UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

ý              Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2004 or

 

o              Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                      .

 

No. 000-24601

(Commission File
Number)

 

PSB BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Pennsylvania				23-2930740
(State of Incorporation)				(IRS Employer ID Number)

 

1835 Market Street, Philadelphia, PA 19103

(Address of Principal Executive Offices)

 

(215) 979-7900

(Registrant’s Telephone
Number)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  ý     No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

 

Yes  o     No  ý

 

Number of shares outstanding as of November 10, 2004

 

Common Stock (no par value)		4,883,038
(Title of Class)		(Outstanding Shares)

 

 

PSB BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2004

 

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Statements of Financial Condition as of September 30, 2004 (unaudited) and December 31, 2003
		Consolidated Statements of Income (unaudited) for the Three and Nine Month Periods Ended September 30, 2004 and 2003
		Consolidated Statements of Cash Flows (unaudited) for the Nine Month Periods Ended September 30, 2004 and 2003
		Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Month Periods Ended September 30, 2004 and 2003
		Notes to Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

PSB BANCORP, INC. AND SUBSIDIARY

STATEMENTS OF FINANCIAL CONDITION

(In thousands except share data)

 

		September 30, 2004				December 31, 2003
		(Unaudited)				(Audited)
Assets
Cash and due from banks		$		5,056		$		3,084
Interest-earning deposits with banks		57,703				34,692
Federal funds sold		26,583				14,632
Total cash and cash equivalents		89,342				52,408
Loans held-for-sale		75,936				51,859
Investment securities available-for-sale, at fair value		88,839				102,882
Investment securities held to maturity (fair value $1,752 and $790)		1,732				775
Federal Home Loan Bank stock – at cost		1,280				1,021
Federal Reserve Bank stock – at cost		1,139				320
Loans		266,195				240,452
Less allowance for possible loans losses		(3,031			)	(3,069			)
Net loans		263,164				237,383
Accrued interest receivable		2,115				2,225
Premises and equipment, net		2,597				2,855
Bank-owned life insurance		12,579				12,224
Other assets		5,456				6,378
		22,747				23,682
Total assets		$	544,179			470,330
Liabilities
Deposits
Non-interest bearing		38,871				32,806
Interest bearing		448,527				383,354
Total deposits		487,398				416,160
Securities sold under agreements to repurchase		1,109				1,099
Advances from borrowers for taxes and insurance		2,252				2,744
Other liabilities		2,108				3,204
		5,469				7,047
Total liabilities		492,867				423,207
Shareholders’ equity
Common stock authorized, 15,000,000 shares no par value, 4,883,038 and 4,530,940 shares issued and outstanding on September 30, 2004 and December 31, 2003, respectively		44,817				42,179
Retained earnings		8,232				6,919
Accumulated other comprehensive loss		(144			)	(199			)
Employee stock ownership plan		(1,163			)	(1,369			)
Treasury stock, at cost, 78,187 and 75,996 on September 30, 2004 and December 31, 2003, respectively		(430			)	(407			)
Total shareholders’ equity		51,312				47,123
Total liabilities and shareholders’ equity		$	544,179			$	470,330

 

1

 

The accompanying notes are an integral part of these financial statements

 

2

 

PSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

		Three months ended September 30,
		2004			2003
		(Unaudited)
Interest income
Loans, including fees		$	5,666		$	5,551
Investment securities		811			905
Deposits with banks		265			189
Total interest income		6,742			6,644
Interest expense
Interest on deposits		2,286			2,123
Interest on borrowings		6			6
Total interest expense		2,292			2,129
Net interest income		4,450			4,515
Provision for loan losses		90			0
Net interest income after provision for loan losses		4,360			4,515
Non-interest operating income		490			483
Other non-operating income		507			—
Non-interest expenses
Salaries and employee benefits		2,564			2,401
Occupancy and equipment		608			544
Other operating		1,326			1,385
Total non-interest expenses		4,498			4,330
Other non-operating expenses		465			—
Income before income taxes		394			668
Income taxes		134			221
Net income		$	260		$	447
Net income per common share
Basic:		$	0.06		$	0.11
Diluted:		$	0.05		$	0.10

 

The accompanying notes are an integral part of these financial statements

 

3

 

PSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

		Nine months ended September 30,
		2004			2003
		(Unaudited)
Interest income
Loans, including fees		$	16,773		$	17,706
Investment securities		2,617			2,327
Deposits with banks		515			879
Total interest income		19,905			20,908
Interest expense
Interest on deposits		6,020			7,612
Interest on borrowings		17			22
Total interest expense		6,037			7,634
Net interest income		13,868			13,274
Provision for loan losses		90			45
Net interest income after provision for loan losses		13,778			13,229
Non-interest income operating		1,503			1,549
Other non-operating income		1,641			—
Non-interest expenses
Salaries and employee benefits		7,193			6,667
Occupancy and equipment		1,751			1,543
Other operating		4,367			4,329
Total non-interest expenses		13,311			12,539
Other non-operating expense		1,622			—
Income before income taxes		1,989			2,239
Income taxes		676			728
Net income		$	1,313		$	1,511
Net income per common share
Basic:		$	0.30		$	0.36
Diluted:		$	0.26		$	0.35

 

The accompanying notes are an integral part of these financial statements

 

4

 

PSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

 

		Nine Months Ended September 30,
		2004			2003
		(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash
Net income		$	1,313		$	1,511
Adjustments used in operating activities:
Provision for loan losses		90			45
Depreciation and amortization		614			658
Amortization of discounts and accretion of premiums on investment securities		104			(174		)
Gain on sale of real estate		(10		)	24
Proceeds from sale and amortization of loans held for sale		8,766			28,410
Originations of loans held for sale		(32,843		)	(55,225		)
ESOP expense		460			315
Change in assets and liabilities:
Decrease in accrued interest receivable		110			548
Increase in other assets		(148		)	(1,275		)
Decrease in accrued expenses		(1,096		)	(2,272		)
Net cash used in operating activities		(22,640		)	(27,435		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities, available-for-sale		(10,845		)	(85,304		)
Proceeds from sale of investment securities		10,000			—
Proceeds from maturities and calls of investment securities		14,133			41,402
Purchase of Federal Home Loan Bank and Federal Reserve Bank Stock		(1,078		)	(400		)
Net (increase) decrease in loans		(25,567		)	56,744
Proceeds from sale of real estate owned		170			92
Purchase of premises and equipment		(356		)	(686		)
Net cash (used in) provided by investing activities		(13,543		)	11,848
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		71,238			(16,417		)
Increase in securities sold under agreements to repurchase		10			21
Change in advances for borrowers’ taxes and insurance		(492		)	(1,104		)
Exercised stock options		2,384			—
Change in treasury stock		(23		)	(15		)
Net cash provided by (used in) financing activities		73,117			(17,515		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		36,934			(33,102		)
Cash and cash equivalents, beginning of period		52,408			110,269
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	89,342		$	77,167

 

5

 

The accompanying notes are an integral part of these financial statements

 

6

 

PSB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
		(Unaudited)						(Unaudited)
Net income		$	260		$	447		$	1,313		$	1,511
Other comprehensive income, net of tax:
Accumulated comprehensive income (loss), investments available for sale		742			(1,014		)	55			(1,458		)
Comprehensive income (loss)		$	1,002		$	(567	)	$	1,368		$	53

 

The accompanying notes are an integral part of these financial statements

 

7

 

PSB BANCORP, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

 

1.              Basis of Presentation

 

This quarterly report presents the consolidated financial statements of PSB Bancorp, Inc.(“PSB”) and its subsidiaries.

 

PSB’s financial statements reflect all adjustments and disclosures which management believes are necessary for a fair presentation of interim results.  The results of operation for the quarter presented does not necessarily indicate the results that PSB will achieve for all of 2004.  You should read these interim financial statements in conjunction with the consolidated financial statements and accompanying notes that are presented in the PSB Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2003.

 

The financial information in this quarterly report has been prepared in accordance with PSB’s customary accounting practices; these financial statements have not been audited.  Certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission.

 

2.              Pension Plans

 

Supplemental Executive Retirement Plan

 

In the third quarter of 2004 First Penn Bank established a nonqualified, noncontributory Supplemental Executive Retirement Plan (the “Executive Plan”) for certain executives that provide for payments upon retirement, death or disability.  The annual benefit is based on annual salary and bonuses (as defined in the Executive Plan) plus interest.  Expense related to the Executive Plan included in the consolidated statements of income is approximately $142,500 for the three month period ended September 30, 2004.

 

Net periodic defined benefit pension expense for the three months ended September 30, 2004 included the following components (in thousands):

 

		2004
Service cost		$	140,000
Interest cost		2,500
Expected return on plan assets		0
Amortization of prior service cost		0
Amortization of unrecognized net actuarial loss		0
Net periodic benefit expense		$	142,500

 

8

 

We currently expect to contribute approximately $142,500 to the Executive Plan with respect to 2004. We made contributions of $0 to the plan in the three month period ended September 30, 2004.

 

Net periodic defined benefit pension expense for the three months ended September 30, 2004 and 2003 included the following components (in thousands):

 

		2004			2003
Service cost		$	—		$	—
Interest cost		16			16
Expected return on plan assets		14			13
Amortization of prior service cost		—			—
Amortization of unrecognized net actuarial loss		—			—
Net periodic benefit expense		$	3		$	4

 

We currently expect to contribute approximately $20,865 to our pension plan with respect to 2004. We are currently evaluating the impact of the Pension Funding Equity Act enacted in April 2004 on our projected funding. We made contributions of $0 to the plan in the three month period ended September 30, 2004.

 

3.              Earnings Per Share (EPS)

 

PSB has appealed the U.S. District Court for the Eastern District of Pennsylvania’s ruling in favor of the plaintiffs’ motion for summary judgment regarding the validity of 895,240 stock options previously declared void by PSB.  Pending the outcome of the appeal, PSB and the plaintiffs have entered into an agreement whereby shares of PSB common stock have been issued to the plaintiffs at the strike price of the contested options.  However, both the shares of common stock and the proceeds of the exercise of the options have been escrowed pending the outcome of the appeal.

 

The following table illustrates the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted EPS computation.  The computation of dilutive earnings per share now includes 895,240 shares of the 1,371,200 options which were issued in connection with the 1999 First Bank of Philadelphia acquisition and were originally

 

9

 

deemed invalid by management.  These shares are considered to be contingently issuable shares and are required to be included in the calculation of diluted EPS and excluded from the calculation of basic EPS for the three and nine month period ended September 30, 2004, because they currently are held in escrow and all or part may be returned pending the outcome of the appeal of the court ruling which rendered the options valid. 

 

		Nine months ended September 30, 2004
		Income (numerator)			Weighted average shares (denominator)		Per share amount
		(In thousands, except per share data)
Basic earnings per share
Income available to common stockholders		$	1,313		4,444		$	0.30
Effect of dilutive stock options		—			689		(0.04		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities		$	1,313		5,133		$	0.26

 

There were 2,128 options that were anti-dilutive for the nine months ended September 30, 2004.

 

		Three months ended September 30, 2004
		Income (numerator)			Weighted average shares (denominator)		Per share amount
		(In thousands, except per share data)
Basic earnings per share
Income available to common stockholders		$	260		4,437		$	0.06
Effect of dilutive stock options		—			728		(0.01		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities		$	260		5,165		$	0.05

 

There were no options that were anti-dilutive for the three months ended September 30, 2004.

 

		Nine months ended September 30, 2003
		Income (numerator)			Weighted average shares (denominator)		Per share amount
		(In thousands, except per share data)
Basic earnings per share
Income available to common stockholders		$	1,511		4,238		$	0.36
Effect of dilutive stock options		—			84		(0.01		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities		$	1,511		4,322		$	0.35

 

10

 

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

 

		Three months ended September 30, 2003
		Income (numerator)			Weighted average shares (denominator)		Per share amount
		(In thousands, except per share data)
Basic earnings per share
Income available to common stockholders		$	447		4,230		$	0.11
Effect of dilutive stock options		—			92		(0.01		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities		$	447		4,322		$	0.10

 

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

 

4.              Stock-Based Compensation

 

In the second quarter of 2004, PSB awarded a total of 200,000 restricted shares of common stock to executives of PSB pursuant to the provisions of PSB’s stock incentive plans.   Shares awarded are earned at a rate of twenty percent (20%) of the aggregate number of shares covered by the share award at the end of each full 12 month period following the date of the grant.  However, upon a Change of Control (as defined in the stock incentive plan), all awards vest immediately.  Expense related to the stock awards included in the consolidated statements of income is $116,000 for the three month period ended September 30, 2004.

 

During the nine months ended September 30, 2004, there  were 1,020,000 stock options granted.  The fair value of each option granted during this period was $2.27.  The fair value was estimated on the date of grant using the Black Scholes pricing model with the following assumptions:  no dividend yield, expected volatility 27.00%, a risk-free interest rate of 3.30% and an expected life of 3.00 years.

 

11

 

Had compensation costs for the first nine months been determined based on the fair value of the options at the grant dates consistent with the method SFAS No. 123 “Accounting for Stock-Based Compensation,” PSB’s net income and earnings per share, basic and diluted, would have been as reduced to the pro forma amounts indicated below for the three and nine month periods ended September 30, 2004:

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(In thousands except per share data)		2004			2003			2004			2003
Net income as reported		$	260		$	447		$	1,313		$	1,511
Less: stock-based compensation costs		(16		)	(24		)	(2,334		)	(40		)
Pro forma net (loss) income		244			423			(1,021		)	1,471
Earnings Per Share Basic:
As reported		$	0.06		$	0.11		$	0.29		0.36
Pro forma		$	0.05		$	0.11		($0.23		)	0.35
Earnings Per Share Diluted:
As Reported		$	0.05		$	0.10		$	0.25		0.35
Pro forma		$	0.05		$	0.10		($0.20		)	0.34

 

5.              Regulatory Matters

 

After several regulatory examinations, effective August 16, 2004, the Memorandum of Understanding entered into on April 14, 2003, between PSB and the Federal Reserve Bank of Philadelphia was terminated.

 

6.              New Accounting Pronouncements

 

12

 

In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued EITF Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1).  The quantitative and qualitative disclosure provisions of EITF 03-1 were effective for years ending after December 15, 2003 and were included in PSB’s 2003 Form 10-K.  In March 2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to investments accounted for under SFAS No. 115 and 124. EITF 03-1 establishes a three-step approach for determining whether an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. In September 2004, the FASB issued a proposed Staff Position, EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF 03-1 (EITF 03-1-a).  EITF 03-1-a would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-

 

13

 

than-temporary impairment under paragraph 16 of EITF 03-1.  In September 2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1).  FSP EITF Issue No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments delays the effective date of certain provisions of EITF Issue 03-1, including steps two and three of the Issue’s three-step approach for determining whether an investment is other-than-temporarily impaired.  However, step one of that approach must still be initially applied for impairment evaluations in reporting periods beginning after June 15, 2004. The delay of the effective date for paragraphs 10-20 of EITF Issue 03-1 will be superseded with the final issuance of proposed FSP EITF Issue 03-1-a,  Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, ‘‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. PSB is currently evaluating this proposed statement and its effects on its results of operations.

 

7.              Variable Interest Entities

 

In 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, which was the average cost per share paid by PSB for these shares.  PSB currently 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.

 

In the first quarter of 2004 PSB adopted FASB interpretation No. 46(R) Consolidation of Variable Interest Entities (“FIN 46(R)”).  In applying FIN 46(R), it was determined that PSB, as the largest shareholder and virtually Iron Bridge’s only financial resource, would absorb a majority of Iron Bridge’s expected losses.  Therefore, it was PSB’s conclusion that in accordance with FIN 46(R), Iron Bridge is a variable interest entity and thus PSB was required to consolidate the financial results of Iron Bridge during the first quarter of 2004.

 

The consolidation of Iron Bridge resulted in PSB recording goodwill of $1,424,957 and minority interest of $168,320.  PSB accounts for goodwill in accordance with SFAS 142, “Goodwill and Other Intangible Assets”.  Goodwill is now subject to impairment testing at least annually to determine whether write-downs of the recorded balances are necessary.  PSB tests for impairment based on the goodwill maintained at each defined reporting unit.  A fair value is determined for each reporting unit based on at least one of three various market valuation methodologies. If the fair value of the

 

14

 

reporting unit exceeds its then book value, no write-down of recorded goodwill is necessary.  If the fair value of a reporting unit is less, an expense may be required on PSB’s books to write down the related goodwill to the proper carrying value.  As of September 30, 2004, PSB completed its transitional testing, and determined that no impairment write-off was necessary.  No assurance can be given that future goodwill impairment tests will not result in a charge to earnings.

 

8.              Reclassifications

 

Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

 

15

 

Item 2.           Management’s Discussion and Analysis of the Financial Condition and Results of Operations.

 

RESULTS OF OPERATIONS

 

General

 

PSB’s results of operations depend primarily on the Bank’s net interest income, which is the difference between interest income on interest-earning assets, and interest expense on its interest-bearing liabilities.  The Bank’s interest-earning assets consist primarily of loans receivable and investment securities, while its interest-bearing liabilities consist primarily of deposits and borrowings.  The Bank’s net income is also affected by its provision for loan losses and its level of non-interest income as well as by its non-interest expense, such as salary, employee benefits, occupancy costs, and charges relating to non-performing and other classified assets.

 

Impact of Inflation

 

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

 

Critial Accounting Policies, Judgments and Estimates

 

Allowance for Credit Losses

 

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

 

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

 

16

 

additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

 

Performance Overview

 

PSB’s net income for the third quarter of 2004 was $260,000 or $0.05 on a diluted per share basis, compared to net income of $477,000 or $0.10 per diluted share for the third quarter of 2003.  The decrease in net income for the third quarter of 2004 compared to the third quarter of 2003 is due to increases in salaries and employee benefits, occupancy and equipment expense, and an increase in PSB’s provision for loan losses.

 

PSB’s net interest margin decreased by 47 basis points from 3.97% for the three months ended September 30, 2004 to 3.50% for the same period in 2003.

 

Net Income

 

PSB’s net income totaled $260,000 and $447,000 for the three months ended September 30, 2004 and 2003, respectively.  PSB’s basic and diluted earnings per share for the three months ended September 30, 2004, were $0.06 and $0.05 respectively, compared to $0.11 and $0.10 per share for the three months ended September 30, 2003.

 

PSB’s net income for the nine months ended September 30, 2004, totaled $1.3 million compared to $1.5 million for the same period in 2003.  PSB’s basic and diluted earnings per share for the nine months ended September 30, 2004 were $0.30 and $0.26 respectively, compared to $0.36 and $0.35 for the basic and diluted earnings for the nine months ended September 30, 2003.

 

Net Interest Income and Average Balances

 

Net interest income is a key component of PSB’s profitability and is managed in coordination with PSB’s interest rate sensitivity position.  Net interest income for the third quarter of 2004 was $4.5 million, unchanged from the third quarter of 2003.  Net interest income for the nine month period ended September 30, 2004, was $13.9 million compared to $13.3 million for the same period in 2003, or a 4.51% increase.  This increase is primarily attributable to an overall lower cost of funds that increased the interest rate spread for the period.

 

Overall, average total interest-earning assets provided a yield of 5.30% for the three months ended September 30, 2004, compared to 5.84% for the same period in 2003.  Average total loans were $331.9 million for the three months ended September 30, 2004, and provided a yield of 6.83% for the period, compared to average total loans of $276.4 million for the three months ended September 30, 2003, which provided a yield of 8.03% for the period.

 

Average total interest-bearing liabilities increased from $401.3 million to $451.1 million or 12.41% for the three months ended September 30, 2004 compared to the three-month period ended September 30, 2003.  The average rate on total interest-bearing liabilities decreased 9 basis points from 2.12% for the three months ended September 30, 2003 to 2.03% for the three months ended September 30, 2004.  The increase in interest-bearing liabilities resulted from increases in

 

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certificates of deposit and NOW checking accounts.  The decrease in the overall rate paid on interest-bearing liabilities was due to PSB’s ability to decrease the rate paid on all of its interest-bearing liabilities.

 

Overall, average total interest-earning assets provided a yield of 5.59% for the nine months ended September 30, 2004, compared to 6.01% for the same period in 2003.  Average total loans of $312.1 million for the nine months ended September 30, 2004, provided a yield of 7.17%, compared to average total loans of $291.0 million for the nine months ended September 30, 2003, that provided a yield of 8.11%.  The increase in average total loans was primarily due to an increase in multi-family residential mortgage loans, nonresidential mortgage loans and commercial loans.

 

Average total interest-bearing liabilities increased from $416.4 million to $419.7 million or 0.79% for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.  The primary reason for the change in total interest-bearing liabilities was a increase in certificates of deposit and NOW checking accounts.  The average rate on interest-bearing liabilities for the nine month period ending September 30, 2004, decreased 52 basis points from 2.44% for the nine months ended September 30, 2003, to 1.92% for the nine months ended September 30, 2004.

 

Provision for Loan Losses

 

The provision for loan losses represents the charge against earnings that is required to fund the allowance for loan losses.   PSB determines the level of the allowance for loan losses through a regular review of the loan portfolio.   Management’s evaluation of the adequacy of the allowance for loan losses is based upon an examination of the portfolio as well as such factors as declining trends, the volume of loan concentrations, adverse situations that may affect the borrower’s ability to pay, prior loss experience within the portfolio, current economic conditions and the results of the most recent regulatory examinations.  PSB made a provision of $90,000 for loan losses during the nine months ended September 30, 2004 and made a provision of $45,000 for the nine months ended September 30, 2003. Additionally,  PSB had charge-offs against the allowance for loan losses of $304,000 and $574,000 and recoveries of $176,000 and $130,000 during the nine month periods ended September 30, 2004 and 2003, respectively.

 

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Average Balance Sheets and Rate/Yield Analysis

 

Net interest income is affected by changes in both average interest rates and average volumes of interest-earning assets and interest-bearing liabilities.  The following tables present the average daily balances of assets, liabilities, and shareholders’ equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average rates for the period indicated:

 

		Three Months Ended September 30,
		2004								2003
		Average Balance			Interest			Yield/ Rate		Average Balance			Interest			Yield/ Rate
		(Dollars in thousands)
ASSETS
Interest-earning assets:
Interest-earning deposits		$	82,933		$	265		1.28	%	$	87,342		$	189		0.87	%
Investment securities		50,826			400			3.15		61,339			460			3.00
Mortgage-backed securities		43,089			411			3.82		29,957			445			5.94
Loans		331,904			5,666			6.83		276,379			5,550			8.03
Total interest-earning assets		508,752			$	6,742		5.30	%	455,017			$	6,644		5.84	%
Noninterest-earning assets		27,877								28,160
Total assets		$	536,629							$	483,177
LIABILITIES
Interest-bearing liabilities:
Now checking accounts		$	27,293		$	32		0.47	%	$	22,737		$	34		0.60	%
Money market accounts		67,823			195			1.15		73,099			169			0.92
Savings deposits		90,014			242			1.08		93,803			328			1.40
Certificates		264,855			1,817			2.74		210,584			1,592			3.02
Total deposits		449,985			2,286			1.02	%	400,223			2,123			2.12
Borrowed money		1,108			6			2.17		1,095			6			2.19
Total interest-bearing liabilities		451,093			$	2,292		2.03	%	401,318			$	2,129		2.12	%
Non-interest-bearing liabilities		35,972								34,947
Total liabilities		487,065								436,265
Shareholders’ equity		49,564								46,912
Total liabilities and shareholders’ equity		$	536,629							$	483,177
Net interest income					$	4,450							$	4,515
Interest rate spread								3.27	%							3.72	%
Net yield on interest-earning assets								3.50	%							3.97	%
Ratio of interest-earning assets to  interest-bearing liabilities								1.15	x							1.15	x

 

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