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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission file number: 000-24601

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

        Indicate by checkmark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

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

        Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act. Yes o    No ý

        As of December 31, 2004 the aggregate market value of the 3,609,307 shares of voting and non-voting common equity of the Registrant outstanding on such date, held by non-affiliates of the Registrant, was approximately $36,381,814.00. This figure is based on the last known sales price, prior to July 1, 2004, reported to the Registrant of $10.08 per share for Common Stock. Although directors, officers and five percent beneficial owners of the Registrant were assumed to be "affiliates" of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status.

Documents incorporated by reference: None

PSB BANCORP, INC.

FORM 10-K

For the Year Ended December 31, 2004

TABLE OF CONTENTS

PART I

ITEM 1.    BUSINESS

        PSB Bancorp, Inc. ("PSB") was organized as a Pennsylvania business corporation on October 3, 1997, for the purpose of becoming a holding company for First Penn Bank (the "Bank"). PSB is subject to regulation by the Federal Reserve Bank of Philadelphia, and its principal business is the ownership of First Penn Bank. At December 31, 2004, PSB had total assets of $533.1 million, total deposits of $475.3 million and shareholders' equity of $52.2 million.

        On October 12, 1999, PSB completed its acquisition of First Bank of Philadelphia. In connection with the acquisition, each outstanding share of First Bank of Philadelphia was exchanged for .857 shares of PSB common stock ("Common Stock"). In addition, options to acquire 1,612,500 shares of First Bank of Philadelphia were converted into options to acquire 1,381,912 shares of Common Stock. Subsequent to the conversion of the options, 1,371,200 of the original First Bank of Philadelphia options were deemed by PSB to be invalid and were voided. The purported option holders 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 First Penn Bank and holds a state commercial bank charter. This provides the Bank with greater lending flexibility.

        On June 29, 2001, PSB acquired Jade Financial Corp. ("Jade") and its wholly-owned subsidiary, IGA Federal Savings Bank ("IGA"), in a cash transaction valued at approximately $25 million. As part of that transaction, IGA, which held a federal thrift charter, was merged with and into the Bank.

        The Bank operates 12 full-service offices, eight of the offices are located in Philadelphia, Pennsylvania, one office is located in each of Montgomery County, Bucks County, Delaware County, and Chester County, Pennsylvania. The Bank plans to open a new branch office in the Chinatown section of Philadelphia, Pennsylvania in 2005.

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

        Historically, the Bank focused its lending activities primarily on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences for retention in the Bank's portfolio. As part of a strategy to diversify its loan portfolio, achieve a higher net interest margin, and reduce interest rate risk, the Bank has increased its origination of commercial real estate loans, commercial business loans, construction loans, multifamily real estate loans, consumer loans, and student loans. The Bank is continuing to pursue its strategy of increasing its loan 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 IGA also provided the Bank with an additional five branch offices in Philadelphia and the counties surrounding the Philadelphia metropolitan area which increased the Bank's geographical reach and provided access to a larger customer base.

        Through the Bank's subsidiary, Transnational Mortgage Company, the Bank has conducted a mortgage banking operation since 1989. Mortgage banking consists primarily of the origination, sale,

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and servicing of first mortgage loans secured by one- to four-family homes. Such loans are sold either as individual loans or as participation certificates issued or guaranteed by FNMA. Loans may be sold either on a servicing retained or servicing released basis.

        First Penn 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, 2004, the Bank had no advances outstanding with the FHLB. The Bank's principal source of income is interest received from loans, investment securities and mortgage-backed securities. The Bank's principal expenses are the interest paid on deposits and borrowings and the cost of employee compensation and benefits.

BUSINESS STRATEGY

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

        On March 10, 2005, PSB issued a press release announcing the engagement of Griffin Financial Group LLC, an investment banking firm, to evaluate PSB's strategic alternatives, including but not limited to a possible sale of PSB.

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 four subsidiaries as follows: Transnational Mortgage Company 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 originated business loans. First Penn Bank Revocable Trust is the owner and beneficiary of bank owned life insurance policies purchased by the trust on a select group of employees.

PERSONNEL

        As of December 31, 2004, PSB and the Bank had 150 full-time and equivalent part-time employees. The Bank is not a party to any collective bargaining agreements.

COMPETITION

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

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interest rates paid and charged, and for service charges on customer accounts. Among the additional advantages many of the Bank's competitors have over the Bank in addition to larger asset and capital bases, are the ability to finance wide-ranging advertising campaigns and to allocate their deposits and other funding to the geographic regions offering highest yield and demand. Many international banking services are indirectly offered by the Bank's competitors through correspondent relationships. By virtue of their greater capital base, most competitors have a substantially higher lending limit than the Bank. Although the Bank is at some disadvantage when competing with larger banks, the Bank believes that its philosophy of providing high-quality service to small and mid-size customers offsets much of the bigger banks' advantages and provides a growth opportunity for the Bank.

REGULATION OF FIRST PENN BANK

        As a state-chartered bank, the Bank is subject to regulation, supervision, and regulatory 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 regulatory examinations by the Federal Reserve Board. In addition, the Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to a maximum of $100,000 per insured account holder. Some aspects of the lending and deposit business that are regulated by the Federal Reserve Board and the FDIC include personal lending, commercial lending, mortgage lending, reserve requirements against certain deposit and loan accounts and the maintenance of the requisite capital to asset ratios. The Bank is also subject to numerous federal, state, and local laws and regulations that set forth specific restrictions and procedural requirements with respect to the extension of credit, credit practices, 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 risk-based capital measures, 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, 2004, First Penn Bank was "well-capitalized" under these regulations.

REGULATION OF PSB

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

        Under Federal Reserve policy, PSB is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank, i.e., to downstream funds to the Bank. Any capital loans

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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, or asset purchases. Such transfers by the Bank to PSB are generally limited in amount to 10% of the Bank's capital and surplus. Furthermore, any loans or extensions of credit are required to be secured in specific amounts, and all transactions are required to be on an arm's length basis. The Bank has never made any loan or extension of credit to PSB nor has it purchased any assets from PSB.

SARBANES-OXLEY ACT OF 2002

        On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002. The stated goals of this sweeping legislation are to enhance penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws. The Sarbanes-Oxley Act generally applies to all companies, including PSB, that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange Act"). The legislation includes provisions, among other things, governing the services that can be provided by a public company's independent auditors and the procedures for approving such services, requiring the chief executive officer and chief financial officer to certify certain matters relating to PSB's periodic filings under the Exchange Act, requiring expedited filings of reports by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations, and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers to set auditing, quality control and ethics standards for accounting firms. The legislation also required the national securities exchanges and Nasdaq to adopt rules relating to certain matters, including the independence of members of a company's audit committee as a condition to listing or continued listing. Section 404 of the Sarbanes-Oxley Act requires companies to assess its internal controls and requires the independent auditor to issue a report with respect to such internal controls. PSB must be compliant with this section of the Sarbanes-Oxley Act by December 31, 2006. Although PSB cannot quantify the cost of compliance at this time, PSB expects such costs to be minimal.

NATIONAL MONETARY POLICY

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

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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 10% 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 50% 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 50% of the Bank's capital. Additionally, the PDOB has the power to issue orders prohibiting the payment of dividends where such payment is deemed to be an unsafe or unsound banking practice.

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

TRANSACTIONS WITH AFFILIATES

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

        As of December 31, 2004, 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, 2004. Seven of the branches are owned and five

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are leased. The Bank is leasing its center city Philadelphia, Pennsylvania full-service office and executive office for a term of 11 years, its 1632 Walnut Street, Philadelphia, Pennsylvania office for ten years, its Media, Pennsylvania office for a term of four years, its Chesterbrook, Pennsylvania office for a term of one year, and its 23rd Street, Philadelphia, Pennsylvania office, on a month to month basis.

ITEM 3.    LEGAL PROCEEDINGS

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

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

        On April 1, 2004, the Court granted the plaintiffs' motion for summary judgment in an action in which the plaintiffs sought to have certain stock options, previously voided by PSB Bancorp, Inc., to be declared enforceable. On April 5, 2004, PSB appealed the court's decision to the United States Court of Appeals for the Third Circuit (the "Appeals Court"). Pending the outcome of the appeal, PSB agreed to allow the purported option holders to exercise the options with the resulting shares and exercise consideration being placed in escrow. Subsequently, on February 15, 2005, the Appeals Court upheld the grant of summary judgment for the plaintiffs. On February 28, 2005, PSB filed a motion for rehearing with the Appeals Court in which PSB avers that, based on recently discovered information, the court lacks jurisdiction because at least one of the plaintiffs is a Pennsylvania resident and therefore diversity of citizenship is absent.

RECENT DEVELOPMENTS

        On June 17, 2004 and September 7, 2004, the purported holders of the additional 475,960 voided options not subject to the initial suit filed separate actions in the Court to have the voided options declared valid and enforceable. These actions only effect 475,960 of the 1,371,200 options previously declared void by PSB. PSB has filed a motion to dismiss both actions for lack of jurisdiction arising from a lack of diversity.

        On December 28, 2004, PSB received a shareholder demand letter (the "Demand Letter") from Mr. David C. Berger, Esq., of Robinson Brog Leinwand Greene Genovese & Cluck P.C., counsel for the purported holders of the voided options ("Option Counsel"), and counsel for Wellington Limited Partnership, a purported shareholder of PSB, requesting that the board of directors prosecute certain actions or take certain corrective measures. A shareholder derivative action is an action brought by a shareholder in the name of the corporation to recover alleged damages incurred by the corporation as a result of the actions of its directors, officers or third parties. Under Pennsylvania law, initially a committee of independent directors must determine whether to proceed with any action. On January 20, 2005, the board of directors of PSB appointed a special committee composed of three independent directors. The independent directors appointed to the special committee are Dennis Wesley, James W. Eastwood, and James Kenney. The special committee was charged with (i) investigating the allegations in the Demand Letter, (ii) preparing and presenting a report to the full board of directors of the results of their investigation, and (iii) making a recommendation to the full board of directors as to whether or not to proceed with a shareholder derivative action. The special committee has engaged separate legal counsel to assist it in the preparation of its report. If any action is recommended by the special committee, any recovery would be for the benefit of PSB. Option Counsel was informed of the formation of the special committee.

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        On March 17, 2005, prior to the conclusion of the formal review by the special committee, Option Counsel brought a shareholder derivative action on behalf of two of the purported option holders in the Court against the members of PSB's board of directors for breach of fiduciary duty and self dealing relating to the purported fraudulent solicitation of shareholder approval of PSB's 2001 Stock Incentive Plan (the "SIP"). This is one of the items contained in the Demand Letter. Plaintiffs are seeking a judgment declaring the SIP null and void and an injunction preventing the issuance or exercise of any additional options under the SIP. This matter will also be reviewed by the special committee formed in response to the Demand Letter. PSB unequivocally denies the allegations and intends to vigorously defend the action. However, there can be no assurance regarding the eventual outcome of this litigation.

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

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

        None

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S 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.

        As of March 30, 2005, PSB's Common Stock was held by approximately 458 holders of record.

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ITEM 6.    SELECTED FINANCIAL DATA

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

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

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

GENERAL

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

IMPACT OF INFLATION

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

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

        The accounting and reporting policies of the Company and its subsidiaries conform with accounting principles generally accepted in the United States of America (US GAAP) applicable to the financial services industry. All significant inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform the previous year's financial statements to the current year's presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets

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and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ significantly from those estimates.

        Allowance For Credit Losses—PSB uses the reserve method of accounting for credit losses. The balance in the allowance for loan losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses. Increases to the allowance for loan and lease losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses. While management considers the allowance for loan and lease losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions or management's assumptions as to future delinquencies, recoveries and losses and management's intent with regard to the disposition of loans and leases. In addition, the regulators, as an integral part of their examination process, periodically review PSB's allowance for loan losses. The regulators may require the Bank to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

        Income Taxes—Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Based upon the review of all components of the deferred tax assets and liabilities, future taxable income of PSB and regulatory guidelines, management has determined that no allowance is deemed necessary at December 31, 2004. However, circumstances could arise that would require management to revisit the need for such an allowance.

PERFORMANCE OVERVIEW

        PSB's net income for 2004 was $2.1 million or $0.40 on a diluted per share basis, compared to $2.0 million or $0.46 on a diluted per share basis for 2003, and $3.1 million or $0.74 per diluted share for 2002 after the cumulative effect of an accounting change (net income of $1.8 million or $0.42 per diluted share prior to the cumulative effect of an accounting change).

        Upon adoption of SFAS No. 142, on January 1, 2002, after the revaluation of certain deferred assets relating to the acquisition of Jade, PSB recognized a cumulative effect of an accounting change of $1.3 million which represented the remaining unamortized portion of negative goodwill related to the Jade acquisition.

NET INTEREST INCOME AND AVERAGE BALANCES

Comparison of Results of Operations in 2004 and 2003

        Net interest income is the key component of the Bank's profitability and is managed in coordination with the Bank's interest rate sensitivity position. Net interest income in 2004 of $19.5 million was $756,000 or 4.03% higher than net interest income in 2003 of $18.8 million.

        The Bank's net interest margin, net interest income divided by total average interest-earning assets, decreased six basis points to 4.02% in 2004 from 4.08% in 2003.

        The Bank's net interest spread, the difference between the yield on interest-earning assets and the rates paid on interest-bearing liabilities, decreased five basis points for 2004 to 3.78% from 3.83% in 2003. During the twelve month period of 2004, the Bank experienced an overall decrease on the yield of its interest-earning assets of 39 basis points. In 2004, the rate paid by the Bank on its interest-bearing liabilities decreased 34 basis points from 2.33% in 2003 to 1.99%. This is generally reflective of movements in market rates. Toward the end of 2004, the Federal Reserve began to increase short-term

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rates but to date long-term rates have not increased proportionately. This may cause further margin compression over time.

        Average investments (including mortgage-backed securities) and interest-earning deposits with banks decreased $8.7 million or 5.11% at December 31, 2004, to $161.5 million compared to $170.2 million at December 31, 2003. The decrease in 2004 in interest-earning deposits with banks is largely due to an increase in loan demand.

        At December 31, 2004, the Bank's average loans were $323.5 million representing 66.70% of total interest-earning assets and provided a yield of 7.36% compared to average loans of $289.7 million for 2003 which represented 63.0% of interest-earning assets and provided a yield of 8.28%. The Bank experienced improved commercial, consumer and mortgage loan demand in 2004, leading to higher originations.

        At December 31, 2004, total average interest-bearing liabilities increased $15.4 million or 3.75% to $426.4 million compared to $411.0 million at December 31, 2003. Total interest expense decreased $1.1 million at December 31, 2004, to $8.5 million as compared to total interest expense of $9.6 million at December 31, 2003. The increase in the Bank's total average interest-bearing liabilities was caused by a decision by the Bank to increase deposits to enable the Bank to meet increased loan demand. The Bank's cost of funds over the last two years was 1.99% in 2004 and 2.33% in 2003.

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AVERAGE BALANCE SHEETS AND RATE/YIELD ANALYSIS

        Net interest income is affected by changes in both average interest rates and average volumes of interest-earning assets and interest-bearing liabilities. The following 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:

*

includes loans held for sale

(1)

The interest earned on nontaxable investment securities and loans is shown on a tax equivalent basis.

(2)

Nonaccrual loans have been included in the appropriate average loan balance category, but interest on nonaccrual loans has not been included for purposes of determining interest income.

        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 changes in volume and rate

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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 $235,000, $45,000, and $1.4 million as additions to the allowance for loan loss and had charge-offs against the allowance of $362,000, $762,000, and $856,000 for the years ended December 31, 2004, 2003, and 2002, respectively. For 2004, management determined that, based on relatively stable economic conditions and a review of the specific factors affecting the allowance, the addition to the provision was deemed adequate.

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

        Although management utilizes its best judgment in providing for loan losses, there can be no assurance that the Bank will not have to increase its provision for loan losses in the future as a result of possible future increases to its non-performing loans or for other reasons based on changes in facts and circumstances. In addition, various regulatory agencies, as an integral part of their examination

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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, 2004, 2003, and 2002 (in thousands):

        The major source of non-interest income is income from bank owned life insurance and service fees on deposit accounts. Non-interest income decreased $98,000 or 4.5% from $2.2 million in 2003 to $2.1 million in 2004. This decrease is primarily due the loss of a significant service fee relationship and increased losses on the sale of loans and equity investments in the current year.

NON-INTEREST EXPENSE

        The following table provides a summary of non-interest expense, by category of expense, for the three years ended December 31, 2004, 2003 and 2002 (in thousands):

        Total non-interest expense for 2004 increased $436,000 or 2.4% to $18.3 million from $17.8 million in 2003. The increase in non-interest expense for 2003 was primarily attributable to: (i) an increase in salaries and employee benefits related to the staffing of a new credit administration department; (ii) the implementation of supplementary employee retirement plans for certain senior executives and (iii) an increase in occupancy expense related to additional costs related to the completion of a new branch to be opened in the Chinatown area of Philadelphia, Pennsylvania in the second quarter of 2005. Total other expenses for 2004 decreased $52,000 or 1.56% from $3.3 million in 2003.

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INCOME TAXES

        PSB accounts for income taxes under the liability method specified by SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The principal types of accounts resulting in differences between assets and liabilities for financial statement and tax return purposes are the allowance for loan losses, leased assets, deferred loan fees and compensation. PSB had an income tax provision of $1.0 million, $1.0 million and $1.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. PSB had an effective tax rate of 34.00%, 33.81% and 29.55% for the years ended December 31, 2004, 2003 and 2002.

LIQUIDITY AND INTEREST RATE SENSITIVITY

        Integral to the management of PSB's balance sheet is the maintenance of adequate liquidity and the ability to evaluate and control interest rate risk. Liquidity represents the ability to meet potential cash outflows resulting from deposit customers who need to withdraw funds or borrowers who need available credit. Interest rate sensitivity focuses on the impact of fluctuating interest rates and the repricing characteristics of rate sensitive assets and liabilities on net interest income.

        PSB's asset/liability management committee monitors the level of short-term assets and liabilities to maintain an appropriate balance between liquidity, risk, and return. Liquidity is derived from various sources that include increases in core deposits, sales of certificates of deposits, loan principal repayments, loan maturities, and cash received on maturities or amortization of investment securities.

        At December 31, 2004, PSB had $54.7 million of cash and cash equivalents. The liquidity position of PSB is also strengthened by the availability of a $231.1 million credit facility with the FHLB. Advances are secured by FHLB stock and qualifying mortgage loans. There were no advances outstanding against this line at December 31, 2004, or at December 31, 2003.

        Management anticipates utilizing its excess liquidity to increase its commercial lending portfolio during 2005.

        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, 2004, net cash used in operating activities was $25.2 million, compared to net cash used by operating activities of $32.1 million for the same period of 2003. During 2004, net cash used in investing activities was $34.7 million, compared to net cash provided by investing activities of $948,000 for the same period of 2003. Financing activities provided cash of $62.1 million during the twelve months ended December 31, 2004, compared to $26.7 million in net cash used in financing activities for the same period of 2003. The net result of these items was a $2.2 million increase in cash and cash equivalents for the twelve month period ended December 31, 2004, compared to a $57.9 million decrease in cash and cash equivalents for the same period of 2003. The significant change in cash and cash equivalents from year-to-year reflects PSB's emphasis on deposit generation.

        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

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mature or re-price within the same time period will fluctuate more widely than a bank that has a closer match. Furthermore, a bank that has liabilities that reprice earlier than its assets will have a decline in its net interest margin as interest rates rise.

        The blending of fixed and floating-rate loans and investments to match their pricing and maturity characteristics against those of the various funding sources is a continuous process in an attempt to minimize fluctuations in net interest income caused by changes in interest rates. The composition of the balance sheet is designed to minimize any significant fluctuation in net interest income and to maximize liquidity.

        One tool used by management to gauge the structure of the balance sheet is a "gap" analysis that categorizes assets and liabilities on the basis of maturity date, the date of next re-pricing, and the applicable amortization schedule. This analysis summarizes the matching or mismatching of rate-sensitive assets versus rate sensitive liabilities according to specified time periods. Management concentrates on the zero to three month and one year gap intervals. At December 31, 2004, PSB had a one-five year positive cumulative gap of $32.7 million and a gap ratio of 2.31 or 6.13% of total assets as of that date.

        The following table shows the interest rate sensitive data at December 31, 2004 (in thousands):

INTEREST RATE SENSITIVITY ANALYSIS

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

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interest rate environments. The market value of equity is defined as the net present value of PSB's existing assets and liabilities.

        A plus or minus 300 basis point rate shock test for the change in the market value of equity indicates at most limited economic value sensitivity to changes in interest rates. A rate shock test indicates the market value of equity increases as rates rise and decreases as rates decline. The Bank's largest exposure is a negative 74.84% reduction in the change in the market value of equity in a plus 300 basis point scenario and a gain of 75.19% in a minus 300 basis point scenario.

        In the event PSB should experience a mismatch in its desired gap ranges or an excessive decline in its market value of equity resulting from changes in interest rates, it has a number of options that it could utilize to remedy such a mismatch. PSB could restructure its investment portfolio through the sale or purchase of securities with more favorable repricing attributes. It could also emphasize growth in loan products with appropriate maturities or repricing attributes, or seek to attract deposits or obtain borrowings with desired maturities.

        There are no known trends or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in liquidity increasing or decreasing in any material way in 2005.

        The commitment expiration periods for commitments of PSB as of December 31, 2004 are as follows(in thousands):