29, 2001, PSB acquired Jade Financial Corp.
("Jade.") The acquisition was accounted for using the
purchase method. The acquisition of Jade resulted in PSB
recording negative goodwill of approximately $1,752,000. On
January 1, 2002, after reducing the carrying value of the
acquired deferred tax asset of Jade by approximately
$350,000, PSB recognized, as a cumulative effect of an
accounting change, approximately $1.3 million of unamortized
negative goodwill, in conjunction with the adoption of SFAS
No. 142, "Goodwill and Other Intangible Assets."

3. Earnings Per Share

The following table illustrates the required disclosure
of the reconciliation of the numerators and
denominators of the basic and diluted EPS computation.
The computation of diluted earnings per share for all
periods excludes 1,371,200 options issued in connection
with the 1999 First Bank of Philadelphia acquisition,
which have been deemed invalid by management.

No options were anti-dilutive at March 31, 2003.

No options were anti-dilutive at March 31, 2002.

4. Regulatory Matters

On April 14, 2003, PSB and the Bank entered into a
Memorandum of Understanding (MOU) with the Federal Reserve
Bank of Philadelphia (Federal Reserve). PSB and the
Bank do not believe that the existence of the MOU or its
provisions will have a material adverse effect on their
consolidated financial position or results of operations.
PSB's Form 10-K for the year ended December 31, 2002,
includes a more detailed description of the terms of the
MOU.

5. New Accounting Pronouncements

In November 2002, the Financial Accounting Standards
Board issued FASB Interpretation No. 45 ("FIN No. 45"),
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others." On January 1, 2003, PSB
adopted the disclosure provisions of FIN No. 45 for
guarantees issued or modified after December 31, 2002,
and adopted the initial recognition and measurement
provisions on January 1, 2003. Adoption of the initial
recognition and measurement provisions did not affect the
PSB's financial condition or results of operations
at or for the three months ended March 31, 2003.

While certain guarantees are only subject to the
disclosure provisions of this Interpretation, others
are subject to both the disclosure and initial
recognition and measurement provisions. For guarantees
that fall within the scope of the initial recognition
and measurement provisions, FIN No. 45 requires a
guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. Under
the previous accounting rules, the Bank did not
record a liability when guaranteeing obligations unless
it became probable that the Bank would have to
perform under the guarantee.

The Bank issues financial and performance standby
letters of credit, both of which are subject to the
disclosure and initial recognition and measurement
provisions of FIN No. 45. Financial and performance
standby letters of credit are conditional commitments
issued by the Bank to assure the financial and
performance obligations of a customer to a third party.
At March 31, 2003, and December 31, 2002, the Bank
was contingently liable on financial and performance
standby letters of credit totaling $1.5 million and
$1.6 million, respectively, $43,000 of which were
originated in the first quarter of this year. The
Bank's commitments under standby letters of credit
expire at various dates through 2004. Amounts due under
these letters of credit would be reduced by any
proceeds that the Company would be able to obtain in
liquidating the collateral for the loans, which varies
depending on the customer. The Bank generally holds
collateral and/or obtains personal guarantees
supporting these commitments. Collateral
held for these commitments at March 31, 2003, was 100%.
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46.")
FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to
a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a
majority of the entity's residual returns, or both. FIN
46 also requires disclosures about variable interest
entities that a company is not required to consolidate,
but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply
to existing entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of
when the variable interest entity was established. PSB
is currently evaluating the impact that FIN 46
will have on its consolidated financial position and
results of operations.

6. Reclassifications

Certain 2002 amounts have been reclassified to conform to
the 2003 presentation.

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 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. The Bank's 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.

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 inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of
goods and services.

Critical Accounting Policies, Judgments and Estimates

SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30,
2001. It also specifies criteria that intangible assets acquired
in a purchase method business combination must meet to be
recognized and reported apart from goodwill. SFAS No. 142
requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for
impairment at least annually. In connection with SFAS No. 142,
transitional goodwill impairment evaluation, on January 1, 2002,
after the reevaluation of certain deferred assets relating to the
acquisition of Jade, PSB recognized a cumulative effect of an
accounting change of $1.3 million which represented the remaining
unamortized portion of negative goodwill.

Allowance for Credit Losses

PSB uses the reserve method of accounting for credit losses.
The balance in the allowance for loan losses is determined based
on management's review and evaluation of the loan portfolio in
relation to past loss experience, the size and composition of the
portfolio, current economic events and conditions, and other
pertinent factors, including management's assumptions as to
future delinquencies, recoveries and losses. Increases to the
allowance for loan and lease losses are made by charges to the
provision for credit losses. Recoveries of previously charged-
off amounts are credited to the allowance for credit losses.

While management considers the allowance for loan and lease
losses to be adequate based on information currently available,
future additions to the allowance may be necessary due to changes
in economic conditions or management's assumptions as to future
delinquencies, recoveries and losses and management's intent with
regard to the disposition of loans and leases. In addition, the
regulators, as an integral part of their examination process,
periodically review PSB's allowance for loan losses. The
regulators may require the Bank to recognize additions to the
allowance for credit losses based on their judgments about
information available to them at the time of their examination.

Performance Overview

PSB's net income for the first quarter of 2003 was $469,000
or $0.11 on a diluted per share basis, compared to net income of
$345,000 or $0.08 per diluted share for 2002 before the
cumulative effect of an accounting change and $1.7 million or
$0.39 on a diluted per share basis after the cumulative effect of
an accounting change for 2002. The results for the first quarter
of 2003 were effected by a continued decrease in the overall
interest rate environment.

In the first quarter of 2002, PSB recognized a gain of
$1.3 million which represented the remaining unamortized portion
of negative goodwill which materially effected net income for the
quarter.

The Bank's net interest margin continues to be negatively
affected by the overall decline of interest rates which is a
result of continuing reductions of interest rates by the Federal
Reserve. Net interest margin declined by 31 basis points from
3.78% for the three months ended March 31, 2002 to 3.47% for the
same period in 2003. To mitigate this margin compression, the
Bank will continue to monitor and adjust its cost of funds
subject to the constraints of local market conditions. The Bank
will also deploy its excess cash in order to increase the yield
on these funds without incurring excessive interest or credit
risk.

Net Income

The Bank's net income totaled $469,000 and $1.7 million for
the three months ended March 31, 2003, and 2002, respectively. On
an operating basis, basic and diluted earnings per share for the
three months ended March 31, 2003, were $0.11 and $.0.11
respectively, compared to $0.08 and $0.07 per share for the three
months ended March 31, 2002, respectively. The Bank's net income
for the three-month period ended March 31, 2002, included a one-
time gain of $1.3 million related to the recognition of the
negative goodwill associated with the acquisition of Jade in June
2001.

Net Interest Income and Average Balances

Net interest income is the key component of the Bank's
profitability and is managed in coordination with its interest
rate sensitivity position. Net interest income for the first
quarter of 2003 was $4.1 million compared to $4.2 million, for
the first quarter of 2002, a decrease of 2.38%. This decrease in
net interest income is related to a 92 basis point decrease on
the yield on interest earning assets, a decrease in the volume of
the loan portfolio, and the early amortization of mortgage-backed
securities. This decrease was partially offset by a 56 basis
point decrease in the rate paid on interest-bearing liabilities.
The Bank's net interest margin decreased by 31 basis points to
3.47% for the three month period ended March 31, 2003, compared
to the three month period ended March 31, 2002, due primarily to
the previously discussed decrease in the yield on interest-
earning assets.

Overall, average total interest-earning assets provided a
yield of 5.98% for the three months ended March 31, 2003,
compared to 6.90% for the same period in 2002. The average yield
for the three months ended March 31, 2003, decreased in all asset
classes except for loans and was due primarily to declining
interest rates. The most significant rate drop was a 46 basis
point drop in the yield on interest-earning deposits and a 208
basis point drop in the yield on investment securities. Average
total loans of $304.4 million for the three months ended
March 31, 2003, provided a yield of 7.94% for the period,
compared to average total loans of $320.9 million for the three
months ended March 31, 2002, which provided a yield of 7.86% for
the period. The decrease in average total loans was primarily
due a continued amortization of consumer, residential and
commercial real estate loans due to competitive pricing in a
declining interest rate environment. The increase of 8 basis
points in the yield on the Bank's loan portfolio and the increase
in the volume of interest-earning deposits with a lower yield had
the greatest effect on the 92 basis point decline in the average
yield on interest-earning assets.

Average total interest-bearing liabilities increased from
$411.7 million to $423.4 million or 2.85%, for the three months
ended March 31, 2003, compared to the corresponding quarter in
2002. The average rate on total interest-bearing liabilities
decreased 56 basis points from 3.37% for the three months ended
March 31, 2002, to 2.81% for the three months ended March 31,
2003. The increase in total interest-bearing liabilities was
primarily due to the increase in certificates of deposits and
money market 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 period indicated:

Provision for Loan Losses

The provision for loan losses represents the charge against
earnings that is required to fund the allowance for loan losses.
The Bank determines the level of the allowance for loan losses
through a regular review of the loan portfolio. Management's
evaluation of the adequacy of the allowance for loan losses is
based upon an examination of the portfolio as well as such
factors as declining trends, the volume of loan concentrations,
adverse situations that may affect the borrowers ability to pay,
prior loss experience within the portfolio, current economic
conditions and the results of the most recent regulatory
examinations. For the first quarter of 2002, management provided
for a provision for loan losses of $304,000. After review of the
loan portfolio, management determined that, based on stable
economic conditions, a review of the specific factors effecting
the allowance, and a judgment by management that the allowance
was adequate, it was not necessary to increase the allowance in
the first quarter of 2003 and therefore no provision was made.

Allowance for Loan Losses

The Bank had an allowance for loan losses of $3.5 million
and $3.6 million for the three months ended March 31, 2003 and
December 31, 2002, respectively. Additionally, the Bank had
charge-offs of $150,000 and recoveries of $40,000 against the
allowance for loan losses during the three-month period ended
March 31, 2003, compared to $252,000 in charge-offs and $29,000
in recoveries for the three month period ended March 31, 2002.

The methodology for determining the adequacy of the
allowance for loan loss considers both risk and economic factors.
The analysis includes all types of loans, with the applied
methodology commensurate to the risk assessment for the portfolio
and present economic conditions. The risk rating of the loan
portfolio is updated monthly by management and utilized for an
overall assessment of the loan loss reserve adequacy, the results
of which are reported quarterly to PSB's Board of Directors. The
results of the assessment of the adequacy of the loan loss
reserve, utilizing the risk ratings and economic factors, receive
the close attention of management on an ongoing basis, with
appropriate revisions made to the methodology in accordance with
regulatory standards, changes in lending policies,
economic/business conditions, past due/classified loans, quality
of loan review, concentration of credit, and examination input.
It is important to note that an effective internal loan review
function is an essential element in satisfactorily implementing
the Bank's methodology.

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. The adequacy of the loan loss allowance is
reviewed monthly by the Bank's Board of Directors. See "Asset
Quality - Allowance for Loan Losses."

Non-interest Income

The following table provides a summary of non-interest
income, by category of income, for the three months ended
March 31, 2003 and March 31, 2002 (in thousands):

Three months ended
March 31,
------------------
2003 2002
---- ------
Service fees on deposit accounts $214 $ 491
Miscellaneous Income 54 134
Gain on sale of investment - 87
Non-deposit fee income 52 109
Other 148 281
---- ------
Total $468 $1,102

The major source of non-interest income consists of gain on
sale of loans, investment gains and losses, loan fees, service
fees on deposit accounts, rental income and other miscellaneous
income. Non-interest income decreased by $634,000, or 57.53%, to
$468,000 for the three months ended March 31, 2003, from
$1.1 million for the three months ended March 31, 2002. The
decrease for the three month period ended March 31, 2003 was a
result of decreases in service fees on deposit accounts, as a
result of a number of factors. In 2003, the Bank instituted a
series of relationship program products to customers. Some
customers of the Bank now receive discounted fees if they
maintain multiple accounts with the Bank. The purpose of the
relationship program is to encourage our customers to maintain
combined accounts that will allow them to take advantage of free
services. Although the service fee income has decreased under
the relationship program, the Bank hopes to attract customers to
use or take advantage of additional services that will ultimately
generate new business and future fee income. Additionally,
during the first quarter of 2003, the Bank terminated a
relationship with a special fee-based customer resulting in a
significant decrease in non-deposit fee income. Additionally, in
the first quarter of 2002, non-interest income was increased by
the one-time gain on the sale of an asset of a subsidiary and a
refund of taxes paid related to the acquisition of Jade that was
realized in the same period.

Non-interest Expense

The following table provides a summary of non-interest
expense, by category of expense, for the three months ended
March 31, 2003, and March 31, 2002 (in thousands):

Three months ended
March 31,
------------------
2003 2002
------ ------
Salaries and employment benefits $2,050 $2,183
Rent and occupancy expense 503 397
Professional fees 276 141
FDIC insurance expense 18 18
General insurance 63 65
Advertising 38 86
Data processing fees 56 52
Director fees 76 98
Other operating expense 852 1,279
------ ------
Total $3,932 $4,319
------ ------
------ ------

Non-interest expense principally consists of employee
compensation and benefits, deposit insurance premiums, marketing,
and premises and occupancy costs. Non-interest expense decreased
by 8.96%, from $4.3 million for the three months ended March 31,
2002 to $3.9 million for the three months ended March 31, 2003.
The principal reason for the decrease in non-interest expense was
a decrease in other operating expenses associated with non-
recurring costs related to the Bank's conversion to a new
hardware/software operating system incurred in the first quarter
of 2002.

Income Taxes

PSB accounts for income taxes under the liability method
specified by SFAS No. 109, "Accounting for Income Taxes." Under
SFAS No. 109, deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred
taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. The principal types of
accounts resulting in differences between assets and liabilities
for financial statement and tax return purposes are the allowance
for loan losses, leased assets, deferred loan fees and
compensation. The Company had an income tax provision of
$205,000, and $326,000 for the three months ended March 31, 2003,
and March 31, 2002, respectively.

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 $174.7 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 credit facility at December 31, 2002, or
at March 31, 2003.

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 three month period ended March 31, 2003,
net cash used in operating activities was $10.1 million, compared
to net cash provided by operating activities of $4.4 million for
the same period of 2002. During the three month period ended
March 31, 2003, net cash provided by investing activities was
$22.7 million, compared to net cash used in investing activities
of $2.2 million for the same period of 2002. Financing activities
provided net cash of $7.0 million during the three months ended
March 31, 2003, compared to $18.7 million in net cash provided by
financing activities for the same period of 2002. The net result
of these items was a $19.6 million increase in cash and cash
equivalents for the three month period ended March 31, 2003,
compared to a $20.9 million increase in cash and cash equivalents
for the same period of 2002. The increase in cash and cash
equivalents in 2003 is primarily due to the proceeds received
from maturing investments of $10.0 million, a net payoff of loans
of approximately $13.0 million, and an increase in deposits of
$7.6 million.

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.

Capital Adequacy

On March 31, 2003, PSB's and the Bank's regulatory capital
dollars and ratios are as follows. These ratios exceed the
requirements for classification as a "well capitalized"
institution, the industry's highest capital category.

FINANCIAL CONDITION

General

The Bank's total assets increased $4.9 million or 1.0% from
$496.8 million at December 31, 2002, to $501.7 million at
March 31, 2003. The increase in total assets was due to an
increase in cash and cash equivalents primarily due to an a
decrease in loans and an increase in core deposits.

At March 31, 2003, the Bank's net loan portfolio totaled
$275.6 million compared to $288.6 million at December 31, 2002.
The decrease in the net loan portfolio is primarily attributable
to a decrease in the volume of commercial real estate and
consumer loans as well as continued refinancing and amortization
of the residential mortgage loans. (In the table below,
commercial real estate loans are classified as "Nonresidential.")

The following table summarizes the loan portfolio of the
Bank by loan category and amount at March 31, 2003, and
December 31, 2002, for the past five years. The loan categories
correspond to the Bank's general classifications (in thousands,
except for percentage):

* Does not include loans held for sale

Total investment securities of PSB (including mortgage-
backed securities) decreased $10.2 million, or 18.22%, to
$46.0 million at March 31, 2003, from $56.2 million at
December 31, 2002.

Cash and cash equivalents, including interest-earning
deposits with banks, increased $19.5 million or 17.70% to
$129.8 million at March 31, 2003, from $110.3 million at
December 31, 2002. The primary change in cash and cash
equivalents was the increase in the Bank's deposit balances and
federal funds sold. The increase in cash and cash equivalents in
2003 is primarily due to the proceeds received from maturing
investments of $10.0 million, a net payoff of loans of
approximately 13.0 million, and an increase in deposits of
$7.6 million.

Total liabilities increased $4.4 million or 1.0% to
$455.0 million at March 31, 2003 from $450.6 million at
December 31, 2002.

Asset Quality

Delinquent Loans

When a borrower fails to make a required payment on a loan,
the Bank attempts to cure the deficiency by contacting the
borrower and seeking payment. Contacts are generally made on the
15th day after a payment is due. In most cases, deficiencies are
cured promptly. If a delinquency extends beyond 30 days, the
loan and payment history is carefully reviewed, additional
notices are sent to the borrower and efforts are made to collect
the loan. While the Bank generally prefers to work with
borrowers to resolve such problems, when the account becomes
90 days delinquent, the Bank does institute foreclosure or other
proceedings, as necessary, to minimize any potential loss.

Non-Performing Assets

The Bank's level of non-performing assets decreased $79,000
or 1.62% to $4.8 million at March 31, 2003, from $4.9 million at
December 31, 2002. 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
March 31, 2003, and December 31, 2002 (Dollars in thousands):

At March At December
31, 31,
2003 2002
-------- -----------
Loans past due 90 days or more as to
interest or principal and accruing
interest $ - $ -
Nonaccrual loans 4,401 4,480
Loans restructured to provide a
reduction or deferral of interest or
principal - -
------ ------
Total nonperforming loans 4,401 4,480
Real estate owned (REO) 382 382
------ ------
Total nonperforming assets $4,783 $4,862
====== ======
Nonperforming loans to total loans 1.44% 1.44%
Nonperforming assets to total assets 0.95% 0.98%
Allowance for loan losses to total loans 1.15% 1.16%
Allowance for loan losses to
nonperforming loans 79.37% 80.42%
Allowance for loan losses to
nonperforming assets 73.03% 74.11%
Net charge-offs as a percentage of total
loans 0.04% 0.28%

Allowance for Loan Losses

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

It is the objective of the Bank's evaluation process to
establish the following components of the allowance for loan
losses: a specific allocation for certain identified loans, a
general allocation for pools of loans based on risk rating, and a
general allocation for inherent loan portfolio losses.
Management performs current evaluations of its criticized and
classified loan portfolios and assigns specific reserves that
reflects the current risk to the Bank. As a general rule,
special mention assets will have a minimum reserve of 3%,
substandard assets will have a minimum reserve of 15%, and
doubtful assets will have a minimum reserve of 50%. A general
reserve allocation is applied for pools of loans based on risk
rating for all loans not specifically reserved for as described
previously.

Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in PSB's market risk
exposure since December 31, 2002.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None

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

(a) 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. (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 March 31, 2003).

99.1 Section 906 Certification of Report by
Chief Executive Officer and Chief
Financial Officer. (filed herewith)

* Denotes a management contract or compensatory plan or
arrangement.

(b) Reports on Form 8-K

(1) Form 8-K filed on March 10, 2003,
reporting the announcement of PSB's
highlights of its financial condition and
earnings for the twelve month period ended
December 31, 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto dully authorized.

PSB BANCORP, INC

By:/s/Anthony DiSandro
--------------------------------
Anthony DiSandro,
President, Chief Executive
Officer

By:/s/John Carrozza
--------------------------------
Principal Financial Officer
and Acting Chief Financial
Officer

May 14, 2003

CERTIFICATIONS

I, Anthony DiSandro, 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: May 14, 2003

/s/Anthony DiSandro
--------------------------------
Anthony DiSandro
Chief Executive Officer

I, John Carrozza, Acting 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: May 14, 2003

/s/John Carrozza
---------------------------------
Acting Chief Financial Officer