PSB BANCORP INC - 10-K Annual Report

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

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, for the fiscal year ended
December 31, 2002, or

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

Commission file number: 000-24601

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

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

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock (no par value)

Indicate by checkmark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Yes /X/ No / /

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

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The aggregate market value of the voting and non-voting common equity of the
Registrant held by nonaffiliates, based on the average between the closing bid
and the closing asked prices as of March 28, 2002 was $6.90. As of March
28, 2002, the Registrant had 4,534,611 shares of common stock outstanding.

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

As of June 30, 2002 the aggregate market value of the 4,534,611 shares of
voting and non-voting common equity of the Registrant outstanding on such
date, held by non-affiliates of the Registrant, was approximately
$35,369,966. This figure is based on the last known sales price, prior to
June 30, 2002, reported to the Registrant of $7.80 per share for Common
Stock. Although directors, officers and five percent beneficial owners of the
Registrant were assumed to be "affiliates" of the Registrant for purposes of
this calculation, the classification is not to be interpreted as an admission
of such status.

Documents incorporated by reference: None

2

PSB BANCORP, INC.

FORM 10-K

For the Year Ended December 31, 2002

Table of Contents

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PART I

ITEM 1. BUSINESS

PSB Bancorp, Inc. ("PSB") was organized as a Pennsylvania business
corporation on October 3, 1997 for the purpose of becoming a holding company for
First Penn Bank (the "Bank.") PSB is subject to regulation by the Federal
Reserve Bank of Philadelphia, and its principal business is the ownership of
First Penn Bank. At December 31, 2002, PSB had total assets of $496.8 million,
total deposits of $442.2 million and shareholders' equity of $46.2 million.

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

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

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

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

Historically, the Bank focused its lending activities primarily on the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences for retention in the Bank's portfolio. As part of a
strategy to diversify its loan portfolio, achieve a higher net interest
margin, and reduce interest rate risk, the Bank has increased its origination
of

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construction loans, commercial real estate loans, commercial business loans,
multifamily real estate loans, consumer loans, and student loans. The Bank is
continuing to pursue its strategy of increasing its concentration in commercial
lending.

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

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

The Bank's principal sources of funds are deposits and the principal and
interest payments on loans, investment securities, and mortgage-backed
securities. The Bank has available credit with the Federal Home Loan Bank of
Pittsburgh ("FHLB.") At December 31, 2002, the Bank had no advances outstanding
with the FHLB. The Bank's principal source of income is interest received from
loans, investment securities and mortgage-backed securities. The Bank's
principal expenses are the interest paid on deposits and borrowings and the cost
of employee compensation and benefits.

BUSINESS STRATEGY

PSB's strategy is to maximize profitability by providing quality deposit
and loan products in an efficient manner. Generally, PSB seeks to implement this
strategy by emphasizing retail deposits as its primary source of funds and by
maintaining a substantial part of its assets in locally-originated residential
first mortgage, commercial real estate loans, commercial business loans,
construction loans, student loans, mortgage-backed securities, and other liquid
investment securities. PSB's business strategy incorporates the following
elements: (1) increasing deposits by expanding its retail branch network to
include other contiguous segments of the metropolitan Philadelphia market, (2)
expanding its lending operations throughout the metropolitan Philadelphia area
and the adjacent counties of Pennsylvania, New Jersey, and Delaware, and (3)
increasing net interest income and reducing interest rate risk by emphasizing
primarily the origination of commercial real estate, construction, commercial
business loans, and consumer loans that generally bear higher interest rates and
have shorter terms than residential mortgage loans.

SUBSIDIARIES

PSB has three subsidiaries: First Penn Bank, Jade Abstract Company, and
Jade Insurance Company. Jade Abstract Company is engaged in the business of
issuing title insurance for residential and commercial real estate properties.
Jade Insurance Company is an inactive corporation that was formed by Jade to act
as an insurance agency. First Penn Bank owns three

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direct subsidiaries and one indirect subsidiary as follows: Transnational
Mortgage Corp. is engaged in a mortgage banking business, PSA Service Corp.
conducts real estate appraisals, processes credit applications and provides
other services in connection with the origination of loans, PSA Financial Corp.
primarily originates business loans and commercial real estate loans. PSA
Financial Corp.'s subsidiary, PSA Consumer Discount Company, primarily
originates consumer loans.

PERSONNEL

As of December 31, 2002, PSB and the Bank had 132 full-time and 5 part-time
employees. The Bank is not a party to any collective bargaining agreements.

COMPETITION

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

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

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

REGULATION OF FIRST PENN BANK

As a state-chartered bank, the Bank is subject to regulation, supervision,
and regular examination by the Pennsylvania Department of Banking (the
"Department") and is subject to the applicable provisions of the Pennsylvania
Banking Code of 1965, as amended (the "Banking Code.") The Bank is a member of
the Federal Reserve System and is subject to regulation, supervision, reporting
requirements, and regular examinations by the Federal Reserve Board. In
addition, the Bank's deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to a maximum of $100,000 per insured account holder.
Some aspects of the lending and deposit business that are regulated by the
Federal Reserve Board and the FDIC include personal lending, commercial lending,
mortgage lending, reserve requirements against certain deposit and loan accounts
and the maintenance of the requisite capital to asset ratios. The Bank is also
subject to numerous federal, state, and local laws and regulations that set
forth specific restrictions and procedural requirements with respect to the
extension of credit, credit practices,

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the disclosure of credit terms, and discrimination in credit transactions. As a
consequence of the extensive regulation of commercial banking activities in the
United States, the Bank's business is particularly susceptible to changes in
federal and state legislation and regulation that may negatively affect the cost
of doing business.

In December of 1992, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted. Among other things, FDICIA provided
increased funding for the FDIC Bank Insurance Fund ("BIF") and provides for
expanded regulation of depository institutions and their affiliates, including
parent holding companies. FDICIA provides the federal banking agencies with
broad powers to take corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are categorized as "well-capitalized," "adequately-capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." A depository institution's capital tier will depend upon
where its capital levels are in relation to various relevant capital measures,
which will include a risk-based capital measure, a leverage ratio, and certain
other factors. A bank is deemed to be "well-capitalized" if it has a total
risk-based capital ratio of 10.0% or greater, a tier 1 risk-based capital ratio
of 6.0% or greater, and a leverage ratio of 5.0% or greater. At December 31,
2002, First Penn Bank was "well-capitalized" under these regulations.

REGULATION OF PSB

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

Under Federal Reserve policy, PSB is expected to act as a source of
financial strength to the Bank and to commit resources to support the Bank,
i.e., to downstream funds to the Bank. Any capital loans by PSB to the Bank are
subordinate in right of payment to deposits and to certain other indebtedness of
the Bank. In the event of PSB's bankruptcy, any commitment by PSB to a federal
bank regulatory agency to maintain the capital of the Bank will be assumed by
the bankruptcy trustee and entitled to a priority of payment.

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

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SARBANES-OXLEY ACT OF 2002

On July 30, 2002, the President signed into law the Sarbanes-Oxley Act
of 2002. The stated goals of this sweeping legislation are to enhance
penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability
of corporate disclosures under the federal securities laws. The
Sarbanes-Oxley Act generally applies to all companies, including PSB, that
file or are required to file periodic reports with the Securities and
Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange
Act.") The legislation includes provisions, among other things, governing the
services that can be provided by a public company's independent auditors and
the procedures for approving such services, requiring the chief executive
officer and chief financial officer to certify certain matters relating to
the company's periodic filings under the Exchange Act, requiring expedited
filings of reports by insiders of their securities transactions and
containing other provisions relating to insider conflicts of interest,
increasing disclosure requirements relating to critical financial accounting
policies and their application, increasing penalties for securities law
violations, and creating a new public accounting oversight board, a
regulatory body subject to SEC jurisdiction with broad powers to set
auditing, quality control and ethics standards for accounting firms. The
legislation also requires the national securities exchanges and Nasdaq to
adopt rules relating to certain matters, including the independence of
members of a company's audit committee as a condition to listing or continued
listing. Given the extensive Securities and Exchange Commission role in
implementing rules relating to many of the new requirements, the final scope
of these requirements remains to be determined at this time, although PSB
does not believe that the application of these new rules to PSB as they
become effective will have a material effect on its financial position or
results of operations.

NATIONAL MONETARY POLICY

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

Bank profitability is significantly dependent on interest rate
differentials. In general, the difference between the interest paid by a bank
on its deposits and borrowed money and the interest received by a bank on
securities held in its investment portfolio, and loans originated and
maintained by the bank comprise the major portion of a bank's earnings. Thus,
the earnings and growth of a bank will be subject to the influence of
economic conditions, both domestic and foreign, and on the levels of and
changes in interest rates. The monetary policies and regulations of the
Federal Reserve have had a significant effect on the operating results of
commercial banks

8

in the past and are expected to continue to do so in the future. The effects of
such policies upon the future business, earnings and growth of the Bank cannot
be predicted.

DIVIDEND LIMITATIONS

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

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

TRANSACTIONS WITH AFFILIATES

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

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ITEM 2. DESCRIPTION OF PROPERTY

As of December 31, 2002, the Bank conducted its business through an
executive/administrative office and 12 full-service branch offices. The
aggregate net book value of the Bank's office premises and equipment was $3.0
million as of December 31, 2002. The Bank is leasing its center city
Philadelphia, Pennsylvania full-service office and executive office for a
term of eleven years, it's 1632 Walnut Street, Philadelphia, Pennsylvania
office for ten years, its Media, Pennsylvania office for a term of four
years, its Chesterbrook, Pennsylvania office for a term of five years, and
its 23rd Street, Philadelphia, Pennsylvania office, on a month to month
basis. Lease expense for the years ended December 31, 2002, 2001, and 2000
was $740,000, $520,000, and $468,000, respectively.

ITEM 3. LEGAL PROCEEDINGS

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

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

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

Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties
in which the Bank holds security interests, claims involving the making and
servicing of real property loans, and other issues incident to the Bank's
business. At this time, there are no such claims or proceedings that are
material to the operations of the Bank.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

PSB's annual meeting of shareholders was held on December 30, 2002. The
following matter was voted upon and approved by the vote indicated.

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Matter No. 1

The election of two Class II directors to hold office for three years from
the date of election:

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

ITEM 6. SELECTED FINANCIAL DATA

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

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

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

GENERAL

PSB's results of operations depend primarily on the Bank's net interest
income, which is the difference between interest income on interest-earning
assets, and interest expense on its interest-bearing liabilities. Its
interest-earning assets consist primarily of loans receivable, investment
securities, and interest earning deposits while its interest-bearing
liabilities consist primarily of deposits. 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 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

Statement 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 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 Financial Corp.,
PSB recognized a cumulative effect of an accounting change of $1.3 million
which represented the remaining unamortized portion of negative goodwill.

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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 evaluaton 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. Credit exposures deemed to be uncollectible are charged against the
allowance 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 reviews PSB's allowance for loan losses. The regulators
may require the Banks to recognize additions to the allowance for credit
losses based on their judgements about information available to them at the
time of their examination.

Income Taxes

Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities. Based upon the review of all components of
the deferred tax assets and liabilitites, future taxable income of PSB and
regulatory guidelines, Management has determined that no allowance is deemed
necessary at December 31, 2002. However, circumstances could arise that would
require management to revisit the need for such an allowance.

PERFORMANCE OVERVIEW

PSB's net income for 2002 was $1.8 million or $0.42 on a diluted per
share basis before the cumulative effect of an accounting change and $3.1
million or $0.74 on a diluted per share basis after the cumulative effect of
an accounting change,

14

compared to net income of $3.0 million or $0.72 per diluted share for 2001
and net income of $165,000 or $0.04 per diluted share for 2000. The results
for 2002 were impacted by an additional provision for loan losses of $830,000
or $0.20 per share in the fourth quarter and non-recurring expenses related
to the cost of a computerized accounting system conversion during 2002 of
$702,000 or $0.17 per share. PSB also realized a facility fee of $482,000 or
$0.11 per share in the fourth quarter. The overall increase in PSB's revenue
in 2001 from 2000 was primarily due the acquisition of the income producing
assets of Jade, and a $2.5 million equity investment write-down in 2000.

Upon adoption of SFAS No. 142, on January 1, 2002, after the revaluation
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 related to
the Jade acquisition.

In the fourth quarter of 2002, management increased the loan loss
reserve by $803,000 in accordance with the application of Staff Accounting
Bulletin (SAB) No. 102 for calculating the reserve for loan losses. The
additional provision was not necessitated by any specific problem loan but
was based on an expected increase in the commercial and consumer loan
portfolio which is more susceptible to risk, as well as any adjustments to
the economic component analysis. Management believed an increase in the loan
loss reserve was warranted.

On November 2, 2002, the Bank completed a successful core hardware and
software conversion to the OSI system from the Fiserv Summit system to
enhance the quality of our banking services at a cost of $702,000. Management
recognized that the Fiserv Summit system was satisfactory for the short term
needs of the Bank, however, it was determined that the system would not be
adequate to support the Bank's future growth plans as a commercial bank.

Additionally, PSB received a facility fee of $482,000 in partial
consideration for the origination of a commercial real estate loan. The
borrower agreed to pay to the Bank a fee equal to 25% of the borrower's net
receipts. This amount was payable upon the occurrence of (i) the sale by the
borrower of its interest in the real property, or (ii) the date that is six
months after the date the borrower acquires title to all or a portion of the
real property. The Bank realized a facility fee income of $482,000 in the
fourth quarter of 2002 from this loan.

NET INTEREST INCOME AND AVERAGE BALANCES

Net interest income is the key component of the Bank's profitability
structure and is managed in coordination with the Bank's interest rate
sensitivity position. Net interest income in 2002 of $18.4 million was $5.5
million or 42.6% higher than 2001 net interest income of $12.9 million. The
Bank's net interest income of $12.9 million in 2001 was $2.4 million or 22.9%
higher than 2000's net interest income of $10.5 million. In 2002, total
interest income increased $4.8 million to $31.7 million from $26.9 million in
2001. In 2001 total interest income increased $5.8 million to $26.9 million
from $21.1 million in 2000. The Bank had a decrease in total interest
expense in 2002 of $759,000 compared to an increase in 2001 of $3.4 million.
In 2002, both net interest income; and interest income increased primarily
due to the acquisition of the Jade loan portfolio.

15

The Bank's net interest margin, net interest income divided by total
average interest-earning assets, increased 78 basis points to 4.07% in 2002
from 3.29% in 2001. The increase is related to a facility fee of $482,000
realized in the fourth quarter and an improvement in the Bank's yield on
other interest-earning assets and a lower cost of funds primarily time
deposits and borrowed funds. In 2001, the net interest margin decreased 87
basis points to 3.29% in 2001 from 4.16% in 2000, primarily due to an
increase in the volume of the Bank's variable-rate loan portfolio due to the
acquisition of Jade and an overall decline of interest rates resulting from a
steady reduction of the prime rate by the Federal Reserve.

The Bank's net interest spread, the difference between the yield on
interest-earning assets and the rates paid on interest- bearing liabilities,
increased 100 basis points to 3.80% in 2002 from 2.80% in 2001. In 2001, the
Bank experienced a decrease of 37 basis points to 2.80% from 3.17% for 2000.
During the twelve month period of 2002, the Bank experienced an overall increase
in interest-earning assets of 15 basis points to 7.00% in 2002 from 6.85% in
2001 and an overall decrease in interest-bearing liabilities. The rate paid on
those liabilities decreased by 85 basis points to 3.20% in 2002 from 4.05% in
2001. Although in 2001, the Bank experienced an overall increase in
interest-bearing liabilities, the rate paid on those liabilities decreased by
115 basis points to 4.05% from 5.20% in 2000, while the yield earned on
interest- earning assets decreased a greater 152 basis points, resulting in the
compression of the net interest spread.

The Bank's yield on average interest-earning assets increased to 7.00%
for 2002 compared to 6.85% in 2001. In 2000, the Bank's yield on average
interest-earning assets was 8.37%. Average loans of $320.0 million at
December 31, 2002 represented 71% of total interest-earning assets, providing
an average yield of 8.25%, average loans of $275.8 million at December 31,
2001, represented 70% of total average interest-earning assets, and provided
an average yield of 7.77%, compared to average loans of $167.1 million at
December 31, 2000, representing 66% of total average interest-earning assets,
and providing an average yield of 9.60%. The 48 basis point increase in the
yield on the loan portfolio in 2002 was primarily due to a $482,000 facility
fee received in the fourth quarter. The substantial decrease in the yield on
the loan portfolio in 2001 was due to the general decrease in overall
interest rates due to numerous and rapid decreases in the federal funds rate
inacted by the Federal Reserve. Average investments and interest-earning
deposits with banks increased $16.0 million or 13.67% at December 31, 2002,
compared to an increase of $32.0 million or 37.36% at December 31, 2001. At
December 31, 2001, average investments and interest-earning deposits with
banks increased $31.9 million or 37.36% to $117.3 million, from $85.4 million
at December 31, 2000. The increase in average investments and
interest-earning deposits with banks in 2002 is primarily due to an increase
in deposits and a decrease in loans. Due to the volatile market, consumers
have become more conservative in investing their funds. Instead of investing
in the stock market they have chosen to invest in safer instruments such as
money markets and time deposits. Due to the competitive market on interest
rates, the bank has experienced a high volume of run-off of consumer and
mortgage loans.

At December 31, 2002, total average-interest bearing liabilities increased
$68.3 million or 19.75% to $414.1 million compared to $345.8 million at December
31, 2001. Total average interest-bearing liabilities decreased $141.5 million or
69.24% to 345.8 million at December 31, 2002, from $204.1 million at December
31, 2000. Total interest expense decreased $759,000 at

16

December 31, 2002 to $13.3 million as compared to a total interest expense
decrease of $3.4 million to $14.0 million at December 31, 2001, from $10.6
million in 2000. The Bank's cost of funds over the last three years was 3.20% in
2002, 4.05% in 2001 and 5.20% in 2000.

The increase in the PSB's liquidity position at December 31, 2002 is
attributable to higher than anticipated prepayments on loans and investment
securities, an increase in deposit activity, lower than anticipated loan
volume in the fourth quarter of 2002, and the uncertainties within the
current interest rate environment.

As management continues to implement its strategic mission of growth and
profitability by deploying more liquid assets for continued loan growth,
primarily in consumer and commercial lending, liquidity levels will resume more
acceptable and traditional target levels and ratios. To the extent that
liquidity exceeds projected levels, excess liquidity will be reinvested in the
Bank's normal investment activities.

AVERAGE BALANCE SHEETS AND RATE/YIELD ANALYSIS

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

17

assets to interest-
bearing liabilities 1.09x 1.24x 1.14x

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

PROVISION FOR LOAN LOSSES

The provision for loan losses represents the charge against earnings
that is required to fund the allowance for loan losses. The Bank determines
the level of the allowance for loan losses through a regular review of the
loan portfolio. Management's evaluation of the adequacy of the allowance for
loan losses is based upon an examination of the portfolio as well as such
factors as declining trends, the volume of loan concentrations, adverse
situations that may affect the borrower's ability to pay, prior loss
experience within the portfolio, current economic conditions and the results
of the most recent regulatory examinations. The Bank allocated $1.4 million,
$270,000 and $100,000 as additions to the allowance for loan loss and had
charge-offs against the allowance of $856,000, $788,000 and $0 for the years
ended December 31, 2002, 2001, and 2000, respectively. The additional
provision was not necessitated by any specific problem loan. Based on an
expected increase in the commercial and consumer loan portfolios which are
more susceptible to risk, as well as any adjustments to the economic
component analysis, management believes an increase in the loan loss reserve
was warranted.

18

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 quarterly by management and utilized for an overall assessment of the
loan loss reserve adequacy, the results of which are reported quarterly to the
Board. 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.

Non-Interest Income

The following table provides a summary of non-interest income, by category of
income, for the three years ended December 31, 2002, 2001, and 2000 (in
thousands):

The major source of non-interest income is income from bank owned life
insurance and service fees on deposit accounts. Non-interest income increased
$1.5 million or 98.26% to $3.1 million in 2002, which is primarily due to the
bank receiving a full year of service fees and other income of Jade compared
to six months in 2001 because the merger of Jade was not effective until July
1, 2001. The increase in the volume of non-interest income in 2001 is
attributable to the acquisition of the fee-bearing deposit accounts of Jade
and the income associated with the Bank Owned Life Insurance investment
acquired from Jade. Without giving effect to the one-time extraordinary loss
on investments of $2.5 million reflecting the write off of

19

the BankZip.com investment in 2000, non-interest income increased $968,000 or
165.18% in 2001 which followed an increase of $65,000 or 12.48% in 2000.

NON-INTEREST EXPENSE

The following table provides a summary of non-interest expense, by category
of expense, for the three years ended December 31, 2002, 2001 and 2000 (in
thousands):

Total non-interest expense for 2002 increased $6.7 million or 64.36% to
$17.1 million from $10.4 million in 2001. Total non-interest expense for 2001
increased $2.1 million to $10.4 million or 24.87% from $8.3 million in 2000.
The increase in other operating expense is primarily due to non-recurring
expenses related to a computer system conversion during 2002 of $702,000. On
November 2, 2002, the Bank completed a successful core hardware and software
conversion to the OSI system from the Fiserv Summit system to enhance the
quality of our banking services. In 2002 and 2001 the increase in
non-interest expense is primarily related to expenses incurred in the
acquisition of Jade, reflecting a full year of non-interest expense in 2002
and six months in 2001.

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.
PSB had an income tax provision of $1.2 million, $755,000 and $10,000 for the
years ended December 31, 2002, 2001, and 2000, respectively.

20

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, 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 $174.4 million credit facility with the FHLB. Advances are secured by
FHLB stock and qualifying mortgage loans. There were no advances outstanding
against this line at December 31, 2002 or at December 31, 2001.

Management anticipates utilizing its liquidity to increase its
commercial lending portfolio during the first half of 2003. In order to
achieve this, management hired three additional commercial lending officers.
Additional liquidity will be utilized to increase the Company's investment
security portfolio in accordance with current ALCO policies and procedures.

Maximizing cash flow over time is crucial to the maintenance of adequate
liquidity. PSB's total cash flow is a product of its operating activities,
investing activities and financing activities. During the twelve month period
ended December 31, 2002, net cash provided by operating activities was $4.8
million, compared to net cash used by operating activities of $1.6 million for
the same period of 2001. During the twelve month period ended December 31, 2002,
net cash provided by investing activities was $25.0 million, compared to net
cash provided by investing activities of $19.6 million for the same period of
2001. Financing activities provided net cash of $25.7 million during the twelve
months ended December 31, 2002, compared to $18.9 million in net cash provided
in financing activities for the same period of 2001. The net result of these
items was a $55.5 million increase in cash and cash equivalents for the twelve
month period ended December 31, 2002, compared to a $36.9 million increase in
cash and cash equivalents for the same period of 2001. The increase in cash and
cash equivalents in 2002 is primarily due to the proceeds received from maturing
investments of $22.7 million, consumer and residential loan due to payoffs of
approximately $7.7 million, and an increase in deposits of $37.6 million.

During 2000, net cash provided by operating activities was $3.6 million,
investing activities provided $24.6 million in net cash and PSB's financing
activities used $27.6 million in net cash. The major components within these two
categories during 2000 were an increase in total loans receivable of $21.2
million and a decrease in investments purchased of $38.9 million. The net result
of these items was a $631,000 increase in cash and cash equivalents for 2000.

21

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.

One tool used by management to gauge the structure of the balance sheet
is a "gap" analysis that categorizes assets and liabilities on the basis of
maturity date, the date of next re-pricing, and the applicable amortization
schedule. This analysis summarizes the matching or mismatching of
rate-sensitive assets versus rate sensitive liabilities according to
specified time periods. Management concentrates on the zero to three month
and one year gap intervals. At December 31, 2002, PSB had a one-year negative
gap of $9.6 million and a gap ratio of 0.93 or 1.31% of total assets as of
that date.

The following table shows the interest rate sensitive data at December 31, 2002
(in thousands):

INTEREST RATE SENSITIVITY ANALYSIS

22

Non interest bearing deposits $ 21,821 $ $ $ 9,992 $ 31,813
NOW accounts 2,089 18,801 20,890
Money market accounts 30,318 30,318 60,636
Savings accounts 19,510 74,144 93,654
Time deposits 16,827 130,568 89,967 1,266 238,628
Borrowed funds 885 190 1,075
Other liabilities $ 3,917 3,917
----------- ----------- --------- --------- -------- ----------
Total liabilities 91,450 130,758 89,967 134,521 3,917 450,613
Shareholder's equity 46,167 46,167
----------- ----------- --------- --------- -------- ----------
Total liabilities and
shareholder's equity $ 91,450 $ 130,758 $ 89,967 $ 134,521 $ 50,081 $ 496,780
=========== =========== ========= ========= ======== ==========

GAP $ 78,671 $ (9,654) $ 42,275 $ (86,693) $(24,599) $ 0

Gap Ratio 1.86 0.93 1.47 0.36 0.51 1.00

Cumulative Gap $ 78,671 $ 69,017 $ 111,292 $ 24,599 $ 0 $ 0

Cumulative Gap Ratio 1.86 1.31 1.36 1.06 1.00 1.00

Management also simulates possible economic conditions and interest rate
scenarios in order to quantify the impact on interest income. The effect that
changing interest rates have on PSB's net interest income is simulated by
increasing and deceasing interest rates. This simulation is known as rate
shocking. The report below forecasts changes in PSB's market value of equity
under alternative interest rate environments. The market value of equity is
defined as the net present value of PSB's existing assets and liabilities.

A plus or minus 300 basis point rate shock test for the internal rate of
return indicates at most limited economic value sensitivity to changes in
interest rates. A rate shock internal rate of return test indicates internal
rate of return reductions as rates rise and larger losses as rates decline. The
Bank's largest exposure is a 52.25% reduction in the internal rate of return in
a minus 100 basis point scenario and a loss of 32.12% in a plus 300 basis point
scenario.

In the event PSB should experience a mismatch in its desired gap ranges or
and excessive decline in its market value of equity resulting from changes in
interest rates, it has a number of

23

options which it could utilize to remedy such a mismatch. PSB could restructure
its investment portfolio through the sale or purchase of securities with more
favorable repricing attributes. It could also emphasize growth in loan products
with appropriate maturities or repricing attributes, or attract deposits or
obtain borrowings with desired maturities.

There are no known trends or any known demands, commitments, events or
uncertainties that will result in, or that are reasonably likely to result in
liquidity increasing or decreasing in any material way.

The commitment expiration periods for commitments of the Company as of
December 31, 2002 are as follows:

CAPITAL ADEQUACY

The Bank is required to maintain minimum ratios of Tier I and total
capital to total "risk weighted" assets and a minimum Tier I leverage ratio,
as defined by the banking regulators. At December 31, 2002, the Bank was
required to have minimum Tier I and total capital ratios of 4.0% and 8.0%,
respectively, and a minimum Tier I leverage ratio of 4.0%. The Bank's actual
Tier I and total capital ratios at December 31, 2002 were 11.37% and 12.53%,
respectively, and the Bank's Tier I leverage ratio was 7.23%. These ratios
exceed the requirements for classification as a "well-capitalized"
institution, the industry's highest capital category. Capital ratios
increased during 2002 over 2001 due to a 3.08% increase in net income versus
only a 2.35% increase in total risk-adjusted assets. Capital ratios decreased
during 2001 over 2000 due to a 106.8% increase in total risk adjusted assets
due to the acquisition of Jade and a decrease in Tier 1 and total capital
from 2000 to 2001. Following are the Bank's capital ratios at December 31,
2002, 2001 and 2000 (Dollars in thousands):

24

Leverage Ratio 7.22% 7.03% 13.21%

Average Assets $ 489,748 $ 463,469 $ 258,709

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

FINANCIAL CONDITION

GENERAL

The company's total assets increased to $496.8 million at December 31,
2002. This represents an increase of 6.1% compared to assets of $467.6
million at December 31, 2001. The increase is attributable to the rapid
deposit growth of the Bank.

At December 31, 2002, PSB's net loan portfolio inclusive of loans held
for sales, totaled $307.5 million as compared to $314.3 million for the year
ended December 31, 2001. This decrease of $6.9 million or 2.20% is primarily
the result of an increase in payoffs of consumer and mortgage loans.

INVESTMENT ACTIVITIES

The Bank's investment portfolio is comprised of mortgage-backed
securities, investment securities, and cash and cash equivalents. The
carrying value of the Bank's investment securities and mortgaged-backed
securities portfolio totaled $54.3 million at December 31, 2002, compared to
$72.0 million at December 31, 2001. The Bank's cash and cash equivalents,
consisting of cash and due from banks, and interest-earning deposits with
other financial institutions, totaled $110.3 million at December 31, 2002,
compared to $54.7 million at December 31, 2001. The deposit growth in the
Bank was attributable to a general trend of consumers choosing to invest
their assets in the safety of bank instruments versus th stock market. The
majority of the Bank's mortgage-backed securities are issued or guaranteed by
the United States Government or agencies thereof. At December 31, 2002,
mortgage-backed securities totaled $45.4 million compared to $66.2 million at
December 31, 2001. The majority of this amount represents securities that
were issued or guaranteed by FNMA, FHLMC or the Government National Mortgage
Association ("GNMA.") The Bank historically maintains high levels of
interest-earning deposits as part of its strategy for meeting liquidity
requirements and improving interest sensitivity.

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

25

Pursuant to SFAS No. 115, which the Bank adopted in 1994, the Bank
classifies its investment securities and mortgage-backed securities as
held-to-maturity, available-for-sale or trading. Available-for-sale and trading
securities are carried at market value, while held-to-maturity securities are
carried at amortized cost. At December 31, 2002, $6.5 million of the Bank's
investment securities and mortgaged-backed securities were classified
held-to-maturity and $51.3 million of the Bank's investment securities and
mortgaged-backed securities were classified available-for-sale. The Bank did not
carry any trading securities at December 31, 2002.

The Bank's Board of Directors has adopted an investment policy that
identifies acceptable types of investments for the Bank and establishes criteria
to guide management in classifying investments as prescribed by SFAS No. 115.
The policy also authorizes the Bank's investment officer to make investments of
up to $1 million. Under the investment policy, the Bank may invest in certain
AAA rated derivative securities. As of December 31, 2002, the Bank had no
collateralized mortgage obligations. The Bank may not invest in high-risk
collateralized mortgage obligations ("CMO") and the Bank's investment officer
must periodically analyze the risk of any CMO held by Bank to determine that
such securities are not within the high-risk category.

On January 29, 1999, PSB purchased 1,600,000 shares of Series A
Convertible Preferred Stock, $.01 par value per share,(the "Preferred Stock")
of McGuire Performance Solutions, Inc. ("MPS"). PSB purchased the shares for
$.78125 per share for a total cost of $1,250,000. In 2000, MPS changed its
name to Iron Bridge Holdings, Inc. ("Iron Bridge")and formed two new
subsidiaries, one adopting the MPS name and the other, Avanti Capital, Inc, a
registered investment advisory company. During the year ended December 31,
2001, and 2000, PSB purchased an additional 375,000 shares and 500,000
shares, respectively, of the Preferred Stock for $1.00 per share for a total
cost $875,000. On December 27, 2002, the founding shareholders of Iron Bridge
purchased from PSB 304,350 shares of preferred stock for $0.88 per share. PSB
owns 87.7% of the Preferred Stock which represents a 49.9% fully diluted
ownership interest in Iron Bridge. The Iron Bridge subsidiary, MPS, is a
nationally recognized firm delivering cost-effective solutions for high
performance total balance sheet management to banks, thrifts, credit unions
and other financial institutions. At December 31, 2002, the value of the
investment in Iron Bridge was approximately $1.6 million.

PSB does have the ability to exercise influence, but not control, over MPS.
Accordingly the investment in MPS is accounted for using the equity method of
accounting. At any time following the fifth anniversary of the original issue
date and prior to the eighth anniversary, or in the event of the death of Dr.
William McGuire, the President of Iron Bridge and MPS, the holders of 60% of
the then outstanding shares of Preferred Stock shall have the right to
require Iron Bridge to redeem their shares at a price equal to the original
purchase price plus accrued and unpaid dividends.

Iron Bridge owns insurance on the life of Dr. McGuire with a face value of $2.5
million to meet its contingent obligation. In event of redemption for reasons
other than death of Dr. McGuire, a payment for 80% of the redemption price is
deferred over a one year period.

On November 16, 1999, PSB invested $2,500,000 in a two year convertible
debenture issued by ZipFinancial.com, Inc., doing business as BankZip, a
start-up internet banking company for community banks. Because the company
ceased operations, wrote off this investment as of December 31, 2000, and
take an after-tax charge to earnings of $1.5 million.

26

CARRYING AND MARKET VALUE OF INVESTMENT AND MORTGAGE-BACKED SECURITIES

The following table sets forth certain information regarding the carrying and
market values of the Bank's investment securities and mortgage-backed securities
in the Bank's held-to-maturity and available-for-sale portfolio at December 31,
2002, 2001 and 2000 (in thousands).

The amortized cost and fair value of PSB's investment securities at
December 31, 2002, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties (in
thousands)
27

INVESTMENT PORTFOLIO MATURITIES

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

LOAN PORTFOLIO

The loan portfolios exhibited mixed results relative to growth
consumer/auto-related financing was adversely impacted by external
macro-economic factors. Competition for commercial business remains strong,
and management continues to look for opportunities that leverage our
strengths, particularly in small business lending. With the shifts in
consumer behavior away from auto-related financing activities management has
moved its efforts more towards the residential, construction, and commercial
real estate markets. We also look to enhance market share in the credit card
and home equity products. This would continue to add to the diversification
of the loan portfolio and help boost growth toward budgeted levels. In
general, credit risk is moderate and slowly increasing.

28

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

Even though growth across product lines remains challenging as national and
global issues adversely impact our market place we still feel there is a large
and very strong market within our local surroundings.

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

Volume for loans secured by one-to four-family residential properties
continues to fluctuate. Year-end 2001 reflects the increases in loan volume
due to the purchase of IGA. Volume variations will continue to be seen
throughout the current period as we manage the growth of the portfolio. In
addition, a continued low rate environment should provide the ability to
remain consistent with past performance. We continue to closely manage the
growth of the portfolio especially in this continued low rate environment.
The Bank has adopted a current philosophy to place all originations as
saleable in order to have an option for potential sale of these lower rate
loans to the secondary market. Risk in this sector remains in the low-to
moderate-range.

Overall growth in the commercial real estate portfolio continues.
Interest rate reductions will spur activity in this sector in spite of other,
less favorable, macro-economic factors. Just as with the residential mortgage
portfolio, commercial real estate is very interest rate sensitive. To achieve
growth in this portfolio, pricing must be carefully formulated to both
attract borrowers and create a reasonable return for the Bank. Construction
lending continues to provide opportunities. Due to the higher levels of
inherent risk in construction lending, these credits are thoroughly
evaluated. Opportunities are more evident in this portfolio. A defensive
stance on long-term fixed rate pricing is necessary to protect already
compressed margins.

Volume for home equity loans continues to fluctuate. Residential loans
decreased by 6% in 2002 due to prepayments despite an increase in new loan
originations of 37%. With a low rate environment, management will continue to
pursue growth in this portion of the consumer loan portfolio but will monitor
the originations of lower interest rate loans as the market begins to recover.

29

To help offset payoffs of current loans, management will be setting
goals for new loan originations with branch managers, management will also
become more aggressive in cross-selling the consumer loan products to the
other subsidiaries of First Penn Bank such as TNMC. Finally, management will
continue to develop loan referral business with outside mortgage brokers.
With the increase in new loan volume, management has implemented new post
closing and document review procedures to preserve loan quality and minimize
delinquency risk. Delinquency rates and charge offs remain good.

At December 31, 2002, the Bank's net loan portfolio totaled $288.6 million,
representing 58.10% of total assets at that date, compared to $297.2 million
representing 63.5% of total assets at December 31, 2001.

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

* Does not include loans held-for-sale

LOAN MATURITIES

The following table sets forth the maturity or period of re-pricing of the
Bank's loan portfolio at December 31, 2002. Demand loans and loans having no
stated schedule of

30

repayments and no stated maturity are reported as due in one year or less.
Adjustable and floating-rate loans are included in the period in which interest
rates are next scheduled to adjust rather than the period in which they
contractually mature, and fixed-rate loans are included in the period in which
the final contractual repayment is due (in thousands).

DELINQUENT LOANS

When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made on the 15th day after a payment is due. In most
cases, deficiencies are cured promptly. If a delinquency extends beyond 60 days,
the loan and payment history is carefully reviewed, additional notices are sent
to the borrower and efforts are made to collect the loan. While the Bank
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.

NON-PERFORMING ASSETS

In 2002, the Bank's level of non-performing assets increased $184,000 or
3.93% to $4.9 million compared to an increase of $587,000 at December 31,
2001 from $4.1 million at December 31, 2000. The increase in 2002 was
primarily due to a new risk rating system implemented in September of 2002
that caused certain items to be recategorized.

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 out of interest income. There are occasional exceptions if the loans
are well secured and in the process of collection. The Bank did not have any
material restructured loans within the meaning of SFAS No. 15 in 2002.

31

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

OTHER REAL ESTATE OWNED

Real estate acquired by the Bank as a result of foreclosure is classified
as other real estate owned ("REO") until it is sold. The REO is initially
recorded at the lower of the related loan balance or fair value of the property
at the date acquired. If the value of the property is less than the loan, less
any related specific loan loss provisions, the difference is charged against the
allowance for loan losses. Any subsequent write-down of REO is charged against
earnings. The Bank had $382,000 and $548,000 of property acquired as a result of
foreclosure at December 31, 2002 and 2001.

CLASSIFIED ASSETS

As part of the Bank's loan review procedures which ultimately result in
the establishment of the Bank's allowance for loan losses, the Bank identifies
and classifies its problem assets into three classifications: "substandard,"
"doubtful" and "loss." Substandard assets have one or more defined weaknesses
and are characterized by the distinct possibility that the Bank will sustain
some loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the Bank is not warranted.
The Bank charges off that portion of an asset as soon as it is classified as a
loss. Exclusive of the Bank's $382,000 of REO, the Bank's classified assets at
December 31, 2002 consisted of $4.5 million of loans classified as substandard,
compared to $4.1 million classified as substandard at

32

December 31, 2001.

ALLOWANCE FOR LOAN LOSSES

PSB has an established process to determine the amount of the allowance
for loan losses, which assesses the risks and losses inherent in its
portfolio. This process provides an allowance consisting of an allocated and
an unallocated component. To determine the allocated component of the
allowance, PSB combines estimates of the reserves needed for loans evaluated
on an individual basis with estimates of reserves needed for general pools of
loans with similar risk characteristics

The methodology for determining the adequacy of the allowance for loan
loss should consider both specific loan risk and general 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 quarterly by
management and utilized for an overall assessment of the loan loss reserve
adequacy, the results of which are being reported quarterly to the Board.

The results of the assessment of the adequacy of the loan loss reserve,
utilizing the risk ratings and economic factors, receives the close attention
of management on an ongoing basis, 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.

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%. Due to the fact that most of the Bank's problem
loans are secured by real estate, management has allocated a majority of the
allowance for loan losses to these real estate collateralized loans. A general
reserve allocation is applied for pools of loans based on risk rating for all
loans not specifically reserved for as described previously.

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

33

The following table sets forth an allocation for the allowance for loan
losses by category. The specific allocations in any particular category may
be reallocated in the future to reflect then current conditions. Accordingly,
management considers the entire allowance available to absorb losses in any
category. (Dollars in thousands)

DEPOSITS

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

34

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

The following tables present the average balances and rates paid on deposits for
each of the years ended December 31, 2002, 2001 and 2000 (Dollars in thousands):

As of December 31, 2002, the Bank had total certificates of deposit of
approximately $230.2 million. The following table summarizes the composition of
these deposits (Dollars in thousands):

The Bank's certificates of deposit in excess of $100,000, which totaled
$46.3 million at December 31, 2002, mature as follows: $10.0 million within
three months, $21.5 million between three and twelve months; and $14.8 million
after twelve months.

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

BORROWINGS

The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional FHLBs subject to supervision and regulation by the Federal
Housing Finance Board. The FHLBs provide a central credit facility primarily for
member institutions. The Bank, as a member of the FHLB of Pittsburgh, is
required to hold shares of common stock in that FHLB in an amount at least equal
to 1% of the aggregate principal amount of its unpaid residential mortgage
loans, home purchase contracts, and similar obligations at the beginning of each
year, or 5% of its advances (borrowings) from the FHLB of Pittsburgh, whichever
is greater. The Bank had a $872,000 investment in the stock of the FHLB at
December 31, 2002, which was in

35

compliance with this requirement. At December 31, 2002, the Bank had no
outstanding borrowings from the FHLB of Pittsburgh.

RECENT ACCOUNTING PRONOUNCEMENTS

On January 1, 2002, PSB adopted SFAS No. 142, Goodwill and Intangible
Assets. This SFAS modifies the accounting for all purchased goodwill and
intangible assets; however, certain provisions of this Statement apply to
goodwill and other intangible assets acquired between July 1, 2001 and the
effective date of SFAS No. 142. SFAS No. 142 includes requirements to test
goodwill and indefinite lived intangible assets for impairment rather than
amortize them, On January 1, 2002, after the revaluation of certain deferred
assets relating to the acquisition of Jade Financial Corp., PSB recognized a
cumulative effect of an accounting change of $1.3 million, which represented
the remaining unamortized portion of negative goodwill.

On January 1, 2002, PSB adopted SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. SFAS No. 144 also changes the
requirements relating to reporting the effects of a disposal or discontinuation
of a segment of a business. The adoption of SFAS No. 144 did not have an impact
on PSB's financial position, results of operations, or cash flows.

In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation
Transition and Disclosure" was issued. SFAS No. 148 amends SFAS No. 123
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The expanded annual disclosure requirements have been provided for the
year ended December 31, 2002. The adoption of SFAS No. 148 did not have an
impact on the financial condition or results of operations of PSB.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

36

ITEM 8. FINANCIAL STATEMENTS

The audited financial statement of PSB Bancorp, Inc. as of December 31,
2002 and 2001 and for the years ended December 31, 2002, 2001, and 2000,
including the report of Grant Thorton, LLP as of December 31, 2002 and 2001
and for the years ended December 31, 2002 and 2001 and the report of PSB's
former auditors for the year ended December 31, 2000, which are included as
Exhibit 99.1 to this Annual Report on Form 10-K, are incorporated herein by
reference.

37

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

NONE

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON; COMPLIANCE
WITH SECTION 16 (a)

The following table sets forth information, as of December 31, 2002, with
respect to the current directors of PSB.

(1) Jade Financial Corp. was acquired by PSB on June 29, 2001.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth for the years ended December 31, 2002, 2001
and 2000 certain information as to the total remuneration paid by the Bank to
executive officers who received salary and bonuses in excess of $100,000 during
such fiscal year.

39

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

**At December 30, 2002, Mr. Anthony Di Sandro was elected Chief Executive
Officer of PSB.

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

(2) Includes directors fees of $31,000, $43,800, $7,800, and $12,000 paid to
Mr. Fumo, Mr. DiSandro, Mr. Polimeno, Mr. O'Connell, and Mr. Incollingo,
respectively, for the year ended December 31, 2002. Includes directors fees
of $24,500, $32,500, and $8,100 paid to Mr. Fumo, Mr. DiSandro, and Mr.
Polimeno respectively, for the year ended December 31, 2001. Includes
directors' fees of $24,000 and $33,200 and $8,400 paid to Mr. Fumo, Mr.
DiSandro, and Mr. Polimeno respectively, for the year ended December 31, 2000.

The following table provides certain information with respect to the number
of shares of common stock represented by outstanding options held by the named
executive officers at December 31, 2002. Also included in the table are the
values for "in-the-money" options that represent the positive difference between
the exercise price of any such options and closing sale price of the common
stock at December 31, 2002.

40

FISCAL YEAR-END OPTION/SAR VALUES

* Based on the market value of the underlying stock at the fiscal year end,
minus the exercise price. The market price on December 31, 2002 was $7.46.

EMPLOYMENT AGREEMENTS PSB and the Bank have entered into employment
agreements (the "Employment Agreements") with Vincent J. Fumo, Chairman and
Chief Executive Officer of PSB, Anthony DiSandro, President of PSB and the Bank,
John J. O'Connell, Vice President of Marketing, and Mario Incollingo, Chief
Operating Officer of the Bank. Under the terms of his Employment Agreement for
2003, Mr. Fumo serves as Chairman of PSB and the Bank at a base salary of
$223,000. Under the terms of his employment agreements for 2003, Mr. DiSandro
serves as President and Chief Executive Officer of PSB and the Bank at a base
salary of $247,000. Mr. O'Connell serves as the Vice President of Marketing of
PSB at a base salary of $176,000. Mario L. Incollingo serves as the Chief
Operating Officer of the Bank at a base salary of $170,000. Each Employment
Agreement provides for an initial term of three years, which will thereafter be
automatically renewed for an additional year on each anniversary date unless
terminated pursuant to its terms by the respective parties.

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

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

41

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

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

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

During the course of 2002, the Committee took into account a variety of
objective and subjective criteria in evaluating the performance of the executive
management of PSB. The Committee assessed in detail the various challenges
facing PSB and the significant competitive pressures within PSB's market area.

In the course of this assessment of competitive salary ranges among other
similarly situated companies, it was noted that competitive executive
compensation packages vary in relationship to these various subjective and
objective factors. A variety of resources were utilized that provided peer data
regarding executive compensation and financial performance of PSB, that included
but was not limited to the "SNL Executive Compensation Review 2002" for both
commercial banks and thrifts, an assessment that reviews executive compensation
and company performance for publicly traded banks and thrifts. Comparisons were
made with institutions located within Southeastern Pennsylvania, the Middle
Atlantic trading area, and relative to national averages. The peer groups
considered in these analyses are not necessarily comprised of the same
institutions used in the peer group for the stock performance graph.

In determining executive compensation for 2002, the Committee established
certain specific objectives for executive management, which included the
execution of the strategic business plan and identifying and completing
acquisition opportunities.

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

42

Mr. Vincent J. Fumo was the Chairman and Chief Executive Officer and Mr.
Anthony DiSandro was the President and Chief Operating Officer of PSB for 2002.
Messrs. Fumo's and DiSandro's salaries and bonuses for 2002 were determined by
the Committee after review of the recent compensation practices of similarly
sized institutions.

James Eastwood, Chairman of
Compensation Committee
Anthony DiSandro, President
Rosanne Pauciello, Secretary
Stephen Marcus, Director

LONG TERM INCENTIVE PLANS

In 2002, The First Penn Bank Cash or Deferred Profit Sharing Plan (401(k))
and the First Penn Bank Profit Sharing Plan were merged into the PSB Bancorp,
Inc. 401(k) Plan. All employees who have attained age 21 and have been credited
with 1,000 hours of service in the previous 12 months are eligible to
participate. Assets of the 401(k) Plan are managed by the 401(k) Plan's
trustees. Mr. Fumo and Mr. DiSandro presently serve as trustees of the 401(k)
Plan.

Under the 401(k) Plan, participants are permitted to make pre-tax reduction
contributions to the 401(k) Plan equal to a percentage of up to 15% of
compensation. For these purposes, "compensation" includes total compensation
(including salary reduction contributions made under the 401(k) Plan sponsored
by the Bank), but does not include compensation in excess of the Code Sections
401(a)(17) limits (presently $200,000 for 2002). The Bank currently matches the
employee contribution up to 3% of compensation. For the 2002 plan year, the Bank
made $105,881 in matching contributions.

Benefits under the 401(k) Plan begin to vest after two years of service in
accordance with the following schedule:

401(k) Plan benefits will be paid to each participant as a straight life annuity
or a qualified joint or survivor annuity. In addition, a participant may elect a
lump sum distribution.

EMPLOYEE STOCK OWNERSHIP PLAN

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

In connection with the conversion and reorganization, the ESOP borrowed
$1,288,540 from PSB to purchase an additional 128,854 shares of PSB Bancorp,
Inc. common stock. PSB also lent sufficient funds to the ESOP to enable the ESOP
to repay the 1995 Loan which had an outstanding principal balance of $234,000 at
December 31, 1998. The loan by PSB to the ESOP

43

will be repaid principally from the Bank's contributions to the ESOP and
dividends payable on Common Stock held by the ESOP over the anticipated 10-year
term of the loan. The interest rate for the ESOP loan is 8.5%. On July 1, 2001,
the IGA Federal Employee Stock Ownership Plan was merged into the ESOP. The
merger of the plans resulted in an additional 375,717 shares of Common Stock
being added to the ESOP holdings.

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

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

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

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

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

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

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

44

1995 STOCK OPTION AND INCENTIVE PLAN

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

Under the 1995 Stock Option Plan, grants of 42,683, 42,683 and 6,876 were
made to Messrs. Fumo, DiSandro and Polimeno. There was no exercise of options
under the 1995 Stock Option Plan at and for the fiscal year ended December 31,
2002.

1995 MANAGEMENT DEVELOPMENT AND RECOGNITION PLANS

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

1998 EMPLOYEE STOCK OPTION PLAN

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

Under this plan, option grants have been made to Messrs. Fumo and DiSandro
for 80,537 and 80,536 shares, respectively. There has been no exercise of
options granted under this plan for the year ended December 31, 2002.

1998 MANAGEMENT RECOGNITION PLAN

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

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

1999 DIRECTOR STOCK OPTION PLAN

The 1999 Director Stock Option Plan (the "1999 Plan") was adopted by the
Board of Directors to provide an incentive program to attract and retain
qualified individuals as directors on both the boards of PSB and the Bank.
Grants under the 1999 Plan can only be made to non-employee directors of PSB
or the Bank and are limited to grants totaling 24,999 options. Under the 1999
Plan, individual option grants of 2,857 shares

45

per director have been made to Mr. Eastwood, Mr. Finley, Mr. Marcus, Mr. Tumini,
Mr. Kenney, Mr. Palermo, and Mr. DeRita. A grant of 4,999 options has been made
to Ms. Pauciello.

2001 PSB BANCORP STOCK INCENTIVE PLAN

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

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

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

- Anthony DiSandro, President and Director of PSB

- Rosanne Pauciello, Secretary and Director of PSB

- Stephen Marcus, Director of PSB

STOCK PERFORMANCE GRAPH

The following graph shows a comparison of total shareholder return on the
common stock, based on the market price of the common stock, with the cumulative
total return of companies on The Nasdaq Stock Market (U.S.) Index and The Nasdaq
Banking Index (U.S.) for the period beginning on December 31, 1997, through
December 31, 2002.

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

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

SUMMARY

46

PSB Bancorp, Inc 100.00 77.93 43.32 40.15 60.10 74.60
The Nasdaq Stock Market (U S) Index
(Broad Market) 100.00 140.10 260.51 158.57 127.87 98.44

Notes:

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

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

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

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

DEFINED BENEFIT PLANS

DEFINED BENEFIT RETIREMENT PLAN

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

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

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

47

YEARS OF SERVICE AND BENEFITS PAYABLE AT RETIREMENT

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

As of December 31, 2002, Mr. Fumo, Mr. DiSandro, and Mr. Polimeno had 26,
24 and 27 years of credited service (i.e. benefit service), respectively.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information furnished to the Bank as
of December 31, 2002, with respect to the beneficial ownership of Common Stock
by (i) each shareholder known to PSB to be the beneficial owner of five percent
(5%) or more of the outstanding shares of Common Stock; (ii) each director of
PSB; (iii) the executive officer named in the Summary Compensation Table on page
44 herein, and (iv) all current executive officers and directors as a group.
Except as indicated in the footnotes to the table, the persons and entities
named have sole voting and investment power with respect to all shares of Common
Stock of which they are the respective beneficial owners.

48

James W. Eastwood 17,857(3) *

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

Vincent J. Fumo 436,516(2) 9.37%

Stephen Marcus 69,657(3) 1.54%

Rosanne Pauciello 15,902(3) *

John J. O'Connell 41,279 *

Mario J. Incollingo 40,366 *

Named Executive Officers

Gary Polimeno 42,477 *

All executive officers and
directors as a group (9 persons) 972,571 25.82%
------- -----

* Ownership percentage is less than 1%.

** Deceased.

(1) Amount includes 50,510 shares held indirectly through the 401(k) Plan,
25,723 shares held through the Profit Sharing Plan, 26,135 shares held by the
1995 Management Recognition Plan and 30,000 shares held by the 1998 Management
Recognition Plan that have been awarded to Mr. DiSandro, 16,012 shares held in
the ESOP, 15,726 shares held by Mr. DiSandro directly and 123,219 shares subject
to immediately exercisable options. Mr. DiSandro is a trustee of the First Penn
Bank ESOP and as such votes 613,057 shares of the ESOP. The ESOP voting
provisions require the holders of allocated shares to direct the trustee as to
how to vote their shares on any and all matters presented to the shareholders of
PSB. The trustee is required to vote the unallocated shares in proportion to the
direction received from the holders of the allocated shares.

(2) Amount includes 46,302 shares held through the 401(k) Plan, 13,504 shares
held through the Profit Sharing Plan, 181,225 shares held by Mr. Fumo directly,
26,138 shares held by the 1995 MRP and 30,000 shares held by the 1998 Management
Recognition Plan that have been awarded to Mr. Fumo, 15,377 shares held in the
ESOP, 750 shares held on behalf of the daughter of Vincent Fumo and 123,220
shares subject to immediately exercisable options. Mr. Fumo is a trustee of the
First Penn Bank ESOP and as such votes 613,057 shares of the ESOP. The ESOP
voting provisions require the holders of allocated shares to direct the trustee
as to how to vote their shares on any and all matters presented to the
shareholders of PSB. The trustee is required to vote the unallocated shares in
proportion to the direction received from the holders of the allocated shares.

49

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

COMPENSATION PLANS

The following chart presents summary information with respect to all PSB's
and First Penn Bank's equity compensation plans in effect as of December 31,
2002.

EQUITY COMPENSATION PLAN INFORMATION

(1) The 1999 Director Stock Option Plan included in this chart was the only
equity compensation plan adopted without shareholder approval.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain directors and executive officers of PSB, and associates of such
persons (including corporations of which such persons are officers or 10%
beneficial owners), were customers of and had transactions with PSB and its
subsidiaries in the ordinary course of business during 2002. All loans made to
such persons were made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and did not involve more
than the normal risks of collectability or present other unfavorable features.
It is expected that any other transactions with directors and officers and their
associates in the future will be conducted on the same basis.

PART IV

ITEM 14. CONTROLS AND PROCEDURES

Within ninety days prior to filing this report, PSB, under the
supervision and with the participation of PSB' management, including the
Chief Executive Officer and the Chief Financial Officer, evaluated the
effectiveness of the design and operation of PSB's disclosure controls and
procedures. Based on that evaluation, PSB's Chief Executive Officer and
acting Chief Financial Officer concluded that PSB's disclosure controls and
procedures are effective. There were no significant

50

changes to PSB's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.

SEC Rule 13a-14 defines "disclosure controls and procedures" as controls
and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that such
information is accumulated and communicated to the issuer's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

The consolidated financial statements listed below are from Exhibit 99.1 to
the Registrant's 2002 Form 10-K.

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

The following reports on Form 8-K were filed in the last quarter of 2002:

None.

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

EXHIBIT NO. DOCUMENT

2.1 Agreement and Plan of Reorganization, dated as of March 19, 1999,
between PSB Bancorp, Inc. and First Bank of Philadelphia.
(incorporated herein by reference to Exhibit 2.1 of the S-4
Registration Statement of PSB Bancorp, Inc. filed June 25, 1999.)

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

3.1 Articles of Incorporation of PSB

51

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,

52

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

53

on April 1, 2002.)

21 Schedule of Subsidiaries (filed herewith.)

99.1 2002 Financial Statements

99.2 Certification of Report by Chief Executive Officer and the
Acting Chief Financial Officer (filed herewith.)

- ------------
* Denotes a management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K

(1) None

SIGNATURES

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

March 31, 2003 PSB BANCORP, INC.

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

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

Signature Title Date
- --------- ----- ----

/s/ Vincent J. Fumo Chairman, Director March 31, 2003

54

Vincent J. Fumo

/s/ Anthony DiSandro President, Chief Executive March 31, 2003
Anthony DiSandro Officer, Director

/s/ John Carrozza Chief Financial Officer March 31, 2003
John Carrozza (Principal Accounting and
Financial Officer)

/s/ James W. Eastwood Director March 31, 2003
James W. Eastwood

/s/ Rosanne Pauciello Corporate Secretary and Director March 31, 2003
Rosanne Pauciello

Director
Stephen Marcus

/s/ Dennis Wesley Director March 31, 2003
Dennis Wesley

/s/ James Kenney Director March 31, 2003
James Kenney

55

I, Anthony DiSandro, Chief Executive Officer of PSB Bancorp, Inc., certify that:

1. I have reviewed this annual report on Form 10-K 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

56

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: March 31, 2003

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

57

I, John Carrozza, Chief Financial Officer of PSB Bancorp, Inc., certify
that:

1. I have reviewed this annual report on Form 10-K 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

58

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: March 31, 2003

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

59

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

60

(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

61

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 (filed herewith.)

99.1 2002 Financial Statements

99.2 Certification of Report by Chief Executive Officer and Acting
Chief Financial Officer (filed herewith.)

- ----------
* Denotes a management contract or compensatory plan or arrangement.

62