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, 2001, PSB had total assets of $467.6 million, total deposits of $404.6 million and shareholders' equity of $41.4 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 determined 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 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. Deposits accepted by the Bank after the mutual holding company reorganization are insured by the FDIC's Bank Insurance Fund.
Historically, the Bank has 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 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 provide 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, 2001, The Bank had no advances outstanding with the FHLB. The 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 as a well-capitalized and independent financial institution. 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 and student loans, mortgage-backed securities and other liquid investment securities. PSB's business strategy incorporates the following elements: (1) increasing assets 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 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, 2001, PSB and the Bank had 130 full-time and 15 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 regionally-based 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, 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 advantages many of the Bank's competitors have over the Bank are larger asset and capital bases, and the ability to finance wide-ranging advertising campaigns and to allocate their deposits and other funding to geographic regions offering highest yield and demand. Many international banking services are indirectly offered 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, First Penn Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to a maximum of $100,000 per insured account holder. The FDIC has the authority to increase its insurance premiums to cover losses and expenses. 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 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, 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, 2001, 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. This support may be required at times, when absent such policy, PSB might not otherwise provide such support. 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, such loans and 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.
Financial Holding Company Legislation
Landmark legislation in the financial services area was signed into law on November 12, 1999. The Gramm-Leach-Bliley Act dramatically changed certain banking laws that had been in effect since the early part of the 20th century. The most radical changes are that the separation between banking and the securities businesses mandated by the Glass-Steagall Act has now been removed, and the provisions of any state law that prohibits affiliation between banking and insurance entities have been preempted. Accordingly, the legislation now permits firms engaged in underwriting and dealing in securities, and insurance companies, to own banking entities, and permits bank holding companies (and in some cases, banks) to own securities firms and insurance companies. The provisions of federal law that preclude banking entities from engaging in non-financially related activities, such as manufacturing, have not been changed. For example, a manufacturing company cannot own a bank and become a bank holding company, and a bank holding company cannot own a subsidiary that is not engaged in financial activities, as defined by the regulators.
The new legislation created a new category of bank holding company called a "financial holding company." In order to avail itself of the expanded financial activities permitted under the new law, a bank holding company must notify the Federal Reserve that it elects to be a financial holding company. A bank holding company can make this election if it, and all its bank subsidiaries, are well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment Act rating, each in accordance with the definitions prescribed by the Federal Reserve and the regulators of the subsidiary banks. Once a bank holding company makes such an election, and provided that the Federal Reserve does not object to such election by such bank holding company, the financial holding company may engage in financial activities (i.e, securities underwriting, insurance underwriting, and certain other activities that are financial in nature as determined by the Federal Reserve) by simply giving a notice to the Federal Reserve within thirty days after beginning such business or acquiring a company engaged in such business. This makes the regulatory approval process to engage in financial activities much more streamlined than it was under prior law.
The intent and scope of the act is positive for the financial services industry, and is an attempt to modernize federal banking laws and make U. S. institutions competitive with those from other countries. While the legislation made significant changes in U. S. banking law, such changes will not directly affect PSB's business unless it decides to avail itself of new opportunities available under the law. PSB does not expect any of the provisions of the Act to have a material adverse effect on the Bank's existing operations, or to significantly increase its costs.
Interstate Acquisitions
On September 29, 1994, the United States Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Law"), which amended various federal banking laws to provide for nationwide interstate banking, interstate bank mergers and interstate branching. The Interstate Banking Law currently allows the acquisition by a bank holding company of a bank located in another state, interstate bank mergers and branch purchase and assumption transactions. Only a few states have "opted-out" of the merger and purchase and assumption provisions by enacting laws that specifically prohibit such interstate transactions.
Pursuant to the Interstate Banking Law, states also may enact legislation to allow for de novo interstate branching by out of state banks.
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 ("PDOB"), 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 additional credit conditions. This controlling influence is undertaken in response to national and international economic developments. Among the means available to the Federal Reserve to implement these 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 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.
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 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.
Item 2
Item 2 Description of Property
As of December 31, 2001, 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 $2.5 million as of December 31, 2001. 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 and its Chesterbrook, Pennsylvania office for a term of five years. Lease expense for the years ended December 31, 2001, 2000, and 1999 was $520,000, $468,000, and $424,000, respectively.
Item 3
Item 3 Legal Proceedings
In the fourth quarter of 2001, PSB declared 1,371,200 options 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 any 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.
Item 4
Item 4 Submission of Matters to a Vote of Securities Holders
PSB's annual meeting of shareholders was held on February 7, 2002. The following matters were voted upon and approved by the vote indicated.
Matter No. 1
The election of two Class III directors to hold office for three years from the date of election, following are the results of those elections:
Nominee Voting Results
Vincent J. Fumo For: 3,502,025 Withheld: 720,847
Thomas J. Finley For: 3,503,996 Withheld: 718,876
The following directors were not subject to reelection and continue to serve as directors of PSB: Anthony DiSandro, Rosanne Pauciello, John J. O'Connell, James W. Eastwood, Mario L. Incollingo and Stephen Marcus.
Matter No. 2
The approval of the 2001 PSB Bancorp, Inc. Stock Incentive Plan:
The votes cast for Matter No. 2 were:
For: 2,221,851 Against: 983,840 Abstain: 2,871
PART II
Item 5
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.
2001 2000 Cash Bid Prices Bid Prices Dividend High Low High Low Declared
First Quarter 5.188 4.063 5.625 4.00 - Second Quarter 5.15 4.188 5.625 4.00 - Third Quarter 6.16 4.90 4.625 4.00 - Fourth Quarter 6.17 5.28 4.375 4.00 -
Item 6
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).
Item 7
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
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 and investment securities, while its interest-bearing liabilities consist primarily of deposits and borrowings. The Bank's net income is also affected by its provision for loan losses and its level of non-interest income as well as by its non-interest expense, such as salary and employee benefits, occupancy costs and charges relating to non-performing and other classified assets.
Performance Overview
PSB's net income for 2001 was $3.05 million or $0.72 on a diluted per share basis compared to net income of $165,000 or $0.04 per diluted share for 2000 and net income of $2.08 million or $0.47 per diluted share for 1999. The significant decrease in net income from 1999 to 2000 was the result of a one-time charge taken by PSB to reflect the write-off of a $2.5 million investment in BankZip.com, an aggregator of Internet banking services that ceased operations. PSB's net income for 2000, without the one-time charge, would have been $2.7 million or $0.68 on a diluted per share basis. The overall increase in PSB's revenue from 2000 to 2001 was primarily due the acquisition of the income producing assets of Jade.
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 2001 of $12.9 million was $2.4 million or 22.84% higher than 2000's net interest income of $10.5 million. The Bank's net interest income of $10.5 million in 2000 was 12.56% higher than 1999's net interest income of $9.3 million. Net interest income of $12.9 million in 2001 was 22.85% higher than net interest income of $10.5 million in 2000. In 2001, total interest income increased $5.8 million to $26.9 million compared to an increase in 2000 of $2.6 million to $21.1 million from $18.6 million in 1999. The Bank had an increase in total interest expense in 2001 of $3.4 million compared to an increase in 2000 of $1.4 million.
The Bank's net interest margin, net interest income divided by total average interest-earning assets, decreased 87 basis points from 4.16% in 2000 to 3.29% in 2001, primarily due to an increase in the volume of our variable rate loan portfolio. In 2000, the net interest margin increased 27 basis points to 4.16% from 3.89% for 1999. The improvement in the Bank's net interest margin in 2000 reflected an improvement in the Bank's yield on interest earning assets, a lower cost of funds and the resolution of a significant portion of the Bank's non- performing assets portfolio and subsequent conversion of those assets to a performing basis.
The Bank's net interest spread, the difference between the yield on interest-earning assets and the rates paid on interest- bearing liabilities, decreased 37 basis points to 2.80% in 2001; in 2000, the Bank experienced an increase of 51 basis points to 3.17% from 2.66% for 1999. 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 spread compression. The increase in the net interest spread to 3.17% in 2000 from 2.66% in 1999 was primarily due to increases on the interest rate for mortgage-backed securities and the loan portfolio.
The Bank's yield on average interest-earning assets decreased to 6.85% for 2001 compared to 8.37% in 2000. In 1999, the Bank's yield on average interest-earning assets was 7.73%. Average loans of $276.0 million at December 31, 2001 represented 70% of total interest-earning assets, providing an average yield of 7.77%, average loans of $167.0 million at December 31, 2000, represented 66% of total average interest-earning assets, and provided an average yield of 9.60%, compared to average loans of $150.0 million at December 31, 1999, representing 63% of total average interest-earning assets, and providing an average yield of 8.96%. 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 made by the Federal Reserve. Average investments and interest bearing deposits with banks increased $32.0 million or 37.36% at December 31, 2001 from December 31, 2000. At December 31, 2000, average investments and interest bearing deposits with banks decreased $4.6 million or 5.1% to $85.4 million, from $90.0 million at December 31, 1999.
At December 31, 2001, total average-interest bearing liabilities increased $141.4 million or 69.24% to $345.8 million compared to $204.3 million at December 31, 2000. Total average interest-bearing liabilities increased $22.2 million or 12.18% at December 31, 2000, from $182.1 million at December 31, 1999. Total interest expense increased $3.4 million at December 31, 2001 to $14.0 million as compared to a total interest expense increase of $1.4 million to $10.6 million at December 31, 2000 from $9.2 million for 1999. The Bank's cost of funds over the last three years was 5.06% in 1999, 5.20% in 2000 and 4.05% in 2001.
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:
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 $270,000, $100,000, and $200,000 as additions to the allowance for loan loss and had charge-offs against the allowance of $788,000, $0 and $0 for the years ended December 31, 2001, 2000 and 1999, respectively.
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, 2001, 2000, and 1999 (in thousands):
Year Ended December 31, 2001 2000 1999
Service fees on deposit accounts $1,074 $412 $479 Loss on write down of investment - (2,500) - Loss on sale of loans and ORE - - (392) Other 480 174 434 Total 1,554 (1,914) 521
The major source of non-interest income is gain on sale of loans, investment gains and losses, and other income and service fees on deposit accounts. Without giving effect to the one-time extraordinary loss on investments of $2.5 million reflecting the write off of 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. 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.
Non-Interest Expense
The following table provides a summary of non-interest expense, by category of expense, for the three years ended December 31, 2001, 2000 and 1999 (in thousands):
Year Ended December 31, 2001 2000 1999
Salaries and employment benefits $ 5,053 $4,383 $3,601 Rent and occupancy expense 1,154 1,162 1,290 Professional fees 385 381 1,064 FDIC insurance expense 38 37 87 General insurance 138 139 157 Advertising 66 129 140 Data processing fees 594 356 237 Director fees 282 246 215 Other operating expense 2,684 1,493 1,015 Total $10,394 $8,326 $7,806
Total non-interest expense for 2001 increased $2.1 million to $10.4 million or 24.84% compared to a modest increase of $520,000 or 6.66% to $8.3 million in 2000 from $7.8 million in 1999. The increase in other operating expense which accounts for a significant portion of the increase in the Bank's non- interest expense is related to expenses incurred in the acquisition of Jade, including a $670,000 increase in salaries and employment benefits related to the acquisition.
Income Taxes
The Company had an income tax provision of $755,000, an income tax provision of $10,000, and an income tax credit of $227,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The 1999 credit resulted from net operating loss carry forwards that were held by First Bank of Philadelphia and used by PSB.
Liquidity and Interest Rate Sensitivity
Integral to the management of PSB's balance sheet is the maintenance of adequate liquidity and the ability to evaluate and control interest rate risk. Liquidity represents the ability to meet potential cash outflows resulting from deposit customers who need to withdraw funds or borrowers who need available credit. Interest rate sensitivity focuses on the impact of fluctuating interest rates and the repricing characteristics of rate sensitive assets and liabilities on net interest income.
PSB's asset/liability management committee monitors the level of short-term assets and liabilities to maintain an appropriate balance between liquidity, risk, and return. Liquidity is derived from various sources that include increases in core deposits, sales of certificates of deposits, loan principal repayments and loan maturities and cash received on maturities or amortization of investment securities.
The liquidity position of PSB is also strengthened by the availability of a $208 million credit facility with the Federal Home Loan Bank of Pittsburgh (FHLB). Advances are secured by FHLB stock and qualifying mortgage loans. There were no advances outstanding against this line at December 31, 2001 or at December 31, 2000.
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, 2001, net cash used by operating activities was $1.6 million, compared to net cash provided by operating activities of $3.6 for the same period of 2000. During the twelve month period ended December 31, 2001, net cash provided by investing activities was $19.6 million, compared to net cash provided by investing activities of $24.6 million for the same period of 2000. Financing activities provided net cash of $18.9 million during the twelve months ended December 31, 2001, compared to $27.5 million in net cash used in financing activities for the same period of 2000. The net result of these items was a $36.9 million increase in cash and cash equivalents for the twelve month period ended December 31, 2001, compared to a $631,000 increase in cash and cash equivalents for the same period of 2000. The increase in cash and cash equivalents in 2001 is primarily due to the proceeds received from maturing investments of $35.1 million, the cash acquisition of Jade, net of cash acquired and debt assumed of $17.0 million, and an increase in deposits of $17.7 million.
During 2000, net cash provided by operating activities was $3.6 million compared to net cash used by operating activities of $1.0 million in 1999. During 2000, PSB's investing activities provided $24.6 million in net cash and PSB's financing activities used $27.5 million in net cash. In 1999, PSB's investing activities used $82.6 million in net cash and PSB's financing activities provided $53.4 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, compared to a net decrease of $30.2 million for 1999. This significant increase in cash and cash equivalents in 2000 is due to a significant decrease in investments purchased and a decrease in loans receivable.
Interest rate risk management is closely related to liquidity management because each is directly affected by the maturity of assets and liabilities. Interest rate risk management monitors the effect that fluctuations in interest rates have on net interest income. The primary function of PSB's interest rate sensitivity management is to reduce exposure to interest rate risk through an appropriate balance between interest-earning assets and interest-bearing liabilities. The goal is to minimize fluctuations in the net interest margin of the Bank due to general changes in interest rates.
The net interest margin of a bank that does not have a relatively close relationship between the quantity of assets that mature or re-price within a given time period and the quantity of liabilities that mature or re-price within the same time period will fluctuate more widely than a bank that has a closer match. Furthermore, a bank that has liabilities that reprice earlier than its assets will have a decline in its net interest margin as interest rates rise.
The blending of fixed and floating rate loans and investments to match their pricing and maturity characteristics against those of the various funding sources is a continuous process in an attempt to minimize fluctuations in net interest income caused by changes in interest rates. The composition of the balance sheet is designed to minimize any significant fluctuation in net interest income and to maximize liquidity. Management believes that the accessibility to FHLB borrowings will provide the flexibility to assist in keeping fluctuations in net interest income under control and to maintain an adequate liquidity position.
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, 2001, PSB had a one-year liability sensitive gap of $8.8 million and a gap ratio of 0.43 or 1.88% of total assets as of that date.
The following table shows the interest rate sensitive data at December 31, 2001 (in thousands):
Interest Rate Sensitivity Analysis
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 33.73% reduction in the internal rate of return in a minus 300 basis point scenario and a loss of 22.30% in a plus 300 basis point scenario.
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, 2001, 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, 2001 were 10.73% and 11.68%, respectively, and the Bank's Tier I leverage ratio was 7.03%. These ratios exceed the requirements for classification as a "well-capitalized" institution, the industry's highest capital category. Capital ratios decreased during 2001 over 2000 due to a 106.8% increase in total risk adjusted assets due to the cash acquisition of Jade and a decrease in Tier 1 and total capital from 2000 to 2001. The increase in capital ratios during 2000 over 1999 was due to a 16.9% decrease in total risk adjusted assets from 1999 to 2000. Following are the Bank's capital ratios at December 31, 2001, 2000 and 1999 (dollars in thousands):
2001 2000 1999 Tier I Capital $ 32,574 $ 34,183 $ 31,348 Tier II Capital 2,871 1,349 1,231 Total Qualifying Capital $ 35,445 $ 35,532 $ 32,579
Risk Adjusted Total Assets $303,527 $146,793 $175,163
Tier I Risk Based Capital Ratio 10.73% 23.29% 17.90% Total Risk Based Capital Ratio 11.68% 24.21% 18.60% Leverage Ratio 7.03% 13.21% 11.48%
Average Assets $463,469 $258,709 $273,174
Management is confident that the Bank will remain "well capitalized".
FINANCIAL CONDITION
General
PSB's total assets increased $212.8 million or 83.1% to $467.6 million at December 31, 2001 from $254.8 million at December 31, 2000. The increase in assets was primarily the result of the acquisition of the assets of Jade.
Net loans increased to $297.2 million at December 31, 2001, from $145.8 million at December 31, 2000. The increase of $151.4 million, or 103.8%, was primarily the result of the acquisition of the loan portfolio of Jade.
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 $72.2 million at December 31, 2001 compared to $67.7 million at December 31, 2000. The Bank's cash and cash equivalents, consisting of cash and due from banks, and interest-earning deposits with other financial institutions, totaled $54.7 million at December 31, 2001 compared to $17.9 million at December 31, 2000. The majority of the Bank's mortgage-backed securities are issued or guaranteed by the United States Government or agencies thereof. At December 31, 2001, mortgage- backed securities totaled $66.5 million compared to $43.1 million at December 31, 2000. The majority of this amount represents securities that were issued or guaranteed by either 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 then available in relation to other opportunities and its expectation of the level of 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.
Pursuant to SFAS No. 115, which the Bank adopted in 1994, the Bank classifies its investment securities and mortgage- backed securities as either 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, 2001, $2.3 million of the Bank's investment securities and mortgaged-backed securities were classified held-to-maturity and $69.9 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, 2001.
The Bank's Board of Directors has also 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, 2001, the Bank had no collateralized mortgage obligations. The Bank may not invest in high-risk collateralized mortgage obligations ("CMOs") 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 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. PSB owns 100% of the Iron Bridge Preferred Stock which represents a 48.17% 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.
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, PSB elected to write off this investment as of December 31, 2000 and take an after-tax charge to earnings of $1.5 million.
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, 2001, 2000 and 1999 (In thousands).
There were no sales of investment securities in 2001, 2000 and 1999.
The amortized cost and fair value of the Company's investment securities at December 31, 2001, 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).
Investment Portfolio Maturities.
The following table sets forth the scheduled maturities, carrying values, and weighted-average yields 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
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.
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 Transnational Mortgage Corp. ("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.
At December 31, 2001 the Bank's net loan portfolio totaled $297.2 million, representing 63.5% of total assets at that date, compared to $145.9 million representing 57.2% of total assets at December 31, 2000. As of December 31, 2001, one- to four-family residential loans totaled $126.5 million representing 42.1% of the loan portfolio, compared to $54.5 million representing 39.9% of the loan portfolio at December 31, 2000. At December 31, 2001 construction loans totaled $24.5 million representing 8.1% of the total loan portfolio. This compares to $23.3 million representing 15.8% of the loan portfolio at December 31, 2000.
The following table summarizes the loan portfolio of the Bank by loan category and amount at December 31 for the past three 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, 2001. Demand loans and loans having no stated schedule of 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 2001, the Bank's level of non-performing assets increased $537,000 or 12.97% to $4.7 million compared to an increase of $1.4 million or 33.36% to $4.1 million at December 31, 2000 from $3.1 million at December 31, 1999. The increase in 2001 was primarily due to a new risk rating system implemented in September of 2001 that caused new items to be classified as non-accrual.
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 backed 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 2001.
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 $548,000 and $1.0 million of property acquired as a result of foreclosure at December 31, 2001 and 2000.
Classified Assets
As part of the Bank's loan review procedures which ultimately results 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 $548,000 of REO, the Bank's classified assets at December 31, 2001 consisted of $3.5 million of loans classified as substandard, compared to $1.0 million classified as substandard at December 31, 2000. This increase was due to the implementation of the previously discussed new risk-rating system.
Allowance for loan losses
The provision for loan losses is an amount charged against earnings to fund the allowance for loan losses on existing loans. In order to determine the amount of the provision for loan losses, the Bank conducts a monthly review of the loan portfolio to evaluate overall credit quality. In establishing its allowance for loan losses, management considers the size and risk exposure for each segment of the loan portfolio, past loss experience, current indicators such as the present levels and trends of delinquency rates and collateral values, and the potential losses for future periods. The provisions are based on management's review of the economy, interest rates, general market conditions, and in certain instances, an estimate of fair value of the collateral, as applicable, considering the current and anticipated future operating environment. These estimates are particularly susceptible to changes that may result in a material adjustment to the allowance for loan losses. As adjustments become identified, they are reported in earnings for the period in which they become known. Management believes that it makes an informed judgment based upon available information. The adequacy of the allowance is reviewed monthly by the Board of Directors.
It is the objective of the Bank's evaluation process to establish the following components of the allowance for loan losses. A specific allocation for certain identified loans, a general allocation for pools of loans based on risk rating and a general allocation for inherent loan portfolio losses. Management performs current evaluations of its criticized and classified loan portfolios and assigns specific reserves that reflects the current risk to the Bank. As a general rule, special mention assets will have a minimum reserve of 5%, 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 three years (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.
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 the gathering of 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, 2001, 2000 and 1999 (dollars in thousands):
As of December 31, 2001, the Bank had total certificates of deposit of approximately $230.2 million. The following table summarizes the composition of these deposits (dollars in thousands):
Amount Percentage Certificates of deposit in excess of $100,000 $ 45,597 20% Individual retirement accounts 28,260 12% Other certificates of deposit 156,357 68% $230,214 100%
The Bank's certificates of deposit in excess of $100,000, which totaled $45.6 million at December 31, 2001, mature as follows: $10.5 million within three months, $23.7 million between three and twelve months; and $11.4 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 $1.1 million investment in the stock of the FHLB at December 31, 2001, which was in compliance with this requirement. At December 31, 2001, the Bank had no outstanding borrowings from the FHLB of Pittsburgh.
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 general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.
Recently Issued Accounting Standards
On July 20, 2001, SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Intangible Assets" were issued.
SFAS No. 141 is effective for all business combinations completed after June 30, 2001.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS No. 142. PSB has elected to adopt the provisions of SFAS 142 as of January 1, 2002.
In August 2001, the FASB issued 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. However, SFAS 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS No. 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The adoption of this statement is not expected to have a significant impact on the financial condition or results of operations of the Bank.
On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. SAB No. 102 provides guidance on the development, documentation, and application of a systematic methodology for determining the allowance for loan loses in accordance with US GAAP and was effective upon issuance. The adoption of SAB No. 102 did not have a material impact on the Bank's financial position or results of operations.
Item 7A
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.
Item 8
Item 8 Financial Statements
The audited financial statement of PSB Bancorp, Inc. as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000, and 1999, including the report of Grant Thorton, LLP as of December 31, 2001 and for the year ended December 31, 2001 and the report of PSB's former auditors as of December 31, 2000 and 1999 and for the years ended December 31, 2000 and 1999, which are included as Exhibit 99 to this Annual Report on Form 10-K, are incorporated herein by reference.
Item 9
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
On October 23, 2001, PSB terminated the engagement of Stockton Bates, LLP ("SB") as PSB's independent auditors, effective immediately as of that date. This change in accountants was approved and ratified by PSB's Board of Directors.
SB's report on PSB's consolidated financial statement for the past two years did not contain any adverse opinion, disclaimer of opinion and was not qualified or modified as to any uncertainty of the audit's scope or accounting principles.
There were no disagreements between PSB and SB for PSB's two most recent fiscal years or for the subsequent interim periods ending March 31, 2001 and June 30, 2001, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to such accountant's satisfaction, would have caused such accountant to make reference to the subject matter of the disagreement in connection with its report on the consolidated financial statements of PSB.
PART III
Item 10
Item 10 Directors, Executive Officers, Promoters and Control Person; Compliance with Section 16 (a)
The following table sets forth information, as of December 31, 2001, with respect to the current directors of PSB.
Year First Elected Principal Occupation Name/Position Age Director During Past Five Years
Class I directors (Term expiring 2002)
Anthony DiSandro, 54 1997 President of PSB Director, President PSB Bancorp, Inc. and Chief Operating Officer
Rosanne Pauciello, 57 1997 Corporate Secretary of Director and PSB Bancorp, Inc; Corporate Secretary Philadelphia School District Home and School Visitor.
John J. O'Connell 66 2001 Vice President, Director Marketing for PSB Vice President of Bancorp, Inc.; Formerly Marketing Chairman and Chief Executive Officer of Jade Financial Corp.(1)
Class II directors (Term expiring 2003)
James W. Eastwood, 56 1997 President of Granary Director Associates, Inc. (project management and consulting firm)
Stephen Marcus 69 2000 Chairman, Emerging Director Growth Equities, Inc. (a venture capital and private investment fund); Founder, CEO of MARS Graphic Services, Inc.
Mario L. Incollingo 63 2001 Chief Operating Officer, Chief Operating Officer, First Penn Bank; Former Director President of Jade Financial Corp. (1)
Class III directors (Term expiring 2004)
Vincent J. Fumo, 58 1997 Chairman and Chief Chairman and Chief Executive Officer of Executive Officer PSB Bancorp, Inc. and Pennsylvania State Senator.
Thomas J. Finley, 81 1997 Retired. Jr., Director _____________________________
(1) Jade Financial Corp. was acquired by PSB on June 30, 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
Item 11 Executive Compensation
The following table sets forth for the years ended December 31, 2001, 2000 and 1999 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.
*Mr. O'Connell and Mr. Incollingo were not officers of PSB or the Bank during the years ended December 31, 2000 and December 31, 1999.
(1) Includes the portion of salary deferred by the executive pursuant to the 401(k) Plan.
(2) Consists of lease payments paid by the Bank with respect to a vehicle provided by the Bank for the executive's use.
(3) Mr. Fumo, Mr. DiSandro and Mr. Polimeno hold 56,137 shares, 56,136 shares and 2,750 shares of restricted stock, respectively, which as of December 31, 2001, had a fair market value of $342,436, $342,430 and $16,775. Of such shares, 26,137, 26,136, and 2,750 shares of each of Messrs. Fumo, DiSandro, Polimeno wer awarded in 1996, 30,000 and 30,000 shares of Messrs. Fumo and DiSandro, respectively, were awarded on October 31, 1999. All shares awarded vest over a five (5) year period at a rate of 20% per year and no dividends have been paid on the restricted stock.
(4) Includes directors fees of $16,400 and $24,400 paid to Mr. Fumo and Mr., DiSandro, respectively, for the year ended December 31, 2001, and directors fees paid by the Bank's subsidiaries to Mr. Fumo, Mr. DiSandro and Mr. Polimeno of $8,100, $8,100 and $8,100, respectively, for the year ended December 31, 2001. Includes directors' fees of $15,600 and $24,800 paid to Mr. Fumo and Mr. DiSandro, respectively, for the year ended December 31, 2000, and directors fees paid by the Bank's subsidiaries to Mr. Fumo, Mr. DiSandro and Mr. Polimeno of $8,400, $8,400, and $8,400, respectively, for the year ended December 31, 2000. Includes directors fees of $13,650 and $19,950 paid to Mr. Fumo and Mr. DiSandro, respectively, for the year ended December 31, 1999, and directors fees paid by the Bank's subsidiaries to Mr. Fumo, Mr. DiSandro and Mr. Polimeno of $8,400, $8,400 and $8,400, respectively, for the year ended December 31, 1999.
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, 2001. 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, 2001.
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, 2001 was $6.10.
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 2002, Mr. Fumo serves as Chairman and Chief Executive Officer of PSB and the Bank at a base salary of $223,000. Under the terms of their Employment Agreements for 2002, Mr. DiSandro serves as President 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 ("Code"), or (ii) not permitted under the Federal Deposit Insurance Act.
Compensation Committee Report on Executive Compensation
Under rules established by the Securities and Exchange Commission ("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 2001, 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 2001" 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 2001, 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.
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 2001. Messrs. Fumo's and DiSandro's salaries and bonuses for 2001 were determined by the Committee after review of the recent compensation practices of similarly sized institutions.
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
Thomas J. Finley, Jr., 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, 2001.
[GRAPHIC]
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
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.
Compensation of Officers and Directors Through 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:
Years of Service Percentage Vested
3 years or less 0% After 3 years 20% After 4 years 40% After 5 years 60% After 6 years 80% After 7 years 100%
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.
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, 2001, Mr. Fumo, Mr. DiSandro, and Mr. Polimeno had 26, 24 and 26 years of credited service (i.e. benefit service), respectively.
First Penn Bank Cash or Deferred Profit Sharing Plan (401(k)). The Bank also maintains the First Penn Bank Cash or Deferred Profit Sharing Plan, which is a qualified, tax-exempt profit sharing plan with a cash-or-deferred feature under Section 401(k) of the Code (the "401(k) Plan"). All employees who have attained age 21 and have completed two years of employment during which they worked at least 1,000 hours 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 to the 401(k) Plan.
Under the 401(k) Plan, participants are permitted to make pre-tax salary reduction contributions to the plan equal to a percentage of up to 15% of compensation. Additional after-tax contributions of up to 10% of compensation may be made to the Plan. 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 Section 401(a)(17) limits (presently $170,000). The Bank may also annually make a discretionary profit sharing contribution to the 401(k) Plan. A participant must complete 1,000 hours of service during the plan year and be employed on the last day of the plan year to receive an allocation of the profit sharing contribution. For the 2001, 2000, 1999, 1998, and 1997 plan years, the Bank made no profit sharing contributions.
All employee contributions and profit sharing contributions to the 401(k) plan and earnings thereon are fully and immediately vested.
Plan benefits will be paid to each participant as a joint and survivor or single life annuity. In addition, a participant may, under certain circumstances, elect a lump sum or period certain payment upon normal retirement, death or disability, or after termination of employment.
First Penn Bank Profit Sharing Plan. The Bank also maintains the First Penn Bank Profit Sharing Plan, which is a qualified plan pursuant to Section 401(a) of the Code. Employees who have completed at least two years of service during which they have worked 1,000 hours or more and who have attained age 21 are eligible to participate in the Profit Sharing Plan. Pursuant to the Profit Sharing Plan the Bank, in its discretion, makes contributions to the accounts of eligible employees. Employee contributions are neither permitted nor required. Benefits under the Profit Sharing Plan become 100% vested upon entry to the Plan. For the 2001, 2000, 1999, 1998, and 1997 plan years, the Bank made profit sharing contributions of $44,516, $0, $0, $0, and $0 respectively
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 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 third 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 and Chief Executive Officer, President and 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.
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, 2001.
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, 2001.
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 for 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 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.
Item 12
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, 2001, 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 13 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.
Amount and Percent of Nature of Outstanding Beneficial Shares of Name of Beneficial Owner Ownership Common Stock
5% Shareholders
First Penn Bank 613,057 13.51% Employee Stock Ownership Plan 11 Penn Center, Suite 2601 1835 Market Street Philadelphia, PA 19103
Investors of America, LP 230,003 5.07% 135 North Meramec Clayton, Missouri 63105
Directors
Anthony DiSandro 285,273(1) 6.12%
James W. Eastwood 33,805(3) *
Thomas J. Finley, Jr. 21,372(3) *
Vincent J. Fumo 434,717(2) 9.46%
Stephen Marcus 69,657(3) 9.33%
Rosanne Pauciello 15,902(3) *
John J. O'Connell 31,000 *
Mario J. Incollingo 26,300 *
Named Executive Officers
Gary Polimeno 42,477 *
All executive officers and directors as a group (9 persons) 960,505 20.00% ______________
* Ownership percentage is less than 1%.
(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, 13,960 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, 13,578 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.
(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,
Item 13
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 2001. 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 collectibility 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.
Item 14
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The consolidated financial statements listed below are from Exhibit 99 to the Registrant's 2001 Form 10-K.
PSB Bancorp, Inc. and Subsidiaries Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Cash Flow Notes to Consolidated Statements Reports of Independent Public Accountants
The following reports on Form 8-K were filed in the last quarter of 2001:
Form 8-K filed October 29, 2001/Change in Registrant's Certifying Accountant.
(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 Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997).
3.2 Bylaws of PSB Bancorp, Inc. (incorporated herein by reference to Exhibit 3.2 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997).
10.1* First Penn Bank's Retirement Plan (incorporated herein by reference to Exhibit 10.1 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997).
10.2* First Penn Bank's Cash or Deferred Profit Sharing Plan (incorporated herein by reference to Exhibit 10.2 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997).
10.3* First Penn Bank's Profit Sharing Plan (incorporated herein by reference to Exhibit 10.3 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997).
10.4* Employment Agreement with Vincent J. Fumo (incorporated herein by reference to Exhibit 7.1 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997).
10.5* Employment Agreement with Anthony DiSandro (incorporated herein by reference to Exhibit 7.2 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997).
10.6* First Penn Bank's Employee Stock Ownership Plan (incorporated herein by reference to Exhibit 10.4 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed on October 9, 1997).
10.7 Lease Agreement between Eleven Colonial Penn Plaza Associates and First Penn Bank, dated as of October 10, 1995 (incorporated herein by reference to Exhibit 10.7 of Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed May 5, 1998).
10.8 Lease Agreement between Eleven Colonial Penn Plaza Associates and First Penn Bank, dated as of October 12, 1995 (incorporated herein by reference to Exhibit 10.8 of Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed on May 5, 1998).
10.9* First Penn Bank's Stock Option Plan (incorporated herein by reference to Exhibit 10.9 of the S-4 Registration Statement of PSB Bancorp, Inc. filed June 25, 1999).
10.10* First Penn Bank's Management Recognition Plan (incorporated herein by reference to Exhibit 10.10 of the S-4 Registration Statement of PSB Bancorp, Inc. filed June 25, 1999).
10.11* Employment Agreement for John J O'Connell. (filed herewith)
10.12* Employment Agreement for Mario L. Incollingo (filed herewith)
10.13* PSB Bancorp, Inc. 2001 Stock Incentive Plan (filed herewith)
21 Schedule of Subsidiaries (filed herewith)
99 Financial Statements (filed herewith)
____________
* Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
Form 8-K filed October 29, 2001/Change in Registrant's Certifying Accountant.
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.
April 1, 2002 PSB BANCORP, INC.
By /s/ Anthony DiSandro Anthony DiSandro President and Chief Operating 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 and Chief April 1, 2002 Vincent J. Fumo Executive Officer, Director
/s/ Anthony DiSandro President, April 1, 2002 Anthony DiSandro Director
/s/ Gary Polimeno Vice President and April 1, 2002 Gary Polimeno Treasurer (Principal Accounting and Financial Officer)
/s/ James W. Eastwood Director April 1, 2002 James W. Eastwood
/s/ Thomas J. Finley, Jr. Director April 1, 2002 Thomas J. Finley, Jr.
/s/ Rosanne Pauciello Corporate Secretary April 1, 2002 Rosanne Pauciello and Director
/s/ Stephen Marcus Director April 1, 2002 Stephen Marcus
/s/ John J. O'Connell Director April 1, 2002 John J. O'Connell
/s/ Mario L. Incollingo Director April 1, 2002 Mario L. Incollingo
Exhibit Index.
Exhibit No. Document
2.1 Agreement and Plan of Reorganization, dated as of March 19, 1999, between PSB Bancorp, Inc. and First Bank of Philadelphia. (incorporated herein by reference to Exhibit 2.1 of the S-4 Registration Statement of PSB Bancorp, Inc. filed June 25, 1999).
2.2 Agreement and Plan of Reorganization, dated as of November 2, 2000, between PSB Bancorp, Inc., PSB Merger Sub, Inc. and Jade Financial Corp. (incorporated herein by reference to Registration Statement of PSB Bancorp, Inc. filed on January 16, 2001.)
3.1 Articles of Incorporation of PSB Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997).
3.2 Bylaws of PSB Bancorp, Inc. (incorporated herein by reference to Exhibit 3.2 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997).
10.1* First Penn Bank's Retirement Plan (incorporated herein by reference to Exhibit 10.1 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997).
10.2* First Penn Bank's Cash or Deferred Profit Sharing Plan (incorporated herein by reference to Exhibit 10.2 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed October 9, 1997).
10.3* First Penn Bank's Profit Sharing Plan (incorporated herein by reference to Exhibit 10.3 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997).
10.4* Employment Agreement with Vincent J. Fumo (incorporated herein by reference to Exhibit 7.1 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997).
10.5* Employment Agreement with Anthony DiSandro (incorporated herein by reference to Exhibit 7.2 of the SB-2 Registration Statement of PSB Bancorp, Inc filed October 9, 1997).
10.6* First Penn Bank's Employee Stock Ownership Plan (incorporated herein by reference to Exhibit 10.4 of the SB-2 Registration Statement of PSB Bancorp, Inc. filed on October 9, 1997).
10.7 Lease Agreement between Eleven Colonial Penn Plaza Associates and First Penn Bank, dated as of October 10, 1995 (incorporated herein by reference to Exhibit 10.7 of Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed May 5, 1998).
10.8 Lease Agreement between Eleven Colonial Penn Plaza Associates and First Penn Bank, dated as of October 12, 1995 (incorporated herein by reference to Exhibit 10.8 of Form S-1, Amendment No. 3 of PSB Bancorp, Inc. filed on May 5, 1998).
10.9* First Penn Bank's Stock Option Plan (incorporated herein by reference to Exhibit 10.9 of the S-4 Registration Statement of PSB Bancorp, Inc. filed June 25, 1999).
10.10* First Penn Bank's Management Recognition Plan (incorporated herein by reference to Exhibit 10.10 of the S-4 Registration Statement of PSB Bancorp, Inc. filed June 25, 1999).
10.11* Employment Agreement for John J O'Connell. (filed herewith)
10.12* Employment Agreement for Mario L. Incollingo (filed herewith)
10.13* PSB Bancorp, Inc. 2001 Stock Incentive Plan (filed herewith)
21 Schedule of Subsidiaries (filed herewith).
99 Financial Statements (filed herewith). ____________
* Denotes a management contract or compensatory plan or arrangement.