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 June 30,2003 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.
------------------------------------------------------
(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)

Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 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 August 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 June 30, 2003

Contents

Page

PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements

Consolidated Statements of Financial Condition
as of June 30, 2003 (unaudited) and December 31,
2002 5

Consolidated Statements of Income (unaudited)
for the Three and Six Month Periods Ended
June 30, 2003 and 2002 7

Consolidated Statements of Cash Flows (unaudited)
for the Six Month Periods Ended June 30, 2003
and 2002 11

Consolidated Statements of Comprehensive Income
(unaudited) for the Three and Six Month Periods
Ended June 30, 2003 and 2002 13

Notes to Consolidated Financial Statements 14

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20

Item 3. Quantitative and Qualitative Disclosures about
Market Risk 32

Item 4. Controls and Procedures 33

PART II. Other Information

Item 1. Legal Proceedings 34

Item 2. Changes in Securities and Use of Proceeds 34

Item 3. Defaults Upon Senior Securities 34

Item 4. Submission of Matters to a Vote of Security
Holders 34

Item 5. Other Information 34

Item 6. Exhibits and Reports on Form 8-K 34

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)

Three Months Ended June 30,
---------------------------
2003 2002
------ ------
(Unaudited)
Interest Income
Loans, including fees $6,114 $6,761
Investment securities 683 1,115
Deposits with banks 360 290
------ ------
Total interest income 7,157 8,166
------ ------
Interest Expense
Interest on deposits 2,530 3,353
Interest on borrowings 6 93
------ ------
Total interest expense 2,536 3,446
------ ------
Net interest income 4,621 4,720
------ ------
Provision for loan losses 45 158
------ ------
Net interest income after
provision for loan losses 4,576 4,562

Non-interest income 598 638
------ ------
Non-Interest Expenses
Salaries and employee benefits 2,216 2,008
Occupancy and equipment 496 406
Other operating 1,565 1,731
------ ------
Total non-interest expenses 4,277 4,145
------ ------
Income before income taxes 897 1,055
Income taxes (302) (280)
------ ------
Net Income $ 595 $ 775
====== ======
Net Income per Common Share
Basic: $ 0.14 $ .19
====== ======
Diluted: $0.14 $ .18
====== ======

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

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

Six Months Ended June 30,
-------------------------
2003 2002
------- -------
(Unaudited)
Interest Income
Loans, including fees $12,156 $13,064
Investment securities 1,418 2,272
Deposits with banks 690 486
------- -------
Total interest income 14,264 15,822
------- -------
Interest Expense
Interest on deposits 5,489 6,736
Interest on borrowings 16 174
------- -------
Total interest expense 5,505 6,910

Net interest income 8,759 8,912

Provision for loan losses 45 462
------- -------
Net interest income after
provision for loan losses 8,714 8,450

Non-interest income 1,066 1,740
------- -------
Non-Interest Expenses
Salaries and employee benefits 4,266 4,191
Occupancy and equipment 999 803
Other operating 2,944 3,470
------- -------
Total Non-Interest Expenses 8,209 8,464
------- -------
Income before income taxes and
cumulative effect of accounting
change 1,571 1,726
Income Taxes (507) (606)

Income before cumulative effect
of accounting change 1,064 1,120
Cumulative effect of accounting
change 0 1,329
------- -------
Net income $ 1,064 $ 2,449
======= =======

Net Income per Common Share
Basic:
Income before cumulative effect
of accounting change $ 0.25 $ .27
Cumulative effect of accounting
Change -- .32
------- =======
Net Income: $ 0.25 $ .59
======= =======
Diluted:
Income before cumulative effect
of accounting change $ 0.25 $ .26
Cumulative effect of accounting
change -- .32
------- -------
Net Income: $ 0.25 $ .58
======= =======

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

PSB BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

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

PSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2003
(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 which 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 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 earnings per share 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 by management to be invalid.

No options were anti-dilutive at June 30, 2003.

Six months ended June 30, 2003
----------------------------------------
Weighted
Income average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
(In thousands, except per share data)

Basic earnings per share
Income available to common
stockholders $1,064 4,223 $0.25
Effect of dilutive securities
Stock options - 83 -
----- ----- -----
Diluted earnings per share
Income available to common
stockholders plus
effect of dilutive securities $1,064 4,306 $0.25
====== ===== =====

No options were anti-dilutive at June 30, 2003.

Three months ended June 30, 2002
----------------------------------------
Weighted
Income average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
(In thousands, except per share data)

Basic earnings per share
Income before cumulative effect
of accounting change $775 4,159 $0.19

Income available to common
stockholders $775 4,159 $0.19

Effect of dilutive securities
Stock options - 93 (.01)
---- ----- -----
Diluted earnings per share
Income available to common
stockholders plus effect of
dilutive securities $775 4,252 $0.18
==== ===== =====

No options were anti-dilutive at June 30, 2002

Six months ended June 30, 2002
----------------------------------------
Weighted
Income average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
(In thousands, except per share data)

Basic earnings per share
Income before cumulative effect
of accounting change $1,120 4,165 $0.27

Cumulative effect
of accounting change $1,329 - $0.32
------ ----- -----
Income available to common
stockholders $2,449 4,165 $0.59

Effect of dilutive securities
Stock options - 80 (.01)
------ ----- -----
Diluted earnings per share
Income available to common
stockholders plus effect of
dilutive securities $2,449 4,245 $0.58
====== ===== =====

No options were anti-dilutive at June 30, 2002.

4. Regulatory Matters

On April 14, 2003, PSB and First Penn Bank (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 Annual Report on 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 PSB's financial condition or results of
operations.

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 June 30, 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, $466,000 of which were
originated during 2003. The Bank's commitments under
standby letters of credit expire at various dates through
2005. Amounts due under these letters of credit would be
reduced by any proceeds that the Bank 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
June 30, 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. PSB has an investment in Iron Bridge
Holdings, Inc. ("Iron Bridge") and this investment is
currently accounted for under the equity method of
accounting. Management has been actively pursuing the
divestiture of its investment in Iron Bridge since December
of 2002. A preliminary determination has been made that this
investment may be required to be consolidated under the
provisions of FIN 46, as of September 30, 2003. The possible
consolidation of Iron Bridge could have a material impact on
the Company's consolidated results of operations for the
three month period ended September 30, 2003 and for the year
ended December 31, 2003.

The Bank adopted Statement of Financial Accounting
Standard 149 ("SFAS No. 149"), "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," on
July 1, 2003. SFAS No. 149 clarifies and amends SFAS
No. 133 for implementation issues raised by constituents or
includes the conclusions reached by the FASB on certain FASB
staff implementation issues. Statement 149 also amends SFAS
No. 133 to require a lender to account for loan commitments
related to mortgage loans that will be held for sale as
derivatives. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. The Bank
periodically enters into commitments with its customers,
which it intends to sell in the future. Management does not
anticipate the adoption of SFAS No. 149 will have a material
impact on the Bank's financial position or results of
operations.

The FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both
Liabilities and Equity," on May 15, 2003. SFAS No. 150
changes the classification in the statement of financial
position of certain common financial instruments from either
equity or mezzanine presentation to liabilities and requires
an issuer of those financial statements to recognize changes
in fair value or redemption amount, as applicable, in
earnings. SFAS No. 150 is effective for public companies
for financial instruments entered into or modified after
May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management
does not anticipate the adoption of SFAS No. 150 will have a
material impact on the Company's financial position or
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 losses are made by charges to the provision
for loan losses. Recoveries of previously charged-off amounts
are credited to the allowance for credit losses.

While management considers the allowance for loan 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. In addition, the regulators,
as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. The regulators may
require the Bank to recognize additions to the allowance for loan
losses based on their judgments about information available to
them at the time of their examination.

The AICPA's Accounting Standards Executive Committee has
issued an exposure draft of a proposed Statement of Position
("SOP"), Allowance for Credit Losses. The proposed SOP addresses
the recognition and measurement by creditors of the allowance for
credit losses related to all loans, as that term is defined in
Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan," with certain exceptions. If adopted,
the proposed SOP would apply to all creditors other than state
and local governmental entities and federal governmental
entities. The Bank is currently reviewing the components of the
proposed SOP and the impact it will have on its consolidated
financial position and results of operations.

Performance Overview

PSB's net income for the second quarter of 2003 was $595,000
or $0.14 on a diluted per share basis, compared to net income of
$775,000 or $0.18 per diluted share for the second quarter of
2002. The decrease in net income for the second quarter of 2003
is primarily a result of a continued decline in the interest rate
environment resulting in decreased interest income, the
reinvestment of maturing and repricing of assets at lower rates,
and accelerated prepayments on higher yielding mortgage-backed
securities and loans.

In the first quarter of 2002, PSB recognized a cumulative
effect of an accounting change of $1.3 million which represented
the remaining unamortized portion of negative goodwill which
materially affected net income for that 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 29 basis points from
4.10% for the three months ended June 30, 2002 to 3.81% for the
same period in 2002. 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
also will attempt to deploy its excess liquidity in order to
increase the yield on these funds without incurring excessive
interest or credit risk.

Net Income

PSB's net income totaled $595,000 and $775,000 for the three
months ended June 30, 2003 and 2002, respectively. PSB's basic
and diluted earnings per share for the three months ended
June 30, 2003 were $0.14 and $0.14 respectively, compared to
$0.19 and $0.18 per share for the three months ended June 30,
2002.

PSB's net income for the six months ended June 30, 2003,
totaled $1.1 million matching the $1.1 million prior to the
recognition of $1.3 million related to the acquisition of Jade,
for the same period in 2002. PSB's basic and diluted earnings
per share for the six months ended June 30, 2003 were $0.25 and
$.0.25 compared to $0.59 and $0.58 per share for the six months
ended June 30, 2002, respectively, including the adjustment to
earnings per share of $.32 to both basic and diluted earnings per
share occasioned by the acquisition of Jade.

We are attempting to stem the decreased earnings by
investing our excess liquidity in short term higher interest
yielding investments and reducing our cost of deposits. In an
attempt to increase earnings, management has recently put into
effect various strategies to enhance the growth of higher
yielding consumer home equity and home equity lines of credit.
The commercial real estate and construction loan departments are
currently working on marketing special loan products to become
more competitive in the lower interest rate market without the
bank assuming additional credit risk.

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 second
quarter of 2003 was $4.6 million compared to $4.7 million, or a
2.09% decrease from the second quarter of 2002. Net interest
income for the six month period ended June 30, 2003 was
$8.8 million compared to $8.9 million, or 1.71% decrease from the
same period in 2002. This decrease is primarily a result of a
continued decline in the interest rate environment, the
reinvestment of maturing higher yielding earning assets and
market repricing of new investment assets at lower rates, and
accelerated prepayments on higher yielding mortgage-backed
securities and loans.

Overall, average total interest-earning assets provided a
yield of 5.90% for the three months ended June 30, 2003, compared
to 7.09% for the same period in 2002. The average yield for the
three months ended June 30, 2003 decreased primarily due to a
decline in the average yield on our loan portfolio, our interest-
earning deposits and our investment and mortgage-backed
securities. Average total loans of $292.3 million for the three
months ended June 30, 2003, provided a yield of 8.37% for the
period, compared to average total loans of $317.3 million for the
three months ended June 30, 2002, which provided a yield of 8.52%
for the period.

Average total interest-bearing liabilities increased from
$413.8 million to $422.8 million or 2.16% for the three months
ended June 30, 2003 compared to the three-month period ended
June 30, 2002. The average rate on total interest-bearing
liabilities decreased 93 basis points from 3.33% for the three
months ended June 30, 2002 to 2.40% for the three months ended
June 30, 2003. The increase in interest-bearing liabilities
resulted from increases in money market and checking account
deposits. The decrease in the overall rate paid on interest-
bearing liabilities was due to PSB's ability to decrease the rate
paid on these accounts in concert with the nationwide decline in
interest rates. Additionally, PSB did not have to offer higher
than average interest rates on deposit accounts to attract new
depositors because of a continuing shift of moneys from equity-
based investments to deposit-based investments due to the
continuing instability of the stock market.

Overall, average total interest-earning assets provided a
yield of 5.94% for the six months ended June 30, 2003, compared
to 7.00% for the same period in 2002. Average total loans of
$298.4 million for the six months ended June 30, 2003, provided a
yield of 8.15%, compared to average total loans of $319.1 million
for the six months ended June 30, 2002, that provided a yield of
8.19%. The decrease in average total loans was primarily due to
the sale of fixed-rate mortgages with lower yielding rates into
the secondary market. In doing so, the Bank reduced the long
term lower interest yielding mortgages and increased mortgage
placement fees by $258,000 over the same period in 2002.

Average total interest-bearing liabilities increased from
$412.8 million to $423.1 million or 2.50% for the six months
ended June 30, 2003 compared to the six months ended June 30,
2002. The primary reason for the change in total interest-
bearing liabilities was an increase in money market and checking
account deposits. The average rate on interest-bearing
liabilities for the six month period ending June 30, 2003,
decreased 75 basis points from 3.35% for the six months ended
June 30, 2002, to 2.60% for the six months ended June 30, 2002.

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:

Three Months Ended June 30,
-----------------------------------------------------------
2003 2002
---------------------------- ----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
(Dollars in Thousands)

ASSETS
Interest-earning assets:
Interest-earning deposits $141,118 $ 360 1.02% $ 73,871 $ 290 1.57%
Investment securities 19,308 184 3.81 11,280 205 7.27
Mortgage-backed securities 32,315 499 6.18 57,981 910 6.28
Net loans 292,283 6,114 8.37 317,322 6,761 8.52
-------- ------ -------- ------
Total interest-earning assets 485,024 $7,157 5.90% 460,454 $8,166 7.09%
-------- ------ -------- ------
Noninterest-earning assets 10,367 27,267
Total assets $495,391 $487,721
======== ========
LIABILITIES
Interest-bearing liabilities:
Now checking accounts $ 23,043 $ 44 0.76% $ 15,701 $ 62 1.58%
Money market accounts 76,049 274 1.44 55,075 505 3.67
Savings deposits 95,317 341 1.43 101,764 431 1.69
Certificates 227,279 1,871 3.29 227,983 2,355 4.13
-------- ------ -------- ------
Total deposits 421,688 2,530 1.20 400,523 3,353 3.35
Borrowed money 1,091 6 2.20 13,310 93 2.79
------ ------
Total interest-bearing liabilities 422,779 2,536 2.40% 413,833 3,446 3.33%
-------- --------
Non-interest-bearing liabilities 25,765 29,898
Total liabilities 448,544 443,731
Retained earnings or shareholders' equity 46,847 43,990
Total liabilities and retained earnings or
shareholders' equity $495,391 $487,721
======== ========
Net interest income $4,621 $4,720
====== ======
Interest rate spread 3.50% 3.76%
Net yield on interest-earning assets 3.81% 4.10%
Ratio of interest-earning assets to interest-
bearing liabilities 1.15x 1.11x

Six Months Ended June 30,
-----------------------------------------------------------
2003 2002
---------------------------- ----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
(Dollars in Thousands)

ASSETS
Interest-earning assets:
Interest-earning deposits $130,952 $ 690 1.05% $ 62,227 $ 486 1.56%
Investment securities 15,418 321 4.16 10,911 385 7.06
Mortgage-backed securities 35,546 1,097 6.17 59,940 1,887 6.30
Net loans 298,351 12,156 8.15 319,113 13,064 8.19
-------- ------- -------- -------
Total interest-earning assets 480,267 $14,264 5.94% 452,191 $15,822 7.00%
-------- ------- -------- -------
Noninterest-earning assets 9,700 29,810
Total assets $489,967 $482,001
======== ========
LIABILITIES
Interest-bearing liabilities:
Now checking accounts $ 21,696 $ 127 1.17% $ 13,726 $ 110 1.60%
Money market accounts 72,360 614 1.70 49,839 827 3.32
Savings deposits 94,254 827 1.75 108,300 932 1.72
Certificates 233,686 3,921 3.36 227,579 4,867 4.28
-------- ------- -------- -------
Total deposits 421,996 5,489 2.60 399,444 6,736 3.37
Borrowed money 1,089 16 2.94 13,307 174 2.62
------- -------
Total interest-bearing liabilities 423,085 5,505 2.60% 412,751 6,910 3.35%
-------- --------
Non-interest-bearing liabilities 20,184 26,115
Total liabilities 443,269 438,866
Retained earnings or shareholders' equity 46,698 43,135
Total liabilities and retained earnings
or shareholders' equity $489,967 $482,001
======== ========
Net interest income $ 8,759 $ 8,912
======= =======
Interest rate spread 3.34% 3.65%
Net yield on interest-earning assets 3.65% 3.94%
Ratio of interest-earning assets to interest-
bearing liabilities 1.14x 1.10x

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 borrower's ability to pay, prior loss
experience within the portfolio, current economic conditions and
the results of the most recent regulatory examinations. PSB had
had a provision for loan losses of $45,000 and $45,000 during the
three and six months ended June 30, 2003 compared to $158,000 and
$462,000 for the three and six months ended June 30, 2002.
Additionally, PSB had charge-offs against the allowance for loan
losses of $150,000 and $322,000 during the three and six month
periods ended June 30, 2003, respectively and recoveries against
the allowance for loan losses of $40,000 and $100,000 during the
three and six month periods ended June 30, 2002, respectively.

Non-interest Income

Non-interest income consists of gain on sale of loans,
service charges, rental income and other income. Non-interest
income decreased by $40,000, or 6.27%, to $598,000 for the three
months ended June 30, 2003, from $638,000 for the three months
ended June 30, 2002, and by $674,000 or 38.74% for the six months
ended June 30, 2003, to $1.1 million from $1.7 million for the
six months ended June 30, 2002. The decrease for the three and
six month periods ended June 30, 2003, was a result of decreases
in service fees on deposit accounts, as a result of the
relationship program products made available to customers in
2003. The purpose of the program is to encourage our customers
to maintain combined accounts which will allow them to take
advantage of free services. Although the fee income has
decreased the Bank believes this product will attract customers
to use or take advantage of additional services, which will
ultimately generate new business and future fee income. This
decrease in non-interest income was mitigated by the sale of an
asset of a subsidiary resulting in a one time gain; and a refund
of past taxes related to the Jade acquisition.

Non-interest Expense

Non-interest expense increased by 3.18%, from $4.1 million
for the three months ended June 30, 2002 to $4.3 million for the
three months ended June 30, 2003. For the six months ended
June 30, 2003 non-interest expense decreased by 3.01%, to
$8.2 million from $8.5 million for the six months ended June, 30,
2002. The principal reason for the decrease in non-interest
expense for the six month period of 2003 was a decrease in other
operating expenses which were higher in the same period of 2002
due to the costs associated with the purchase and installation of
new core software and hardware.

The following table provides a summary of non-interest
expense, by category of expense, for the six months ended
June 30, 2003, and 2002:

Six months ended June 30,
-------------------------
2003 2002
------ ------
(In thousands)

Salaries and employment benefits $4,266 $4,191
Rent and occupancy expense 999 803
Professional fees 585 458
FDIC insurance expense 36 36
General insurance 108 127
Advertising 87 173
Data processing fees 125 124
Director fees 151 192
Other operating expense 1,852 2,360
------ ------
Total $8,209 $8,464

Provision for Income Taxes

Income tax provisions for the three and six month periods
ended June 30, 2003 were $302,000 and $507,000, respectively,
compared to $280,000 and $606,000, respectively, for the same
periods 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 include increases
in core deposits, sales of certificates of deposits, the
amortization and prepayment of loans and mortgage-backed
securities, and maturities of investment securities and other
short-term investments. The liquidity position of PSB is also
strengthened by a $173 million credit facility with the Federal
Home Loan Bank ("FHLB"). Advances are secured by FHLB stock and
qualifying mortgage loans. PSB had no outstanding borrowings from
the FHLB as of June 30, 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 six months ended June 30, 2003, net cash
used in operating activities was $5.8 million, compared to net
cash provided by operating activities of $6.2 million for the
same period of 2002. During the six months ended June 30, 2003,
net cash provided by investing activities was $25.7 million,
compared to net cash used in investing activities of $7.3 million
for the same period of 2002. Financing activities used net cash
of $6.2 million during the six months ended June 30, 2003,
compared to $22.4 million in net cash provided by financing
activities for the same period of 2002. The net result of these
items was a $13.7 million increase in cash and cash equivalents
for the six months ended June 30, 2003, compared to a
$21.3 million increase in cash and cash equivalents for the same
period of 2002.

Interest Rate Sensitivity

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 any significant 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

PSB is required to maintain minimum ratios of Tier I and
total capital to total "risk weighted" assets and a minimum
Tier I leverage ratio, as defined by the banking regulators.
PSB's liquidity is quantified through the use of a standard
liquidity ratio of liquid assets (cash and cash equivalents,
investment securities available-for-sale, mortgage-backed
securities available-for-sale and Federal Home Loan Bank stock)
to short-term borrowings plus deposits. At June 30, 2003, PSB was
required to have a minimum Tier I and total capital ratios of
6.0% and 10.0%, respectively, and a minimum Tier I leverage ratio
of 4.0%. PSB's actual Tier I and total capital ratios at
June 30, 2003, were 15.10% and 16.23%, respectively, and PSB's
Tier I leverage ratio was 9.32%. These ratios exceed the
requirements for classification as a "well capitalized"
institution, the industry's highest capital category.

On June 30, 2003, PSB was in compliance with regulatory
capital requirements as shown in the following table:

Well
Capitalized At June 30, At December 31,
Ratios 2003 2002
----------- --------------------- ---------------------
PSB Bank PSB Bank
--------- --------- --------- ---------

Tier I Capital $ 46,153 $ 36,341 $ 44,862 $ 35,346
Tier II Capital 3,452 3,428 3,630 3,608
-------- -------- -------- --------
Total Qualifying Capital $ 49,605 $ 39,769 $ 48,492 $ 38,954

Risk Adjusted Total Assets $305,673 $302,519 $313,433 $310,831

Tier I Risk Based Capital Ratio 6.00% 15.10% 12.01% 14.31% 11.37%
Total Risk Based Capital Ratio 10.00% 16.23% 13.15% 15.47% 12.53%
Leverage Ratio 5.00% 9.32% 7.38% 9.10% 7.22%

Average Assets 495,368 492,250 492,749 489,748

FINANCIAL CONDITION

General

PSB's total assets decreased $7.8 million or 1.57% from
$496.8 million at December 31, 2002, to $489.0 million at
June 30, 2003. The decrease in PSB's assets was primarily
attributable to time deposits decreasing by approximately
$6.0 million, as of June 30, 2003.

At June 30, 2003, PSB's net loan portfolio totaled
$251.3 million compared to $288.6 million at December 31, 2002.
The decrease is primarily attributable to a decrease in the
volume of one-to four-family mortgages, construction, and
consumer loans as indicated in the tables below.

The following tables summarize the loan portfolios of PSB by
loan category and amount at June 30, 2003, compared to
December 31, 2002, respectively. From time to time,
TransNational Mortgage Corp., a subsidiary of PSB, 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 (Dollars in thousands):

At June 30, At December 31,
2003 2002
------------------ ------------------
Amount Percent Amount Percent Variance % Change
-------- ------- -------- ------- --------- --------

Real Estate Loans:
One-to four-family* $ 78,363 30.72% $106,496 36.40% $(28,133) -26.42%
Construction loans 24,729 9.69% 28,853 9.86% (4,124) -14.29%
Five or more family residence 13,007 5.10% 4,082 1.39% 8,925 218.64%
Nonresidential 93,794 36.77% 102,739 35.12% (8,945) -8.71%

Commercial loans 18,094 7.09% 16,720 5.72% 1,374 8.22%
Consumer loans 27,083 10.63% 33,666 11.51% (6,583) -19.55%
-------- ------ -------- ------ -------- ------
Total loans $255,070 100.00% $292,556 100.00% $(37,486) 12.81%
======== ====== ======== ====== ======== ======
Less:
Unearned fees and discounts $ 344 $ 323
Undisbursed loan proceeds - -
Allowance for loan losses 3,426 3,603
-------- --------
Net Loans $251,301 $288,630
======== ========

* Does not include loans held for sale

Total investment securities (including mortgage-backed
securities) increased $9.9 million, or 17.62%, to $66.1 million
at June 30, 2003, from $56.2 million at December 31, 2002.

Cash and cash equivalents, including interest-earning
deposits with banks, increased $13.7 million or 12.42% to
$123.9 million at June 30, 2003, from $110.3 million at
December 31, 2001.

Total liabilities decreased $8.5 million or 1.89% to
$442.1 million at June 30, 2003 from $450.6 million at
December 31, 2002. This decrease primarily reflects a decrease
in time deposits by approximately $6.0 million, as of June 30,
2003.

We have implemented a disciplined asset and liability
management process in the second quarter of 2003 to manage our
deposit and loan pricing. Through this process we have
significantly lowered our cost of deposits and reduced interest
rate risk. Our strategies have been directed to increasing the
attractiveness of our core deposit products. As we continue to
execute this strategy it will provide the bank with greater
flexibility to react to changes in the interest rate environment

Asset Quality

Allowance for Loan Losses

The allowance for possible loan losses is funded through a
provision for possible loan losses charged to expense. Loans are
charged against the allowance for possible loan losses when
management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes
will be adequate to absorb loan losses on existing loans that may
become uncollectible based on evaluations of the collectibility
of loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review
of specific problem loans and current economic conditions that
may affect a borrower's ability to pay. These estimates are
particularly susceptible to change that may result in a material
adjustment to the allowance for loan losses. As adjustments
become identified, they are charged against earnings for the
period in which they become known. Management believes that it
makes an informed judgment based upon available information.

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 reflect the
current risk to PSB. As a general rule, special mention assets
will have a minimum reserve of 3%, substandard assets will have a
minimum reserve of 20%, 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.

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. 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 increased $16,000 or
0.21% to $4.88 million at June 30, 2003, from $4.87 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
June 30, 2003 and December 31, 2002:

At June 30, At December 31,
2003 2002
----------- ---------------
(Dollars in thousands)
Loans past due 90 days or more as
to interest or principal and
accruing interest $ - $ -
Nonaccrual loans 4,423 4,480
------ ------
Total nonperforming loans 4,423 4,480
Real estate owned (REO) 455 382
------ ------
Total nonperforming assets $4,878 $4,862
====== ======

Nonperforming loans to total loans 1.73% 1.53%
Nonperforming assets to total
assets 1.00% 0.98%
Allowance for loan losses to total
loans* 1.34% 1.23%
Allowance for loan losses to
Non-performing loans* 77.46% 80.42%
Allowance for loan losses to
Non-performing assets 70.23% 74.11%
Net charge-offs as a percentage of
total loans 0.04% 0.28%

* Does not include loans held-for-sale

Item 3. Quantitative and Qualitative Disclosures About Market
Risk

There has been no material change in PSB's assessment of its
sensitivity to market risk since its presentation in the 2002
Annual Report on Form 10-K filed with the Securities and Exchange
Commission.

ITEM 4. CONTROLS AND PROCEDURES

PSB's management conducted an evaluation, under the
supervision and with the participation of PSB's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of PSB's disclosure controls and procedures
as of June 30, 2003. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that
PSB's disclosure controls and procedures are effective in
alerting them in a timely manner to material information required
to be included in PSB's SEC reports. In addition, PSB's
management, including the Chief Executive Officer and Chief
Financial Officer, reviewed PSB's internal controls, and there
have been no significant changes in PSB's internal controls or in
other factors that could significantly affect those controls
subsequent to the date of their last evaluation.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 2. Changes in Securities and Use of Proceeds.

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) Exhibits.

31.1 Certification of Anthony DiSandro
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.

31.2 Certification of John Carrozza pursuant
to Section 302 of the Sarbanes-Oxley Act
of 2002.

32 Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.

(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/Anthony DiSandro
--------------------------------
Anthony DiSandro,
President, Chief Executive
Officer, and Director

By:/s/John Carrozza
--------------------------------
John Carrozza,
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)

August 14, 2003

Exhibit Index

Exhibit No. Document
- ----------- --------

31.1 Certification of Anthony DiSandro pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002.

31.2 Certification of John Carrozza pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002.

32 Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.