##### Table of Contents

---

United States

Securities and Exchange Commission

Washington, D.C. 20549



---



Form 10-K



---



|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



OR



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number: 0-17177



---



BSB BANCORP, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 16-1327860                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                            |  |           
|------------------------------------------- |  | ----------
|58-68 Exchange Street, Binghamton, New York |  | 13901     
|(Address of principal executive offices)    |  | (Zip Code)



Registrants
telephone number, including area code: (607) 779-2406



---



Securities registered pursuant to Section 12(b) of the Act: Not applicable



|                                                            |  |                                          
|----------------------------------------------------------- |  | -----------------------------------------
|Securities registered pursuant to Section 12(g) of the Act: |  | Common Stock, ($0.01 par value per share)
|                                                            |  | Title of class                           



---



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No ̈



Indicate by check mark 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 registrants knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K. ̈



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



The aggregate market value of the common equity held by non-affiliates of the Registrant as of June 30, 2003 was approximately $213.7 million. Number of shares of common stock outstanding as of February 3, 2004 -
9,310,888



DOCUMENTS INCORPORATED BY REFERENCE



List hereunder the following documents incorporated by reference and the Part of the Form
10-K into which the document is incorporated: None



---



---

##### Table of Contents

TABLE OF CONTENTS



FORM 10-K ANNUAL
REPORT

FOR THE YEAR ENDED

DECEMBER 31, 2003

BSB BANCORP, INC.



|         |  |          |  |                                                                                       |  |        
|-------- |  | -------- |  | ------------------------------------------------------------------------------------- |  | -------
|         |  |          |  |                                                                                       |  | Page   
|PART I   |  |          |  |                                                                                      
|         |  | Item 1.  |  | Business                                                                              |  | 3      
|         |  | Item 2.  |  | Properties                                                                            |  | 24     
|         |  | Item 3.  |  | Legal Proceedings                                                                     |  | 25     
|         |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 25     
|         |  |         
|PART II  |  |          |  |                                                                                      
|         |  | Item 5.  |  | Market for the Registrants Common Equity and Related Stockholder Matters             |  | 25     
|         |  | Item 6.  |  | Selected Financial Data                                                               |  | 26     
|         |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 27     
|         |  | Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 49     
|         |  | Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 52     
|         |  | Item 9.  |  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 83     
|         |  | Item 9A. |  | Controls and Procedures                                                               |  | 83     
|         |  |         
|PART III |  |          |  |                                                                                      
|         |  | Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 84     
|         |  | Item 11. |  | Executive Compensation                                                                |  | 87     
|         |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 97     
|         |  | Item 13. |  | Certain Relationships and Related Transactions                                        |  | 99     
|         |  | Item 14. |  | Principal Accountant Fees and Services                                                |  | 100    
|         |  |         
|PART IV  |  |          |  |                                                                                      
|         |  | Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 102    
|         |  |          |  | Exhibit Index                                                                         |  | 102-106



---

##### Table of Contents

FORWARD-LOOKING STATEMENTS



Certain statements in this Form 10-K, especially within Managements Discussion and Analysis of Financial Condition and
Results of Operations, will include forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended. In general, the word or phrases will likely result, are expected to, will
continue, is anticipated, estimate, project, believe or similar expressions are intended to identify forward-looking statements. In addition, certain disclosures and information
customarily provided by financial institutions, such as analysis of the adequacy of the allowance for loan losses or an analysis of the interest rate sensitivity of the Companys assets and liabilities, are inherently based upon predictions of
future events and circumstances. Although the Company makes such statements based on assumptions which it believes to be reasonable, there can be no assurance that actual results will not differ materially from the Companys expectations. Some
of the important factors which could cause its results to differ from any results which might be projected, forecasted or estimated, based on such forward-looking statements include: (i) general economic and competitive conditions in the markets in
which the Company operates, and the risks inherent in its operations; (ii) the Companys ability to manage its credit risk and control its operating expense, increase earning assets and non-interest income, and maintain its net interest margin;
and (iii) the level of demand for new and existing products. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the
forward-looking statements. Except as required by applicable law, the Company does not intend, and specifically disclaims any obligation, to update forward-looking statements.



PART I



ITEM 1. BUSINESS



GENERAL



BSB Bancorp, Inc.



BSB Bancorp, Inc. (the Company) is the Delaware chartered bank holding company for BSB Bank & Trust Company
(BSB Bank & Trust or the Bank). The Company owns 100% of the issued and outstanding common stock, $1.00 par value, of the Bank, which is the primary asset of the Company. The business of the Company is the business of the
Bank, which is the Companys sole segment. All references to the Company include the activities of the Bank, unless the context indicates otherwise. The Companys and the Banks principal executive offices are located at 58-68
Exchange Street, Binghamton, New York 13901, telephone (607) 779-2406.



On December 24, 2003, Partners Trust Financial Group, Inc. (Partners) announced a definitive agreement to acquire BSB Bancorp, Inc. The merger is contingent upon the successful conversion and restructuring of Partners and
Partners Trust, MHC into a full capital stock corporation. The Company will be merged into the reorganized Partners following the conversion. The conversion, offering and acquisition are expected to be completed in mid-2004, subject to regulatory
and stockholder approvals. The consideration to be paid in the merger will be 40% cash and 60% stock. Shareholders of the Company will be able to elect either $36.00 in cash or shares of common stock of the reorganized Partners Trust, subject to
customary proration and allocation procedures. The exchange ratio for the stock portion will be determined by dividing $36.00 by the price at which shares of Partners Trust common stock are sold in the conversion. The aggregate value of the
transaction is approximately $347 million.



The Company, as a
bank holding company, is subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve System (the Federal Reserve Board), as well as the New York State Banking Department.



3



---

##### Table of Contents

BSB Bank & Trust Company



The Bank is headquartered in Binghamton, New York and at December 31, 2003 conducted business in Broome, Chenango, Onondaga
and Tioga Counties and adjacent areas of New York State. During the first quarter of 2002, the Company sold its $10.7 million credit card portfolio to American Express and recognized a net gain before taxes of approximately $1.8 million on the sale.
The increasing costs associated with maintaining the technology to provide a high level of service to our customers and the higher levels of charge-offs associated with credit card debt made this a less profitable line of business for the Company.
During the fourth quarter of 2002, the Company sold its two Elmira branches located in the Chemung County area. The sale allowed the Company to concentrate efforts on the further development of its retail branch operations in the Greater Binghamton
area and the Central New York region. The sale included deposits of approximately $44.2 million, net loans of approximately $2.8 million and certain other assets and resulted in a net gain before taxes of approximately $3.1 million. In May 2003, the
Bank opened a new in-house item processing center primarily to facilitate direct control over the technology and operational processing of bank and customer transactions with the Federal Reserve.



BSB Bank & Trust serves its customers from 20 full-service banking
offices. Additional banking services are provided by a network of branch-based and off-premise automatic teller machines, as well as 12 proprietary banking service locations (Storeteller) within a large area supermarket chain. The
primary market areas of the Bank are the Southern Tier of New York, centered around the city of Binghamton, and Central New York, centered around Syracuse. These metropolitan areas have a combined population of nearly one million people. Over the
past decade, BSB Bank & Trust has grown from a traditional thrift institution to a diversified financial services organization providing a full range of deposit and loan products to area businesses and consumers, mortgage banking, trust,
investment and insurance services. The Bank is a major provider of banking services to consumers and the business community, as well as banking services for school districts and cooperative education centers, cities, towns, villages and numerous
municipal agencies. It is also active in indirect automobile financing.



The Bank is subject to regulation, examination and supervision by the New York State Banking Department (NYSBD) and the Federal Deposit Insurance Corporation (FDIC). Deposits in the Bank are insured by the FDIC to
the extent provided by law. The Bank is also a member of the Federal Home Loan Bank of New York (FHLB).



LENDING ACTIVITIES



The Company offers commercial and residential permanent and construction mortgage loans, commercial and industrial loans (C&I), small
business loans, various direct and indirect consumer loans including home equity lines of credit and home equity loans and other types of consumer loans. As a community bank, all loans are approved locally, either by individual loan officers, the
management loan committee or the directors loan committee, depending on the size and type of loan. Interest rates charged by the Company are affected principally by the demand for such loans and the supply of funds available for lending
purposes. These factors are in turn affected by general economic conditions, including local competition, monetary policies of the Federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.



One of the Companys objectives for 2003 was to continue
the process initiated in 2001 of restructuring its asset mix and, as part of the process of achieving this objective, reduce the size of the commercial and industrial portfolio. Another part of the restructuring process was to increase the size of
the real estate loan portfolio, increasing both residential and commercial mortgage loans. This was consistent with the goal of improving asset quality and creating more sustainable and stable earnings over time.



The Companys portfolio of loans totaled $1.4 billion at December 31,
2003, representing 65.5% of the Companys total assets at that date, compared to $1.3 billion, and 66.2% of the Companys total assets at December 31, 2002. The Company continued to lower the balance of C&I loans within its portfolio
of assets. The balance of C&I loans decreased to $323.6 million or 22.3% of all loans at December 31, 2003 compared to $492.2 million or 36.5% of all loans at December 31, 2002. These loans are generally tied to the Companys prime rate
(Prime Rate). Real estate loans, another strategic focus during 2003, increased to $758.2 million or 52.3% of all loans at December 31, 2003 compared to $477.3 million or 35.4% at December 31, 2002.



4



---

##### Table of Contents

The balance of consumer loans was $367.4 million at December 31, 2003 compared to $378.0 million at
December 31, 2003 and 2002. The decline in consumer loans is largely the result of the decrease in balance of mobile home loans from $55.4 million at December 31, 2002 to $45.1 million at December 31, 2003.



As interest rates continued to decline during the year, the Company
considered it prudent to sell its longest duration residential mortgage loan originations while retaining its shorter term fixed- and variable-rate loans and bi-weekly mortgage loans with maturities of less then 30 years. In this strategy, real
estate loans increased to 52.3% of the loan portfolio at December 31, 2003 from 35.4% at December 31, 2002. This increase in the percent of real estate loans to total loans is consistent with the Companys overall strategy to improve asset
quality by dedicating itself to implementing a strong credit culture, translating into a stronger credit risk profile for the future.



Loan Portfolio Composition



The following table sets forth the composition of the Companys loan portfolio by loan type as of the dates indicated.



|                        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|----------------------- |  | ------------ | --------- | ------- | ------ | - | ------ | ---- | --------- |  | ------ | ------ |  | ------- | --------- |  | ------ | - | ------- | - | --------- | ------ | ------ | ------- |  | - | --------- |  | ------ | -
|                        |  | December 31, |          
|                        |  | 2003         |           |         | 2002   |   |        | 2001 |           |  | 2000   |        |  | 1999    |          
|(Dollars in Thousands)  |  | Amount       |           | Percent |        |   | Amount |      | Percent   |  |        | Amount |  | Percent |           |  | Amount |   | Percent |   |           | Amount |        | Percent | 
|Commercial loans        |  | $            | 323,634   |         | 22.33  | % |        | $    | 492,171   |  | 36.53  | %      |  | $       | 750,552   |  | 50.56  | % |         | $ | 1,012,430 |        | 55.06  | %       |  | $ | 916,442   |  | 52.69  | %
|                        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Consumer loans:         |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Personal-direct         |  |              | 70,965    |         | 4.90   | % |        |      | 65,768    |  | 4.88   | %      |  |         | 61,078    |  | 4.11   | % |         |   | 64,965    |        | 3.53   | %       |  |   | 72,497    |  | 4.17   | %
|Personal-indirect       |  |              | 249,558   |         | 17.22  | % |        |      | 270,597   |  | 20.08  | %      |  |         | 268,787   |  | 18.10  | % |         |   | 324,402   |        | 17.65  | %       |  |   | 352,426   |  | 20.25  | %
|Other                   |  |              | 46,889    |         | 3.23   | % |        |      | 41,596    |  | 3.09   | %      |  |         | 48,489    |  | 3.27   | % |         |   | 49,470    |        | 2.69   | %       |  |   | 47,808    |  | 2.75   | %
|                        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Total consumer loans    |  |              | 367,412   |         | 25.35  | % |        |      | 377,961   |  | 28.05  | %      |  |         | 378,354   |  | 25.48  | % |         |   | 438,837   |        | 23.87  | %       |  |   | 472,731   |  | 27.17  | %
|                        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Real estate:            |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Fixed-rate:             |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Residential             |  |              | 498,651   |         | 34.41  | % |        |      | 262,199   |  | 19.46  | %      |  |         | 145,856   |  | 9.82   | % |         |   | 127,482   |        | 6.93   | %       |  |   | 97,221    |  | 5.59   | %
|FHA & VA                |  |              | 1,128     |         | 0.08   | % |        |      | 1,844     |  | 0.14   | %      |  |         | 2,775     |  | 0.19   | % |         |   | 4,008     |        | 0.22   | %       |  |   | 5,513     |  | 0.32   | %
|Commercial              |  |              | 36,092    |         | 2.49   | % |        |      | 34,767    |  | 2.58   | %      |  |         | 18,433    |  | 1.24   | % |         |   | 10,278    |        | 0.56   | %       |  |   | 11,516    |  | 0.66   | %
|Commercial FHA          |  |              | 153       |         | 0.01   | % |        |      | 160       |  | 0.01   | %      |  |         | 170       |  | 0.01   | % |         |   | 179       |        | 0.01   | %       |  |   | 186       |  | 0.01   | %
|                        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Total fixed-rate        |  |              | 536,024   |         | 36.99  | % |        |      | 298,970   |  | 22.19  | %      |  |         | 167,234   |  | 11.26  | % |         |   | 141,947   |        | 7.72   | %       |  |   | 114,436   |  | 6.58   | %
|                        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Adjustable-rate:        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Residential             |  |              | 59,002    |         | 4.07   | % |        |      | 66,301    |  | 4.92   | %      |  |         | 72,304    |  | 4.87   | % |         |   | 88,700    |        | 4.82   | %       |  |   | 74,480    |  | 4.28   | %
|Commercial              |  |              | 163,172   |         | 11.26  | % |        |      | 112,028   |  | 8.31   | %      |  |         | 116,263   |  | 7.83   | % |         |   | 156,831   |        | 8.53   | %       |  |   | 161,496   |  | 9.28   | %
|                        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Total adjustable-rate   |  |              | 222,174   |         | 15.33  | % |        |      | 178,329   |  | 13.23  | %      |  |         | 188,567   |  | 12.70  | % |         |   | 245,531   |        | 13.35  | %       |  |   | 235,976   |  | 13.56  | %
|                        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|Total real estate loans |  |              | 758,198   |         | 52.32  | % |        |      | 477,299   |  | 35.42  | %      |  |         | 355,801   |  | 23.96  | % |         |   | 387,478   |        | 21.07  | %       |  |   | 350,412   |  | 20.14  | %
|                        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  
|                        |  | $            | 1,449,244 |         | 100.00 | % |        | $    | 1,347,431 |  | 100.00 | %      |  | $       | 1,484,707 |  | 100.00 | % |         | $ | 1,838,745 |        | 100.00 | %       |  | $ | 1,739,585 |  | 100.00 | %
|                        |  |              |           |         |        |   |        |      |           |  |        |        |  |         |           |  |        |   |         |   |           |        |        |         |  |   |           |  |        |  



The following table
sets forth scheduled contractual maturities of loans in the Companys portfolio at December 31, 2003. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdraft loans are reported as due in one year or
less. The following table also sets forth the dollar amount of loans which are scheduled to mature after one year which have fixed- and adjustable-interest rates.



|                                  |  |                             |         |                            |   |                         |  |               |         |       |   |         |  |   |          
|--------------------------------- |  | --------------------------- | ------- | -------------------------- | - | ----------------------- |  | ------------- | ------- | ----- | - | ------- |  | - | ---------
|(Dollars in Thousands)            |  | ResidentialReal EstateLoans |         | CommercialReal EstateLoans |   | CommercialBusinessLoans |  | ConsumerLoans |         | Total
|Amounts due:                      |  |                             |         |                            |   |                         |  |               |         |       |   |         |  |   |          
|Within one year                   |  | $                           | 32,376  |                            | $ | 42,335                  |  | $             | 157,723 |       | $ | 85,877  |  | $ | 318,311  
|After one year through five years |  |                             | 143,947 |                            |   | 78,491                  |  |               | 124,390 |       |   | 183,423 |  |   | 530,251  
|Beyond five years                 |  |                             | 382,458 |                            |   | 78,591                  |  |               | 41,521  |       |   | 98,112  |  |   | 600,682  
|                                  |  |                             |         |                            |   |                         |  |               |         |       |   |         |  |   |          
|Total                             |  | $                           | 558,781 |                            | $ | 199,417                 |  | $             | 323,634 |       | $ | 367,412 |  | $ | 1,449,244
|                                  |  |                             |         |                            |   |                         |  |               |         |       |   |         |  |   |          
|Amounts due after one year:       |  |                             |         |                            |   |                         |  |               |         |       |   |         |  |   |          
|Fixed                             |  | $                           | 469,870 |                            | $ | 35,948                  |  | $             | 114,089 |       | $ | 238,456 |  | $ | 858,363  
|                                  |  |                             |         |                            |   |                         |  |               |         |       |   |         |  |   |          
|Adjustable                        |  | $                           | 56,535  |                            | $ | 121,134                 |  | $             | 51,822  |       | $ | 43,079  |  | $ | 272,570  
|                                  |  |                             |         |                            |   |                         |  |               |         |       |   |         |  |   |          



5



---

##### Table of Contents

Contractual maturities of loans do not necessarily reflect the actual life of loans in the Companys
portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and enforcement of due-on-sale clauses. Such clauses give the Company the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid.



Commercial and Industrial Lending



As of December 31, 2003, commercial loans amounted to $323.6 million or 22.3% of the Companys total loans. Under New York law, the Bank generally
may not lend to any one entity more than 15% of the Banks capital stock, surplus and undivided profits. However, the Bank is permitted to extend a loan up to 25% of the Banks capital stock, surplus and undivided profits, provided that
the loan is collateralized to the extent that such loan is between 15% and 25% of the Banks capital stock, surplus and undivided profits. The Banks policy, consistent with regulation, restricts loans to any borrower and related entities
to 15% of shareholders equity, unless the amount in excess of 15% is secured by liquid collateral. Loan relationships approaching 15% of the Banks shareholders equity generally require diversification in both repayment source and
collateral.



The Company offers a variety of commercial loan
services, including term loans and revolving lines of credit, as well as letters of credit. Commercial lending involves somewhat greater credit risks to the Company than most other types of lending. The Company has looked to decrease the overall
portfolio size to a more manageable level that would represent a smaller percent of the total loan portfolio. Consistent with this objective, the C&I loan portfolio has decreased $168.5 million to $323.6 million or 22.3% of the entire loan
portfolio at December 31, 2003. As a part of the strategy to decrease the C&I loan portfolio, the Company sold certain large, under-performing loans with an aggregate carrying value of $36.7 million during the fourth quarter of 2003. The Company
has maintained a consistent number of large borrowing relationships within the portfolio. At December 31, 2003, there were 10 loan relationships exceeding $10.0 million compared to 8 loan relationships at December 31, 2002. The average size of a
C&I loan increased from $222,000 in 2002 to $238,000 in 2003.



Management continues to review commercial loan applications from companies with a strong financial base and strong credit history, principally within the Companys market area. Commercial loan originations amounted to $53.8 million or
7.9% of total loans originated in 2003 compared to $99.4 million or 18.4% of total loans originated in 2002. Total loan commitments to the 10 largest lending relationships ranged from $10.4 million to $27.2 million at December 31, 2003. Outstanding
loan balances for these 10 relationships, ranging from $2.9 million to $19.8 million, are made up of 37 individual loans. Each of these loans has varied sources of repayment and collateral. The Company periodically reviews all larger group credits.



The commercial loan portfolio is diversified by industry, type
and size, and the loans have been made primarily to small- and medium-sized businesses in the regional market. Approximately 48.1% of the Companys commercial loans bear floating interest rates tied to the Prime Rate. The average yield on the
commercial loan portfolio was 6.27% in 2003 and 6.58% in 2002. The Companys average Prime Rate was 4.12% in 2003 and 4.67% in 2002. Commercial loans are made on both a collateralized and uncollateralized basis and include collateralized lines
of credit. Although most have shorter terms, the maximum term of a non-real estate collateralized commercial loan is ten years.



The Companys commercial loan officers are responsible for generating new business, the underwriting and assignment of internal risk ratings as loans
are committed, and monitoring the creditworthiness of borrowers and for changing risk ratings when appropriate. The Loan Analysis unit analyzes the financial information and recommends risk ratings for larger credits. The Loan Review department
reviews risk ratings assigned and has authority to change ratings and recommends risk ratings for larger credits, as appropriate. The risk ratings are used in conjunction with a risk rating migration analysis program to assist monthly in determining
levels of loss allowance needed. Delinquency reports are reviewed during the month to prompt the loan officer to call or send written notice to the borrower.



6



---

##### Table of Contents

The authority to approve commercial loans varies by the size of the loan. Loans under $150,000 must have
a secondary approval of the loan officers team leader. Loans exceeding $5.0 million require multiple approvals from the senior loan officer or the CEO, plus the Credit Deputy and the Directors Loan Committee. For commercial loans at
intermediate levels, the Company requires designated approvals of the senior loan officers, the CEO, plus the Credit Deputy. The Board of Directors approves individual loan authority.



For loan portfolio analysis, geographic concentrations are reviewed at the same time as industry concentrations.
Approximately 69.2% of commercial loans are located in the Companys primary market area of Broome, Chenango, Onondaga and Tioga Counties. Of the remaining 30.8%, 28.0% are spread through other counties of New York State with primary
concentrations in Monroe, Cortland and Tompkins Counties. The remainder of these loans are in other states.



In addition to the various types of lending services, the Company also offers to commercial customers a range of depository and related services,
including commercial demand deposit accounts, cash management, payroll and direct deposit to employees accounts.



The Company monitors commercial loan and commercial real estate industry stratifications at least four times per year and continues to require diversity
throughout its commercial loan and commercial real estate portfolios.



Commercial Real Estate Lending



The Company
originated $97.7 million in commercial real estate loans in 2003 compared to $42.8 million in 2002. At December 31, 2003, the Company had $199.4 million of commercial real estate loans outstanding, representing approximately 13.8% of the
Companys total loan portfolio. Of the $199.4 million outstanding at December 31, 2003, $36.2 million were fixed-rate loans with amortization periods of 3 to 25 years. Adjustable-rate loans at December 31, 2003 were $163.2 million and had rates
determined by indices such as Prime Rate, the London Interbank Offer Rate (LIBOR) or Treasury bill rates. These adjustable-rate loans reprice every one, three or five years based on the current index and any spread over that index, if
applicable. With the current level of rates at historic lows and with financial institutions throughout the market area competitively pricing the loans, the Company has seen a small increase in fixed-rate loan balances from $34.9 million at December
31, 2002 to $36.2 million at December 31, 2003. The origination of commercial real estate loans in 2002, was primarily from the Companys major market areas in a four county area of the Southern Tier and Central regions of New York. In 2003,
commercial real estate loan originations in the same four county area, were only 45.6% of all such originations. The Companys strategy to grow the commercial real estate portfolio has been impacted by the lack of local economic growth of the
moderate-sized commercial organizations within our principal market areas. As a result, recent growth of this portfolio includes originations of 16.0% from adjacent counties and 25.9% from other states, principally in the New England area. Projects
outside our primary market area are generally with existing customers with operations in such areas.



In setting interest rates and origination fees on new loans and maturity extensions, management considers both current market conditions and its analysis
of the risk associated with the particular project. When the loan is underwritten, the following items are part of the consideration: the properties cash flow and its ability to service the debt, collateral coverage, the percent of occupancy
if applicable, creditworthiness of tenants, creditworthiness of borrowers and guarantors, and other factors that could impact the repayment of the debt.



The approvals for commercial real estate loans follows the same levels of authority as described for commercial and industrial loans.



7



---

##### Table of Contents

Consumer Lending



The Company engages in a variety of consumer lending activities including auto loans, both direct and indirect, home equity line of credit loans,
overdraft loans, student loans and direct personal loans. Consumer loans provide diversification within the loan portfolio and allow the Company to meet the credit needs of our customers. The short-term nature of these loans shortens the duration of
the entire loan portfolio. As of December 31, 2003, a total of $367.4 million of consumer loans was outstanding as compared to $378.0 million at December 31, 2002. The decline in consumer loans is largely a result of the decrease in mobile home
loans from $55.4 million at December 31, 2002 to $45.1 million at December 31, 2003. Existing mobile home loans are aging off the loan portfolio and are not being replaced with new originations as witnessed by the decline of originations for mobile
home loans from $2.9 million in 2002 to $101 thousand in 2003. Consumer loans generally involve more risk of collectibility than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral. As a
result, consumer lending collections are dependent on the borrowers continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, personal bankruptcy and by adverse economic conditions. The Company has
maintained a strong presence in indirect lending within our market areas. New auto loans historically have a lower incidence of loss than used autos. Indirect new auto loan balances have remained constant at $60.1 million at December 31, 2002 and
December 31, 2003. Originations of indirect new auto loans have decreased from $46.9 million in 2002 to $29.7 million in 2003. The Company faces vigorous competition from automakers offering zero percent financing and other incentives to
market their products.



Of the $320.5 million in personal loans
outstanding at December 31, 2003, $71.0 million or 22.1% represented direct consumer loans originated by the Companys lending staff. The remaining $249.5 million or 77.9% represented the indirect consumer loan portfolio originated through
relationships with mobile home service companies, automobile and other retail dealers. Indirect originations in 2003 totaled $95.0 million or 56.5% of all consumer loan originations. Of these indirect originations, used auto loans were the largest
source at $65.0 million. The used auto loans ending balance at December 31, 2003 was $124.5 million, down from $128.5 million at December 31, 2002. These loans typically are shorter term and pay off faster than new auto loans. All personal loans
originated for the Company are advanced at fixed-interest rates, with a high percentage of the loans offering repayment terms up to 60 months.



Home equity lines of credit are primarily an adjustable-rate consumer loan product with a term of 20 or 30 years. Such loans are generally collateralized
by the borrowers primary residence, when the loan to value ratio, taking into account the first mortgage loan, does not exceed a maximum of 95% based on the borrowers credit rating. As of December 31, 2003, the outstanding balance of
total home equity lines of credit was $43.4 million, an increase of $7.1 million from $36.3 million at December 31, 2002. The increase in home equity line of credit loans is a result of the Companys overall strategy of increasing the
origination loans collateralized by real estate. Interest rates on home equity lines of credit are adjusted monthly to reflect changes in the Prime Rate.



Consumer loans are marketed throughout the Companys branches and via print and visual media promotions. Authority for approval of consumer loans
varies by loan type and individual authority limits as approved by the Board of Directors and must follow the approved underwriting practices of the Company which normally include employment status, credit history and credit score.



In the first quarter of 2002, the Company sold its $10.7 million credit card
portfolio to American Express Company.



Consumer lending, with
its short-term characteristics, contributes to the improvement of the Companys overall interest rate sensitivity because of its more rapid amortization compared to residential and commercial real estate loans.



8



---

##### Table of Contents

Residential Real Estate Lending



The Company historically has been, and continues to be, a leading originator of residential real estate loans in its market
area. At December 31, 2003, $558.8 million or 38.6% of the Companys total loan portfolio consisted of residential mortgage loans. In 2003 and 2002, residential mortgage loan originations amounted to $390.8 million and $200.5 million,
respectively, which represented approximately 57.1% and 38.0%, respectively, of the Companys total loan originations.



The continued decline in interest rates during 2003 to their current low levels caused consumer preference to remain with fixed-rate residential loans.
Loans were originated or refinanced at lower fixed rates as consumers looked to lock in the attractive financing rates. Residential mortgage lending continues to be an important component of the Companys loan portfolio. During 2003, the
Company retained in its portfolio of loans with maturities of 20 years or less. Residential mortgages originated with maturities greater then 20 years are generally sold by the Company. In 2003 the Company sold $55.8 million in residential
mortgages, an increase from $24.7 million sold in 2002. The bi-weekly residential loan has been the most popular product among our customers as they are able to obtain attractive rates with an actual duration closer to that of a 20-year loan. For
2003, total originations of bi-weekly residential loans were $264.5 million or 38.6% of all mortgage originations. By comparison, in 2002, total bi-weekly residential loan originations were $84.0 million or 41.9% of mortgage originations. The trend
to refinance at lower fixed-rates is reflected in the 2003 originations of 10-year mortgages ($64.7 million) and 15-year mortgages ($157.4 million). By comparison, the Company originated, in 2002, a total of $52.4 million of 10- and 15-year
fixed-rate mortgages, with 72.1% of these in the 15-year category.



The growth in these portfolios is shown in the following chart of residential mortgage loan balances at December 31, 2003 and December 31, 2002.



|                                       |  |             |         |             |   |        
|-------------------------------------- |  | ----------- | ------- | ----------- | - | -------
|(Dollars in Thousands) At December
31, |  | 2003 Amount |         | 2002 Amount
|30-year fixed-rate                     |  | $           | 46,799  |             | $ | 62,506 
|15- to 20-year fixed-rate              |  |             | 94,731  |             |   | 81,090 
|10-year fixed-rate                     |  |             | 25,764  |             |   | 14,414 
|30-year bi-weekly fixed-rate           |  |             | 29,481  |             |   | 45,080 
|15- to 20-year bi-weekly fixed-rate    |  |             | 207,633 |             |   | 45,791 
|10-year bi-weekly fixed-rate           |  |             | 87,445  |             |   | 11,441 
|Other fixed-rate                       |  |             | 7,926   |             |   | 3,721  
|Adjustable-rate                        |  |             | 59,002  |             |   | 66,301 
|                                       |  |             |         |             |   |        
|                                       |  | $           | 558,781 |             | $ | 330,344
|                                       |  |             |         |             |   |        



Residential real
estate loans provide a favorable alternative for the Company as a key element of the strategy to reduce credit risk within its overall loan portfolio. Such loans also fulfill the objective of a full range of loan services to customers within our
primary market areas. Generally, retail originations of residential real estate loans provide the Company more direct control over the volume of such loans, and more favorable origination costs. In order to achieve favorable operational
efficiencies, the Company opened a new facility in 2002 dedicated to residential real estate loan production. The balance between wholesale and retail loans closed remained nearly the same with approximately 60.4% of the residential real estate
loans closed within the Companys facilities. Significant changes in the penetration of the Companys two major markets were achieved during 2003, as retail residential real estate loans closed in Central New York were approximately 49.5%
of the total in 2003 as compared to approximately 43% in 2002.



9



---

##### Table of Contents

Loan Review



The Company maintains a Loan Review program in order to measure the quality of its loan portfolio, to enable management to report on the level of
impairment within the loan portfolio and to recommend appropriate loan loss reserve levels to Senior Management and the Board of Directors. The Loan Review department is responsible for analysis and monitoring of loans subsequent to their commitment
or acquisition by the Company. Loan reviews provide a systematic process to ensure appropriate corrective action for any potential problem loan.



The Loan Review department provides Senior Management and the Board of Directors with information regarding the quality and structure of all loan
portfolios. Monthly reporting for each loan portfolio includes reports on past due and non-performing trends, an evaluation of the loan loss provision, analysis of the adequacy of the allowance for loan losses, as well as a summary of loans deemed
as impaired or troubled debt restructurings. Quarterly reporting includes a management action listing for certain commercial loans based upon the risk ratings assigned during the current review. Loan Review also reports on changes in risk ratings
between quarters and industry concentration.



Delinquent Loans



If a borrower fails to make a scheduled payment on a
loan, the Company attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts are generally made within five business days after the expiration of the payment grace period set forth in the loan contract for residential
mortgage and consumer loans. Commercial customers are contacted within five days after a payment becomes past due. The Company has established a Special Assets unit that performs all collection activity for retail loans. Also, commercial loans are
transferred to this unit as soon as it is determined that loan payments may not continue on a timely basis.



While the Company generally prefers to work with borrowers to resolve such problems, the Company does initiate foreclosure or repossession proceedings or
pursues other legal collection procedures, as necessary, to minimize any potential loss. Once the Company takes legal title, the property is classified as other real estate owned and repossessed assets on the Consolidated Statement of Condition.



Classification of Loans



The Companys Loan Review department performs a risk rating analysis as
an integral part of the review of each loan portfolio. For the commercial and commercial real estate portfolios, the risk rating analysis includes a grading system following a standard risk rating matrix. Based upon this matrix, the Company
determines a classification for such loans and other assets that are considered to be of lesser quality, as substandard, doubtful or loss assets. An asset is considered substandard if it is
inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard, with the added characteristic that the identified weaknesses make collection or liquidation in full
improbable. Assets classified as loss are those considered uncollectable and of such little value that the continuance as assets without the establishment of a specific loss reserve is not warranted.



At December 31, 2003, the Company had classified $53.4 million of assets as
performing substandard loans, which include $0.8 million of accruing loans identified as troubled debt restructured loans. Comparative information at December 31, 2002, reflects $78.2 million of assets as performing substandard loans, which include
$12.2 million of accruing loans identified as troubled debt restructured loans.



Non-performing Assets and Other Real Estate Owned (ORE)



Loans are placed on a non-accrual status when, in the judgement of management, the probability of collection of principal or interest is deemed to be insufficient to warrant further accrual. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from interest income. Other than with respect to consumer loans, the Company does not accrue interest on loans greater than 90 days or more past due unless the estimated fair
value of the collateral and active collection efforts are believed to be adequate to result in full recovery. Loans are removed from non-accrual status when they become current as to principal and interest, or when in the opinion of management, the
loans are expected to be fully collectible as to amounts due for both principal and interest.



10



---

##### Table of Contents

Other real estate owned and repossessed assets is comprised of property or assets acquired in the
settlement of loans. These assets are initially established at the lesser of the recorded investment in the loan, or at the estimated fair value of the asset, less an estimate of the costs expected to be incurred during its disposition. At the time
of foreclosure or repossession, the amount, if any, by which the recorded investment in the loan exceeds the net fair value of the asset received is charged against the allowance for loan losses. Any subsequent declines in estimated fair value of
the property or asset, or expenses incurred to maintain the property or asset, are charged to operating expense. An asset may be considered an in-substance foreclosure or repossession if the Company has taken possession of the asset serving as
collateral for the loan, regardless of whether the Company has legal title to the asset. The final disposition of the property or asset is dependent upon many factors and the final disposition price may differ from the recorded value at that time.
Any gains or losses upon disposition are recorded to operating expense.



The following table sets forth information regarding non-accrual loans, loans which are 90 days or more overdue and other real estate owned and repossessed assets held by the Company at the dates indicated:



|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|(Dollars in Thousands) December
31,                                        |  | 2003 |        |   | 2002 |   |        | 2001 |  |   | 2000   |   |  | 1999 |       
|Non-accrual loans:                                                         |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial loans                                                           |  | $    | 11,186 |   |      | $ | 34,614 |      |  | $ | 42,424 |   |  | $    | 17,104 |   |  | $ | 1,852  |  
|Residential real estate loans                                              |  |      | 622    |   |      |   | 616    |      |  |   | 882    |   |  |      | 2,071  |   |  |   | 2,161  |  
|Commercial real estate loans                                               |  |      | 32     |   |      |   | 2,647  |      |  |   | 4,235  |   |  |      | 1,522  |   |  |   | 53     |  
|Consumer loans                                                             |  |      | 134    |   |      |   | 288    |      |  |   |       |   |  |      |       |   |  |   |       |  
|Troubled debt restructured loans                                           |  |      | 1,126  |   |      |   | 12,172 |      |  |   | 12,255 |   |  |      | 10,660 |   |  |   | 6,596  |  
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total non-accrual loans                                                    |  |      | 13,100 |   |      |   | 50,337 |      |  |   | 59,796 |   |  |      | 31,357 |   |  |   | 10,662 |  
|Accruing loans with principal or interest payments 90 days or more overdue |  |      | 109    |   |      |   | 278    |      |  |   | 879    |   |  |      | 781    |   |  |   | 945    |  
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total non-performing loans                                                 |  |      | 13,209 |   |      |   | 50,615 |      |  |   | 60,675 |   |  |      | 32,138 |   |  |   | 11,607 |  
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Other real estate owned and repossessed assets                             |  |      | 1,231  |   |      |   | 3,109  |      |  |   | 2,034  |   |  |      | 1,805  |   |  |   | 2,442  |  
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total non-performing assets                                                |  | $    | 14,440 |   |      | $ | 53,724 |      |  | $ | 62,709 |   |  | $    | 33,943 |   |  | $ | 14,049 |  
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total non-performing loans to total loans                                  |  |      | 0.91   | % |      |   | 3.76   | %    |  |   | 4.09   | % |  |      | 1.75   | % |  |   | 0.67   | %
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total non-performing assets to total assets                                |  |      | 0.65   | % |      |   | 2.64   | %    |  |   | 3.04   | % |  |      | 1.47   | % |  |   | 0.63   | %
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  



Accruing loans
classified as troubled debt restructured loans totaled $13.8 million, $13.8 million, $8.8 million, $4.8 million and $13.1 million at December 31, 2003, 2002, 2001, 2000 and 1999, respectively. The Company does not consider these loans to be
non-performing.



During 2003, the Company sold certain large,
under-performing loans with an aggregate carrying value of $36.7 million. The proceeds from the sale of these loans, net of estimated transaction costs, was $27.2 million. The $9.5 million difference between the carrying value and the net proceeds
from the sale of these loans generally reflects the Companys previously established loan loss reserves and was charged-off against the allowance for loan losses. They had no impact on the Companys income statement. Prior to the decision
to sell, these loans were either non-performing or performing loans classified as substandard. As a result of the sale, non-performing loans decreased $14.5 million and substandard performing loans declined $22.2 million.



Additional interest income would have been recorded on loans accounted for on
a non-accrual basis of approximately $1.1 million, $3.0 million, $4.0 million, $1.8 million and $806,000, at December 31, 2003, 2002, 2001, 2000 and 1999, respectively, if such loans had been current throughout the respective years. Such amounts
were not included in the Companys interest and dividend income for the respective periods.



Interest income on non-accrual loans was recognized during the years 2003, 2002, 2001, 2000 and 1999, of approximately $300,000, $540,000, $2.1 million,
$1.3 million and $119,000, respectively.



11



---

##### Table of Contents

Allowance for Loan Losses



The process of originating loans, of any type, includes an inherent risk that loan losses will be experienced. The risk of
loss varies with, among other things, general economic conditions, the type of loan, creditworthiness of the borrower and, for a collateralized loan, the quality of the collateral securing the loan. In an effort to minimize loan losses, the Company
monitors its loan portfolio by reviewing delinquent loans and taking appropriate measures as discussed above. In addition, with respect to the Companys commercial real estate and commercial business loans, the Company closely watches all loans
with a risk rating (described above under Classification of Loans) that indicate potential adverse factors. Also, the loan review process includes, on an annual basis, a review of the borrowers financial statements and, in some
cases, inspections of borrowers collateral properties.



The allowance for loan losses represents the amount available for probable loan losses in the Companys loan portfolio as estimated by management. Management performs a comprehensive assessment, at least quarterly, of the allowance for
loan losses. Based upon the periodic reports completed by the Loan Review program, the allowance is assessed with a migration analysis by applying estimated loss ratios to the risk ratings of loans both individually and by category. The estimated
loss ratios incorporate such factors as recent loss experience, current economic conditions and trends, trends in past due and non-accrual amounts, the risk characteristics of various classifications and concentrations of loans, transfer
risks and other pertinent factors. Specific reserves are evaluated through review of impaired loans, non-performing loans and certain performing loans designated as problems. The evaluation includes regular disciplined analysis of the portfolio
covering the risk profile and experience of the existing portfolio, along with growth, concentration and management resources. The allowance for loan losses reflects managements best estimate of probable loan losses.



At December 31, 2003, the allowance for loan losses was $47.4 million or
3.27% of total loans outstanding providing coverage for non-performing loans of 359.01%. The coverage of non-performing loans was 124.96% at December 31, 2002, and the allowance for loan losses was $63.3 million or 4.69% of total loans outstanding.
The table below summarizes the activity in the Companys allowance for loan losses over the last five years. The Companys improved coverage ratio for non-performing loans is consistent with managements priority to strategically
balance the mix of the Companys loan portfolio and recognize the influence of general economic and business conditions, especially those influencing our regional businesses. Managements assessment of the adequacy of the allowance for
loan losses incorporates an evaluation of the Companys overall loan portfolio, based on both general economic factors and specific factors influencing loans covered by the risk-rating system described above.



12



---

##### Table of Contents

|                                                |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|Years Ended December 31, (Dollars in
Thousands) |  | 2003 |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|Average total loans outstanding                 |  | $    | 1,409,653 |   |      | $ | 1,359,891 |      |  | $ | 1,657,154 |   |  | $    | 1,797,857 |   |  | $ | 1,715,429 |  
|                                                |  |      |           |   |     
|Allowance at beginning of period                |  | $    | 63,250    |   |      | $ | 58,829    |      |  | $ | 59,291    |   |  | $    | 29,134    |   |  | $ | 25,030    |  
|                                                |  |      |           |   |     
|Charge-offs:                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial loans                                |  |      | 32,527    |   |      |   | 42,934    |      |  |   | 16,688    |   |  |      | 21,058    |   |  |   | 11,635    |  
|Consumer loans                                  |  |      | 4,089     |   |      |   | 4,422     |      |  |   | 6,657     |   |  |      | 4,272     |   |  |   | 5,110     |  
|Residential real estate loans                   |  |      | 94        |   |      |   | 88        |      |  |   | 228       |   |  |      | 151       |   |  |   | 267       |  
|Commercial real estate loans                    |  |      | 891       |   |      |   | 1,112     |      |  |   | 58        |   |  |      | 110       |   |  |   | 381       |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total loans charged-off                         |  |      | 37,601    |   |      |   | 48,556    |      |  |   | 23,631    |   |  |      | 25,591    |   |  |   | 17,393    |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Recoveries:                                     |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial loans                                |  |      | 10,212    |   |      |   | 4,578     |      |  |   | 3,459     |   |  |      | 836       |   |  |   | 1,173     |  
|Consumer loans                                  |  |      | 1,472     |   |      |   | 2,229     |      |  |   | 1,340     |   |  |      | 1,030     |   |  |   | 1,087     |  
|Residential real estate loans                   |  |      |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   | 83        |  
|Commercial real estate loans                    |  |      |          |   |      |   |          |      |  |   | 146       |   |  |      | 161       |   |  |   | 17        |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total recoveries                                |  |      | 11,684    |   |      |   | 6,807     |      |  |   | 4,945     |   |  |      | 2,027     |   |  |   | 2,360     |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net charge-offs                                 |  |      | 25,917    |   |      |   | 41,749    |      |  |   | 18,686    |   |  |      | 23,564    |   |  |   | 15,033    |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Provision for loan losses                       |  |      | 10,088    |   |      |   | 46,170    |      |  |   | 18,224    |   |  |      | 53,721    |   |  |   | 19,137    |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance at end of period                      |  | $    | 47,421    |   |      | $ | 63,250    |      |  | $ | 58,829    |   |  | $    | 59,291    |   |  | $ | 29,134    |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Ratio of net charge-offs to:                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Average total loans outstanding                 |  |      | 1.84      | % |      |   | 3.07      | %    |  |   | 1.13      | % |  |      | 1.31      | % |  |   | 0.88      | %
|Ratio of allowance to:                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Non-performing loans                            |  |      | 359.01    | % |      |   | 124.96    | %    |  |   | 96.96     | % |  |      | 184.49    | % |  |   | 251.00    | %
|Year-end total loans outstanding                |  |      | 3.27      | % |      |   | 4.69      | %    |  |   | 3.96      | % |  |      | 3.22      | % |  |   | 1.67      | %



The allowance for loan
losses required an aggregate provision for loan losses of $10.1 million in 2003 compared to $46.2 million in 2002. At December 31, 2002, the coverage of non-performing loans was 124.96%, as the allowance for loan losses was $63.3 million or 4.69% of
total loans outstanding. At December 31, 2003, the allowance decreased to $47.2 million or 3.27% of total loans outstanding, with the coverage of non-performing loans increasing to 359.01%. The improved coverage ratio for non-performing loans is
consistent with managements priority to strategically balance the mix of the Companys loan portfolio and recognize the influence of general economic and business conditions, especially those influencing our regional businesses.



The following table sets forth the allocation of the allowance
for loan losses by loan category for the years indicated. This allocation is based on managements assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The
allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.



|                                       |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|-------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|At December 31, (Dollars in
Thousands) |  | 2003 |        | 2002 |   | 2001   |  | 2000 |        | 1999
|Real estate:                           |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|Commercial                             |  | $    | 8,002  |      | $ | 6,543  |  | $    | 2,905  |      | $ | 2,817  |  | $ | 2,329 
|Residential                            |  |      | 1,097  |      |   | 881    |  |      | 644    |      |   | 272    |  |   | 240   
|Commercial                             |  |      | 26,905 |      |   | 44,502 |  |      | 48,487 |      |   | 48,616 |  |   | 21,446
|Consumer                               |  |      | 11,417 |      |   | 11,324 |  |      | 6,793  |      |   | 7,586  |  |   | 5,119 
|                                       |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|                                       |  | $    | 47,421 |      | $ | 63,250 |  | $    | 58,829 |      | $ | 59,291 |  | $ | 29,134
|                                       |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       



13



---

##### Table of Contents

Below are tables showing the amount of the allowance allocated to each loan type as a percentage of the total allowance,
as well as the percentage of each loan type relative to the total loan portfolio:



|                                      |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|Year                                  |  | 2003   |   |  | 2002   |   |  | 2001   |   |  | 2000   |   |  | 1999   |  
|Category percent to total allowance:  |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Real estate:                          |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Commercial                            |  | 16.87  | % |  | 10.35  | % |  | 4.94   | % |  | 4.75   | % |  | 7.99   | %
|Residential                           |  | 2.31   | % |  | 1.39   | % |  | 1.09   | % |  | 0.46   | % |  | 0.82   | %
|Commercial                            |  | 56.74  | % |  | 70.36  | % |  | 82.42  | % |  | 82.00  | % |  | 73.62  | %
|Consumer                              |  | 24.08  | % |  | 17.90  | % |  | 11.55  | % |  | 12.79  | % |  | 17.57  | %
|                                      |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                      |  | 100.00 | % |  | 100.00 | % |  | 100.00 | % |  | 100.00 | % |  | 100.00 | %
|                                      |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Loan category percent to total loans: |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Real estate:                          |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Commercial                            |  | 13.76  | % |  | 10.91  | % |  | 9.08   | % |  | 9.10   | % |  | 9.96   | %
|Residential                           |  | 38.56  | % |  | 24.51  | % |  | 14.88  | % |  | 11.97  | % |  | 10.19  | %
|Commercial                            |  | 22.33  | % |  | 36.53  | % |  | 50.56  | % |  | 55.06  | % |  | 52.68  | %
|Consumer                              |  | 25.35  | % |  | 28.05  | % |  | 25.48  | % |  | 23.87  | % |  | 27.17  | %
|                                      |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                      |  | 100.00 | % |  | 100.00 | % |  | 100.00 | % |  | 100.00 | % |  | 100.00 | %
|                                      |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  



INVESTMENT ACTIVITIES



The objectives of the Companys investment portfolio
include: (a) to generate a source of liquidity or absorb liquidity as loan demand fluctuates, (b) establish a medium to implement interest-rate risk management strategies as needed, (c) provide regulatory and operational liquidity to conduct
day-to-day business activities of the Company, (d) inject high credit quality assets into the balance sheet and (e) generate a favorable return on investments without undue compromise of other objectives.



As of December 31, 2003, the Companys investment securities portfolio
of $643.4 million constituted 29.1% of its total assets. Such securities consist of United States Treasury securities, United States Government Agency securities, mortgage-backed securities (including collateralized mortgage obligations
(CMOs)), obligations of state and local governments and corporate debt and equity securities. Securities available for sale at December 31, 2002 were $538.5 million. Securities held to maturity amounted to $55.4 million at December 31,
2002, and consisted of securities that management had the ability and intent to hold to maturity. These securities are carried at amortized cost. The Company maintains no trading securities portfolio. The Company is a member of the FHLB and is
required to hold capital stock of the FHLB. At December 31, 2003, there was $19.5 million of this FHLB capital stock, which is carried at cost. The stock is not transferable and can only be redeemed by the FHLB.



In March 2003, the Company sold its entire holdings of $9.1 million in
certain corporate securities based upon an internal analysis concerned with anticipated downgrades associated with deteriorating fundamentals of the issuer. These corporate securities have been classified as held to maturity securities from the time
of their initial purchase in 2002. Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, such sales transactions cast doubt on the Companys intent to hold other held to maturity securities to maturity.
As a result, in March 2003, the Company reclassified its entire remaining held to maturity portfolio to available for sale. The aggregate amortized cost of the held to maturity portfolio was $44.9 million at the time of the transfer. In addition, as
a result of the sale and transfer, the Company is precluded from classifying any newly purchased securities as held to maturity for the foreseeable future.



14



---

##### Table of Contents

Collateralized mortgage obligations are securities backed by pools of mortgages. Interest, principal
amortization and prepayments are directed in a predetermined order (traunches), as received, until each class is paid off. The vast majority of CMOs purchased by the Company are issued by government-sponsored agencies such as Freddie Mac
and Fannie Mae. The Company owns and occasionally buys private issuer CMOs. The Company purchases mostly senior traunches that have been rated in the top two categories by major rating services such as Moodys and Standard and Poors. The
Company performs tests on CMOs at the time of purchase to determine that the issues being considered for purchase fall within the risk parameters established by the Companys investment policy.



The Company also purchases and sells mortgage participation certificates that
consist primarily of certificates issued by Fannie Mae and Freddie Mac. At December 31, 2003, the Companys gross mortgage-backed securities portfolio of $372.1 million included $263.8 million of CMOs and $108.3 million in participation
certificates.



There is significant uncertainty as to the
timing of repayments from mortgage-backed securities because borrowers whose mortgages are pooled into mortgage-backed securities have the option to prepay their loans at any time. This option can affect the returns the Company anticipates earning
by investing in these securities. When interest rates fall as they did during 2002 and 2003, borrowers tend to refinance their mortgages resulting in accelerated prepayments of the mortgages underlying mortgage-backed securities, thereby reducing
the period of time the Company will receive the anticipated higher rate of return. Market values are also affected by the borrowers option to prepay. In falling rate environments, the possibility of prepayment increases as borrowers refinance the
underlying loans in order to receive a lower rate of interest. This factor limits the degree to which mortgage-backed securities appreciate. When interest rates rise the probability of the underlying mortgages refinancing decreases; this extends the
average time during which a lower rate will be received and decreases the value of the security. The majority of the Companys investments are carried as available for sale and, therefore, fluctuations in the equity of the Company can occur as
changes in market value arise. Certain changes in market value can frequently be attributed to changes in general interest rates.



The following table sets forth the carrying value of the Companys securities portfolio as of December 31 of the years indicated (also, see Note 3 of
the Consolidated Financial Statements included in Item 8 of this report):



|                                       |  |               |         |                 |       |   |               |      |                 |  |       |               |  |                 |         |  |       |  
|-------------------------------------- |  | ------------- | ------- | --------------- | ----- | - | ------------- | ---- | --------------- |  | ----- | ------------- |  | --------------- | ------- |  | ----- | -
|At December 31,                        |  | 2003          |         |                 | 2002  |   |               | 2001 |                
|(Dollars in Thousands)                 |  | CarryingValue |         | Percentof Total |       |   | CarryingValue |      | Percentof Total |  |       | CarryingValue |  | Percentof Total |        
|Available for sale portfolio:          |  |               |         |                 |       |   |               |      |                 |  |       |               |  |                 |         |  |       |  
|U. S. Government and Agency securities |  | $             | 163,451 |                 | 26.2  | % |               | $    | 104,453         |  | 19.4  | %             |  | $               | 82,129  |  | 16.8  | %
|Municipal obligations                  |  |               | 23,773  |                 | 3.8   |   |               |      | 11,607          |  | 2.2   |               |  |                 | 12,219  |  | 2.5   |  
|Mortgage-backed securities             |  |               | 108,340 |                 | 17.4  |   |               |      | 221,253         |  | 41.1  |               |  |                 | 238,375 |  | 48.9  |  
|Collateralized mortgage obligations    |  |               | 263,835 |                 | 42.3  |   |               |      | 175,817         |  | 32.6  |               |  |                 | 149,712 |  | 30.7  |  
|Equity securities                      |  |               | 23,183  |                 | 3.7   |   |               |      | 23,773          |  | 4.4   |               |  |                 | 3,672   |  | 0.8   |  
|Corporate debt securities              |  |               | 41,250  |                 | 6.6   |   |               |      | 1,642           |  | 0.3   |               |  |                 | 1,578   |  | 0.3   |  
|                                       |  |               |         |                 |       |   |               |      |                 |  |       |               |  |                 |         |  |       |  
|Total securities available for sale    |  | $             | 623,832 |                 | 100.0 | % |               | $    | 538,545         |  | 100.0 | %             |  | $               | 487,685 |  | 100.0 | %
|                                       |  |               |         |                 |       |   |               |      |                 |  |       |               |  |                 |         |  |       |  
|Held to maturity portfolio:            |  |               |         |                 |       |   |               |      |                 |  |       |               |  |                 |         |  |       |  
|Corporate debt securities              |  |               |        |                 |      |   |               | $    | 33,179          |  | 59.9  | %             |  | $               | 2,874   |  | 20.9  | %
|Municipal obligations                  |  |               |        |                 |      |   |               |      | 15,682          |  | 28.3  |               |  |                 | 9,291   |  | 67.4  |  
|Mortgage-backed securities             |  |               |        |                 |      |   |               |      | 6,480           |  | 11.7  |               |  |                 | 1,566   |  | 11.4  |  
|Collateralized mortgage obligations    |  |               |        |                 |      |   |               |      | 32              |  | 0.1   |               |  |                 | 43      |  | 0.3   |  
|                                       |  |               |         |                 |       |   |               |      |                 |  |       |               |  |                 |         |  |       |  
|Total securities held to maturity      |  |               |        |                 |      |   |               | $    | 55,373          |  | 100.0 | %             |  | $               | 13,774  |  | 100.0 | %
|                                       |  |               |         |                 |       |   |               |      |                 |  |       |               |  |                 |         |  |       |  
|Total securities portfolio             |  | $             | 623,832 |                 |       |   |               | $    | 593,918         |  |       |               |  | $               | 501,459 |  |       |  
|                                       |  |               |         |                 |       |   |               |      |                 |  |       |               |  |                 |         |  |       |  



15



---

##### Table of Contents

The U.S. Government Agency obligations in the Companys investment portfolio consist primarily of
securities callable by the issuing agencies with calls ranging out to four years. The call features limit the appreciation potential of the securities as the probability of them being called on the call date rises as interest rates decline.



The following table presents the maturities of and the
weighted average yield on the Companys aggregate investment portfolio, at amortized cost, at December 31, 2003. At this date, the Company had no securities which exceeded 10% of stockholders equity. No tax equivalent adjustments have
been made.



|                                      |  |                     |        |      |                                  |   |        |                                   |        |  |                 |        |  |       |         |  |        |   |      |   |         |        |      |      |  |   |         |  |      |  
|------------------------------------- |  | ------------------- | ------ | ---- | -------------------------------- | - | ------ | --------------------------------- | ------ |  | --------------- | ------ |  | ----- | ------- |  | ------ | - | ---- | - | ------- | ------ | ---- | ---- |  | - | ------- |  | ---- | -
|                                      |  | In One Year or less |        |      | After One Year ThroughFive Years |   |        | After Five Years ThroughTen Years |        |  | After Ten Years |        |  | Total |        
|                                      |  | Amount              |        | Rate |                                  |   | Amount |                                   | Rate   |  |                 | Amount |  | Rate  |         |  | Amount |   | Rate |   |         | Amount |      | Rate | 
|Available for sale:                   |  |                     |        |      |                                  |   |        |                                   |        |  |                 |        |  |       |         |  |        |   |      |   |         |        |      |      |  |   |         |  |      |  
|U.S. Government and agency securities |  | $                   | 4,974  |      | 6.25                             | % |        | $                                 | 30,051 |  | 4.83            | %      |  | $     | 112,248 |  | 4.36   | % |      | $ | 14,958  |        | 4.79 | %    |  | $ | 162,231 |  | 4.55 | %
|Municipal obligations                 |  |                     | 6,775  |      | 2.76                             | % |        |                                   | 8,534  |  | 4.64            | %      |  |       | 2,603   |  | 4.82   | % |      |   | 5,078   |        | 4.84 | %    |  |   | 22,990  |  | 4.15 | %
|Mortgage-backed securities            |  |                     | 495    |      | 6.92                             | % |        |                                   | 5,909  |  | 4.29            | %      |  |       | 24,495  |  | 5.07   | % |      |   | 74,756  |        | 5.64 | %    |  |   | 105,655 |  | 5.44 | %
|Collateralized mortgage obligations   |  |                     |       |      |                                 |   |        |                                   | 133    |  | 5.61            | %      |  |       | 17,944  |  | 5.66   | % |      |   | 245,001 |        | 4.50 | %    |  |   | 263,078 |  | 4.58 | %
|Equity securities                     |  |                     |       |      |                                 |   |        |                                   |       |  |                |        |  |       |        |  |       |   |      |   | 23,592  |        | 4.59 | %    |  |   | 23,592  |  | 4.59 | %
|Corporate debt securities             |  |                     | 499    |      | 6.25                             | % |        |                                   | 1,002  |  | 7.25            | %      |  |       |        |  |       |   |      |   | 39,688  |        | 4.99 | %    |  |   | 41,189  |  | 5.06 | %
|                                      |  |                     |        |      |                                  |   |        |                                   |        |  |                 |        |  |       |         |  |        |   |      |   |         |        |      |      |  |   |         |  |      |  
|Total available for sale              |  | $                   | 12,743 |      | 4.42                             | % |        | $                                 | 45,629 |  | 4.78            | %      |  | $     | 157,290 |  | 4.63   | % |      | $ | 403,073 |        | 4.78 | %    |  | $ | 618,735 |  | 4.74 | %
|                                      |  |                     |        |      |                                  |   |        |                                   |        |  |                 |        |  |       |         |  |        |   |      |   |         |        |      |      |  |   |         |  |      |  



In the table above,
equity securities, which normally have no fixed term to maturity, have been included in the After Ten Years category for this presentation. Mortgage-backed securities and collateralized mortgage obligations are listed based on the
contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without penalties.



DEPOSITS



At December 31, 2003, the Company had $1,589.1 million in total deposits (including escrow funds). Deposits are attracted principally from within the
Companys primary market area through the offering of a broad selection of deposit instruments, including commercial savings and demand deposits, negotiable order of withdrawal (NOW) accounts, money market deposit accounts,
statement savings accounts, time deposits and retirement accounts for both individuals and small businesses. Of these deposit instruments, $692.9 million or 43.6% of all deposits consisted of time deposit accounts, $429.4 million or 27.0% consisted
of money market deposit accounts, $181.7 million or 11.4% consisted of escrow and statement savings accounts, $156.7 million or 9.9% consisted of non-interest-bearing checking accounts and $128.4 million or 8.1% consisted of NOW accounts.



The Companys electronic delivery systems include an ATM
network (MachineTeller®) and point-of-sale network
(StoreTeller®). Deposit accounts in the Company are
insured to the maximum permissible amounts by the Bank Insurance Fund (BIF), as administered by the Federal Deposit Insurance Corporation (FDIC). Accordingly, the Company is subject to rules, regulations and examinations of
the FDIC.



The following table shows the distribution of the
deposit accounts in the Company by type of deposits as of December 31 for the years indicated:



|                                |  |              |           |         |        |   |                     |      |   |        |   |           |  |        |                     |  |      |        |  |         |           |  |                     |   |  |      |  
|------------------------------- |  | ------------ | --------- | ------- | ------ | - | ------------------- | ---- | - | ------ | - | --------- |  | ------ | ------------------- |  | ---- | ------ |  | ------- | --------- |  | ------------------- | - |  | ---- | -
|                                |  | December 31, |          
|                                |  | 2003         |           |         | 2002   |   |                     | 2001 |  
|(Dollars in Thousands)          |  | Amount       |           | Percent |        |   | WeightedAverageRate |      |   | Amount |   | Percent   |  |        | WeightedAverageRate |  |      | Amount |  | Percent |           |  | WeightedAverageRate |  
|Savings                         |  | $            | 181,720   |         | 11.44  | % |                     | 0.60 | % |        | $ | 175,637   |  | 12.17  | %                   |  | 0.83 | %      |  | $       | 166,275   |  | 11.11               | % |  | 1.75 | %
|NOW                             |  |              | 128,400   |         | 8.08   | % |                     | 0.21 | % |        |   | 131,535   |  | 9.12   | %                   |  | 0.25 | %      |  |         | 123,985   |  | 8.28                | % |  | 0.85 | %
|Money market                    |  |              | 429,376   |         | 27.02  | % |                     | 1.17 | % |        |   | 339,191   |  | 23.51  | %                   |  | 1.08 | %      |  |         | 350,119   |  | 23.39               | % |  | 1.54 | %
|Non-interest-bearing demand     |  |              | 156,678   |         | 9.86   | % |                     |     |   |        |   | 154,758   |  | 10.73  | %                   |  |     |        |  |         | 159,096   |  | 10.63               | % |  |     |  
|Time deposits(1)                |  |              | 692,912   |         | 43.60  | % |                     | 2.65 | % |        |   | 641,635   |  | 44.47  | %                   |  | 2.43 | %      |  |         | 697,462   |  | 46.59               | % |  | 3.51 | %
|                                |  |              |           |         |        |   |                     |      |   |        |   |           |  |        |                     |  |      |        |  |         |           |  |                     |   |  |      |  
|Total deposits at end of period |  | $            | 1,589,086 |         | 100.00 | % |                     | 1.56 | % |        | $ | 1,442,756 |  | 100.00 | %                   |  | 1.46 | %      |  | $       | 1,496,937 |  | 100.00              | % |  | 2.29 | %
|                                |  |              |           |         |        |   |                     |      |   |        |   |           |  |        |                     |  |      |        |  |         |           |  |                     |   |  |      |  

---

|(1) | Minimum balances required to earn interest, depending upon type of time deposit, range from $500 to $100,000.
|--- | -------------------------------------------------------------------------------------------------------------



16



---

##### Table of Contents

The Company attempts to manage the flow of deposits by pricing its accounts to remain generally
competitive with other financial institutions in its market area. The Company has used its pricing policies to moderate deposit inflow to control its cost of funds in view, among other considerations, of its capital adequacy requirements. Management
believes that this action does not have an adverse effect on its ability to acquire deposits.



The following table presents, by various interest rate categories, the amounts of time deposit accounts at December 31, 2002 and 2003, respectively, which mature during the periods indicated:



|                       |  |              |         |          |   |                              |  |             |         |            |   |         |  |   |         |  |   |       
|---------------------- |  | ------------ | ------- | -------- | - | ---------------------------- |  | ----------- | ------- | ---------- | - | ------- |  | - | ------- |  | - | ------
|                       |  |              |         |          |   | Amounts at December 31, 2003
|                       |  |              |         |          |   | Maturing Within             
|                       |  | December 31, |         | One Year |   | Two Years                    |  | Three Years |         | Thereafter
|(Dollars in Thousands) |  | 2002         |         | 2003     |   |                              |  |            
|Time deposits:         |  |              |         |          |   |                              |  |             |         |            |   |         |  |   |         |  |   |       
|0% to 1.99%            |  | $            | 106,545 |          | $ | 243,298                      |  | $           | 223,189 |            | $ | 19,633  |  | $ | 476     |  | $ |      
|2% to 3.99%            |  |              | 369,324 |          |   | 372,222                      |  |             | 119,968 |            |   | 103,745 |  |   | 91,004  |  |   | 57,505
|4% to 5.99%            |  |              | 147,886 |          |   | 76,741                       |  |             | 23,212  |            |   | 12,171  |  |   | 24,874  |  |   | 16,484
|6% to 7.99%            |  |              | 17,297  |          |   | 600                          |  |             | 446     |            |   | 144     |  |   |        |  |   | 10    
|8% to 9.99%            |  |              | 583     |          |   | 51                           |  |             | 43      |            |   |        |  |   |        |  |   | 8     
|                       |  |              |         |          |   |                              |  |             |         |            |   |         |  |   |         |  |   |       
|Total time deposits    |  | $            | 641,635 |          | $ | 692,912                      |  | $           | 366,858 |            | $ | 135,693 |  | $ | 116,354 |  | $ | 74,007
|                       |  |              |         |          |   |                              |  |             |         |            |   |         |  |   |         |  |   |       



The following table
presents, by various interest rate categories, the amounts of time deposit accounts of $100,000 or more at December 31, 2003, which mature during the periods indicated:



|                       |  |       |         |                 |   |                          |  |                         |        |            |   |        |  |   |        
|---------------------- |  | ----- | ------- | --------------- | - | ------------------------ |  | ----------------------- | ------ | ---------- | - | ------ |  | - | -------
|                       |  |       |         | Maturing Within
|(Dollars in Thousands) |  | Total |         | Three Months    |   | Over Three to Six Months |  | Over Six toTwelveMonths |        | Thereafter
|0% to 2.99%            |  | $     | 173,521 |                 | $ | 25,508                   |  | $                       | 18,965 |            | $ | 30,952 |  | $ | 98,096 
|3% to 3.99%            |  |       | 106,272 |                 |   | 12,578                   |  |                         | 9,171  |            |   | 1,471  |  |   | 83,052 
|4% to 5.99%            |  |       | 13,381  |                 |   | 752                      |  |                         | 129    |            |   | 1,968  |  |   | 10,532 
|                       |  |       |         |                 |   |                          |  |                         |        |            |   |        |  |   |        
|Total                  |  | $     | 293,174 |                 | $ | 38,838                   |  | $                       | 28,265 |            | $ | 34,391 |  | $ | 191,680
|                       |  |       |         |                 |   |                          |  |                         |        |            |   |        |  |   |        



BORROWINGS



The Company has available a number of sources for borrowing funds. The
Companys principal borrowings are advances from the FHLB and securities sold under repurchase agreements. See Note 9 of Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further information regarding the
Companys borrowings.



TRUST POWERS



The Company provides full trust services to individuals, corporations and
non-profit organizations including executor of estates, trustee under wills, living trust agreements, custodian services, investment management services and acts as trustee of qualified retirement plans. At December 31, 2003, the Company managed
$288.5 million in trust assets.



17



---

##### Table of Contents

INVESTMENT IN SUBSIDIARIES



BSB Bancorp, Inc.



At December 31, 2003, BSB Bank & Trust Company is the only banking subsidiary of the Company. The Company also has three subsidiary trusts, as
described below, which have issued trust preferred securities.



See the Recent Accounting Pronouncements section for discussion of the impact that the adoption of FASB Interpretation No. 46 R, Consolidation of Variable Interest Entities (revised) had on the presentation of these investments.



In 1998, the Company formed a wholly owned subsidiary business
trust, BSB Capital Trust I, L.L.C. (Trust I), for the purpose of issuing trust preferred securities which qualify as Tier I capital of the Company. Trust I issued at par $30.0 million of 8.125% trust preferred securities in an exempt
offering. The trust preferred securities are non-voting, mandatorily redeemable in 2028 and guaranteed by the Company. The entire net proceeds to Trust I from the offering were invested in junior subordinated obligations of the Company, which are
the sole assets of Trust I. During 2002, $7.0 million of these securities were repurchased at a net gain of approximately $726,000, then during 2003, $1.5 million were repurchased at a net gain of approximately $6,000.



During 2002, two new subsidiaries were formed for the purpose of issuing
additional preferred securities which are non-voting and guaranteed by the Company. BSB Capital Trust II, L.L.C. (Trust II) was formed for the purpose of issuing trust preferred securities which qualify as Tier I capital for the Company.
Trust II issued at par $10.0 million of floating rate securities maturing in 2032. These securities pay interest at the six-month London InterBank Offering Rate (LIBOR) plus 370 basis points. BSB Capital Trust III, L.L.C. (Trust
III) was formed for the purpose of issuing trust preferred securities which qualify as Tier I capital for the Company. Trust III issued at par $15.0 million of floating rate securities maturing in 2033. These securities pay interest at the
three-month LIBOR plus 335 basis points. The entire net proceeds from Trust II and Trust III were invested in junior subordinated obligations of the Company, which are the sole assets of the respective trusts. The proceeds from each issue of the
subordinated obligations were used for general corporate purposes.



BSB Bank
& Trust Company



The Bank has five subsidiaries.



B-Save Corporation, incorporated by the Company in 1982,
performs treasury management services for the Company. At December 31, 2003, B-Save Corporation held $114.0 million in earning assets, primarily U.S. Government Agency securities.



BSB Credit Corporation was incorporated by the Company in 1983 to solicit mortgage loan applications for the Company through
commissioned employees of this subsidiary. During 1992, the name was changed to BSB Mortgage Corporation. In March 2002, BSB Mortgage Corporation was moved to a single 4,500 square foot facility in Vestal, New York. The entire mortgage loan process,
from application to closing, is now conducted in this facility. The range of residential real estate products offered by BSB Mortgage Corporation includes: traditional fixed-rate mortgages, one-year adjustable-rate mortgages, convertible
adjustable-rate mortgages (convertible to a fixed-rate after the first and before the fifth year), bi-weekly mortgages, reverse mortgages, government-backed mortgages (such as FHA and SONYMA mortgages) and new home construction loans. During 2003,
$390.8 million residential real estate loans were originated by BSB Mortgage Corporation.



During 1996, the Company formed BSB Financial Services, Inc. to serve as the focal point for marketing brokerage services. BSB Financial Services, Inc. currently offers a broad choice of investment and insurance
products that includes annuities, mutual funds, stocks and bonds, money market funds, unit investment trusts, U.S. Government securities, life insurance and long-term care insurance. All of these products are offered through INVEST Financial
Corporation, a registered broker/dealer. Also, certain insurance products are available through BSB Financial Services, Inc. as an independent insurance agent.



18



---

##### Table of Contents

BSB Newpro, Inc. was incorporated by the Company in 1997 and acquires, holds, maintains and disposes of
property acquired through foreclosure for the Company. At December 31, 2003, BSB Newpro held $1.1 million in foreclosed property for the Company.



As part of the 1999 acquisition of Skaneateles Bancorp, Inc., the Company acquired a wholly owned real estate investment trust subsidiary. This company,
now named BSB Preferred Capital Corporation, was formed to provide a cost effective means of raising funds, including capital, on a consolidated basis. The Companys strategy is to acquire, hold and manage real estate mortgage assets,
including, but not limited to residential mortgage loans, mortgage-backed securities and commercial mortgage loans. At December 31, 2003, BSB Preferred Capital Corporation held $107.6 million in real estate mortgage assets. The income earned on
these assets, net of expenses, is distributed to the Company in the form of dividends.



PERSONNEL



As of December 31, 2003, the
Company, on a consolidated basis, had 483 full-time and 114 part-time employees. The employees are not represented by any collective bargaining unit, and the Company considers its relationship with its employees to be good.



COMPETITION



The Company faces significant competition in attracting deposits and loans. Its most direct competition for deposits has
historically come from commercial banks, thrift institutions and credit unions located in its market area. The Company also faces additional significant competition for investors funds from short-term money market mutual funds and issuers of
corporate and government securities. The Company competes for deposits principally by offering depositors a wide variety of deposit programs, convenient branch locations and banking hours, tax-deferred retirement programs and other services. The
Company also utilizes newspaper, radio, television and other media to advertise its deposit and loan services. The Company does not rely upon any individual group or entity for a material portion of its deposits.



The Companys competition for loans comes principally from thrift
institutions, credit unions, mortgage banking companies and commercial banks. The Company competes for loan originations primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides consumers
and commercial borrowers, real estate brokers, automobile dealers, builders and regional correspondent mortgage originators. The Company also relies on the residential mortgage origination efforts of BSB Mortgage Corporation, a wholly owned
subsidiary. Factors which affect competition include the general availability of lendable funds and credit, general and local economic conditions, current interest rate levels and volatility in the lending markets.



SUPERVISION AND REGULATION



The Company is a bank holding company, registered with the Federal Reserve
under the Bank Holding Company Act. As such, the Federal Reserve is the Companys primary federal regulator, and the Company is subject to extensive regulation, examination, and supervision by the Federal Reserve. The Bank is a New York
chartered bank and trust company. The FDIC is the Banks primary federal regulator, and the Bank is subject to extensive regulation, examination and supervision by the FDIC. In addition, as to certain matters, the Bank is subject to regulation
by the Federal Reserve. The Bank also is subject to extensive regulation, examination, and supervision by the NYSBD and is a member of the FHLB System.



The Company is subject to capital adequacy guidelines of the Federal Reserve. The guidelines apply on a consolidated basis and require bank holding
companies having the highest regulatory ratings for safety and soundness to maintain a minimum ratio of Tier 1 capital to total average assets (or leverage ratio) of 3%. All other bank holding companies are required to maintain an
additional capital cushion of 100 to 200 basis points. The Federal Reserve capital adequacy guidelines also require bank holding companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 4% and a minimum ratio of qualifying
total capital to risk-weighted assets of 8%. As of December 31, 2003, the Companys leverage ratio was 8.76%, its ratio of Tier 1 capital to risk-weighted assets was 12.52%, and its ratio of qualifying total capital to risk-weighted assets was
13.80%. The Federal Reserve may set higher minimum capital requirements for bank holding companies whose circumstances warrant it, such as companies anticipating significant growth or facing unusual risks. The Federal Reserve has not advised the
Company of any special capital requirement applicable to it.



19



---

##### Table of Contents

Any bank holding company whose capital does not meet the minimum capital adequacy guidelines is
considered to be undercapitalized and is required to submit an acceptable plan to the Federal Reserve for achieving capital adequacy. Such a companys ability to pay dividends to its shareholders could be restricted. In addition, the Federal
Reserve has indicated that it will consider a bank holding companys capital ratios and other indications of its capital strength in evaluating any proposal to expand its banking or nonbanking activities.



The Bank is subject to leverage and risk-based capital requirements and
minimum capital guidelines of the FDIC that are similar to those applicable to the Company. As of December 31, 2003, the Bank was in compliance with all minimum capital requirements. The Banks leverage ratio was 7.93%, its ratio of Tier 1
capital to risk-weighted assets was 11.37%, and its ratio of qualifying total capital to risk-weighted assets was 12.64%. As a result, the Bank met the requirements of a well capitalized financial institution under FDIC guidelines.



Any bank that is less than well-capitalized is subject to
certain mandatory prompt corrective actions by its primary federal regulatory agency, as well as other discretionary actions, to resolve its capital deficiencies. The severity of the actions required to be taken increases as the banks capital
position deteriorates. A bank holding company must guarantee that a subsidiary bank will meet its capital restoration plan, up to an amount equal to 5% of the subsidiary banks assets or the amount required to meet regulatory capital
requirements, whichever is less. In addition, under Federal Reserve policy, a bank holding company is expected to serve as a source of financial strength, and to commit financial resources to support its subsidiary banks. Any capital loans made by a
bank holding company to a subsidiary bank are subordinate to the claims of depositors in the bank and to certain other indebtedness of the subsidiary bank. In the event of the bankruptcy of a bank holding company, any commitment by the bank holding
company to a federal banking regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and would be entitled to priority of payment.



The Bank also is subject to substantial regulatory restrictions on its ability to pay dividends to the Company. Under NYSBD
regulations, the Bank may not pay a dividend, without prior NYSBD approval, if the proposed dividend, together with all other dividends paid during the current calendar year and the two preceding calendar years, exceeds the net profits
of the Bank during the same period. The Banks ability to pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. During 2002, the Bank requested and received approval under these provisions to pay
dividends to the Company in the amount of $30 million. This request was necessary because of the Banks reduced net earnings in 2002.



The FDIC insures the deposits of the Bank up to regulatory limits and the Bank is subject to deposit insurance assessments to maintain the insurance funds
administered by the FDIC. The deposits of the Bank historically have been insured by and subject to deposit insurance assessments to maintain the Bank Insurance Fund (BIF). The FDIC has adopted regulations establishing a permanent
risk-related deposit insurance assessment system. Under this system, the FDIC places each insured bank in one of three capitalization categories and one of three supervisory categories, based on evaluations provided by the institutions primary
federal regulator. Each insured banks insurance assessment rate is determined by its combined risk rating. Since January 1, 1997, the annual insurance premiums on bank deposits insured by the BIF have varied between $0.00 per $100 of deposits
for banks classified in the highest capital and supervisory evaluation categories to $0.27 per $100 of deposits for banks classified in the lowest categories. BIF assessment rates are subject to semi-annual adjustment by the FDIC within a range of
five basis points without public comment. The FDIC also possesses authority to impose special assessments from time to time. The current assessment rate for the Bank is $0.0154 per $100 of covered deposits.



The Federal Deposit Insurance Act provides for additional assessments to be
imposed on insured depository institutions to pay for the cost of Financing Corporation (FICO) funding. The FICO assessments are adjusted quarterly to reflect changes in the assessment bases of the FDIC insurance funds and do not vary
depending upon a depository institutions capitalization or supervisory evaluation. During 2003, insured depository institutions paid a FICO assessment of $0.0154 per $100 of BIF-insured deposits. The assessment rate was retained at this rate
for 2004.



20



---

##### Table of Contents

Under Federal Reserve regulations, the Bank is required to maintain non-interest-earning reserves against
its transaction accounts (primarily NOW and regular checking accounts) in the amount of 3% of its aggregate transaction accounts up to $36.1 million (subject to an exemption for the first $3.1 million of such accounts and further adjustment by the
Federal Reserve). Reserves of 10% (subject to adjustment by the Federal Reserve between 8% and 14%) must be maintained against that portion of the Banks total aggregate transaction accounts in excess of $36.1 million. The Bank is in compliance
with these requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve, the effect of this reserve
requirement is to reduce the Banks interest-earning assets.



As a member of the Federal Home Loan Bank of New York (FHLB), the Bank is required to hold capital stock of FHLB in an amount equal to the greater of 1.0% of the aggregate unpaid principal amount of the Banks residential
mortgage loans at the beginning of each year, 5.0% of the Banks outstanding advances from FHLB, or 0.3% of the Banks total assets. At December 31, 2003, the Bank met this requirement and owned $19.5 million of FHLB capital stock.



The Bank utilizes the FHLB system to help meet its borrowing
needs. The Banks shares of the capital stock of FHLB and certain types of mortgages and other assets of the Bank are used to secure advances from FHLB. The interest rate charged the Bank varies depending upon the maturity of the advances and
the current cost of funds of FHLB. At December 31, 2003, the Bank had outstanding $390.8 million in term advances and no overnight line of credit advance from FHLB.



Transactions between the Bank and any affiliate, which includes the Company, are governed by sections 23A and 23B of the
Federal Reserve Act. Generally, sections 23A and 23B are intended to protect insured depository institutions from suffering losses arising from transactions with non-insured affiliates, by limiting the extent to which a bank or its subsidiaries may
engage in covered transactions with any one affiliate and with all affiliates of the bank in the aggregate, and requiring that such transactions be on terms that are consistent with safe and sound banking practices.



The Federal Reserve adopted a new regulation, Regulation W, effective April
1, 2003, that comprehensively implements sections 23A and 23B. The regulation unifies and updates staff interpretations issued over the years, incorporates several new interpretative proposals (such as to clarify when transactions with an unrelated
third party will be attributed to an affiliate), and addresses new issues arising as a result of the expanded scope of nonbanking activities engaged in by banks and bank holding companies in recent years and authorized for financial holding
companies under the Gramm-Leach-Bliley Act (GLB Act).



Under the GLB Act, all financial institutions, including the Company and the Bank, are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customers request, and
establish procedures and practices to protect customer data from unauthorized access. The Company has developed such policies and procedures for itself and the Bank, and believes it is in compliance with all privacy provisions of the GLB Act.



On December 4, 2003, the Fair and Accurate Credit Transactions
Act of 2003 was signed into law. The Act includes many provisions concerning national credit reporting standards, and permits consumers, including the customers of the Company and the Bank, to opt out of information sharing among affiliated
companies for marketing purposes. The Act also requires financial institutions, including banks, to notify their customers if they report negative information about them to credit bureaus or if the credit that is granted to them is on less favorable
terms than are generally available. Banks also must comply with guidelines to be established by their federal banking regulators to help detect identity theft.



21



---

##### Table of Contents

Under Title III of the USA PATRIOT Act, also known as the International Money Laundering Abatement and
Anti-Terrorism Financing Act of 2001, all financial institutions, including the Company and the Bank, are required to take certain measures to identify their customers, prevent money laundering, monitor certain customer transactions and report
suspicious activity to U.S. law enforcement agencies, and scrutinize or prohibit altogether certain transactions of special concern. Financial institutions also are required to respond to requests for information from federal banking regulatory
agencies and law enforcement agencies concerning their customers and their transactions. Information-sharing among financial institutions concerning terrorist or money laundering activities is encouraged by an exemption provided from the privacy
provisions of the GLB Act and other laws. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act, which
applies to the Bank, or the BHC Act, which applies to the Company. The Company has in place a Bank Secrecy Act compliance program, and it engages in very few transactions of any kind with foreign financial institutions or foreign persons.



The Sarbanes-Oxley Act, signed into law on July 30, 2002
(SOA), addresses, among other issues, director and officer responsibilities for proper corporate governance of publicly traded companies, including the establishment of audit committees, certification of financial statements, auditor
independence and accounting standards, executive compensation, insider loans, whistleblower protection, and enhanced and timely disclosure of corporate information. In general, SOA is intended to allow stockholders to monitor more effectively the
performance of publicly traded companies and their management. Provisions of SOA were effective from within 30 days to one year from enactment, and the Securities and Exchange Commission has enacted rules to implement various provisions of SOA.
Effective August 29, 2002, the chief executive officer and the chief financial officer of the Company are required to certify that the Companys quarterly and annual reports do not contain any untrue statement of a material fact. The federal
banking regulators have adopted generally similar requirements concerning the certification of financial statements.



TAXATION



Federal Taxation



General. The Company files a consolidated tax return which includes the income of all subsidiaries. The following discussion of federal taxation is a summary of certain pertinent federal income tax matters.



Bad Debts.The Bank is currently taxed as a large bank for
federal income tax purposes, since its average total assets exceed $500 million. As a large bank, the Bank may only deduct specific wholly or partially worthless debts pursuant to Section 166 of the Internal Revenue Code.



Net Operating Loss Carryovers. Generally, a corporation may carry back
net operating losses (NOLs) to the preceding two tax years and forward to the succeeding 20 taxable years. At December 31, 2003, the Company had no net operating loss carryforward for federal income tax purposes.



Capital Gains and Corporate Dividends-Received Deduction. Corporate
net capital gains are taxed at a maximum tax rate of 35%. The dividends-received deduction is 70% of the dividends received from less than 20% owned corporations. However, certain dividend payments between members of an affiliated group
are eligible for a 100% deduction.



The Companys federal
income tax returns for its tax years beginning in 2000 are open under the statute of limitations and are subject to review by the IRS.



22



---

##### Table of Contents

New York State Taxation



The Company and certain bank subsidiaries (the Combined Group) are subject to an annual New York State Franchise tax equal to the greater
of a regular tax (the State Regular Tax), an alternative minimum tax (the State Alternative Minimum Tax), a tax based on the combined taxable assets of the Combined Group, or a fixed minimum tax of $250.



The State Regular Tax was computed at the rate of 8.0% for 2002, 7.5% for
2003, and will be 7.5% for 2004 based on the Combined Groups entire net income.



The State Alternative Minimum Tax is computed at the rate of 3% on the Combined Groups, alternative entire net income for the taxable year. The Combined Groups alternative entire net income consists of
entire net income, increased by certain deductions not allowed in computing alternative entire taxable income.



The tax based on combined taxable assets is determined using the Combined Groups combined average assets allocable to New York State. The tax is
computed at the rate of one-tenth of a million per dollar of taxable assets.



The New York State Franchise tax paid by the Company is deductible for Federal income tax purposes.



The Combined Groups New York State income tax returns for tax years beginning in 2000 are open and subject to review by New York State.



Delaware State Taxation



As a Delaware business corporation, the Company is required to file annual
returns and pay annual fees and franchise taxes to the state of Delaware. The Company pays approximately $107,000 in annual Delaware franchise tax.



OTHER AVAILABLE INFORMATION



The Company files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the
Securities and Exchange Commission. You may obtain copies of these documents by visiting the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SECs website
at http://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, the Company makes copies of these documents (other than exhibits) available to the public free of charge through the
Banks website at www.bsbbank.com. The Companys website also includes the Companys Code of Business Conduct and Ethics; Corporate Governance Guidelines; Compensation Committee Charter; and Nominating and Corporate Governance
Committee Charter. Documents can also be obtained by contacting Larry Denniston, Senior Vice President and Corporate Secretary, at our principal offices, which are located at 58-68 Exchange Street, Binghamton, New York, 13901 or by calling
607-779-2406 or toll free 1-877-289-0221.



23



---

##### Table of Contents

|ITEM 2. | PROPERTIES
|------- | ----------



The Company does not own or lease any property, other than that owned or leased by the Bank and its subsidiaries. BSB Bank & Trust conducts its
business from its executive office and currently 20 full-service offices located in Broome, Chenango, Onondaga and Tioga Counties of upstate New York. The following table sets forth certain information relating to each of BSB Bank & Trusts
offices as of December 31, 2003:



|                         |  |                                  |  |                |  |                                   |  |                    |      
|------------------------ |  | -------------------------------- |  | -------------- |  | --------------------------------- |  | ------------------ | -----
|Office                   |  | Location                         |  | Owned orLeased |  | Lease ExpirationIncluding Options |  | Net Book Value (1)
|                         |  |                                  |  |                |  |                                   |  | ($ in Thousands)  
|Main Office              |  | 58-68 Exchange St., Binghamton   |  | Owned          |  | N/A                               |  | $                  | 1,090
|Annex                    |  | 58 Exchange St., Binghamton      |  | Owned          |  | N/A                               |  |                    | 936  
|99 Hawley St.            |  | 99 Hawley St., Binghamton        |  | Owned          |  | N/A                               |  |                    | 303  
|92 Hawley St.            |  | 92 Hawley St., Binghamton        |  | Owned          |  | N/A                               |  |                    | 1,275
|Endwell Office           |  | 540 Hooper Rd., Endwell          |  | Owned          |  | N/A                               |  |                    | 257  
|Vestal Plaza Office      |  | 4700 Vestal Parkway East, Vestal |  | Leased         |  | 2011                              |  |                    | 117  
|Tioga Office             |  | 1054 State Route 17C, Owego      |  | Leased         |  | 2013                              |  |                    | 43   
|Oakdale Mall Office      |  | 223 Reynolds Rd., Johnson City   |  | Leased         |  | 2016                              |  |                    | 12   
|Norwich Office           |  | 118 State Highway 320, Norwich   |  | Leased         |  | 2015                              |  |                    | 36   
|Northgate Plaza Office   |  | 1250 Front St., Binghamton       |  | Leased         |  | 2017                              |  |                    | 46   
|West Side Office         |  | 273 Main St., Binghamton         |  | Leased         |  | 2012                              |  |                    | 46   
|Endicott Office          |  | 43 Washington Ave., Endicott     |  | Owned          |  | N/A                               |  |                    | 857  
|East Side Office         |  | 156 Robinson St., Binghamton     |  | Leased         |  | 2021                              |  |                    | 383  
|Mortgage Office          |  | 1923 Vestal Pkwy, East Vestal    |  | Owned          |  | N/A                               |  |                    | 658  
|Skaneateles Office       |  | 33 E. Genesee St., Skaneateles   |  | Owned          |  | N/A                               |  |                    | 432  
|Downtown Syracuse        |  | 431 E. Fayette St., Syracuse     |  | Owned          |  | N/A                               |  |                    | 2,986
|Rano Blvd. Office        |  | 100 Rano Blvd., Vestal           |  | Leased         |  | 2019                              |  |                    | 147  
|Cicero Office            |  | 5791 East Seymour St., Cicero    |  | Owned          |  | N/A                               |  |                    | 517  
|Camillus Office          |  | 100 Kasson Rd., Camillus         |  | Leased         |  | 2010                              |  |                    | 35   
|Shop City Office         |  | 426 Grant Blvd., Syracuse        |  | Leased         |  | 2009                              |  |                    | 50   
|Airport Plaza P&C Office |  | 3803 Brewton Rd., N. Syracuse    |  | Leased         |  | 2009                              |  |                    | 90   
|Penn Can P&C Office      |  | 7785 Frontage Rd., Cicero        |  | Leased         |  | 2009                              |  |                    | 96   
|North Medical Office     |  | 5100 West Taft Rd., Liverpool    |  | Leased         |  | 2017                              |  |                    | 75   
|Fayetteville Office      |  | 7320 Genesee St. E. Syracuse     |  | Owned          |  | N/A                               |  |                    | 842  

---

|(1) | Net book value of leasehold improvements is included.
|--- | -----------------------------------------------------



BSB Bank & Trust also operates 55 ATMs (MachineTeller®), an extensive system within the market area, that
provide 24-hour banking services. The Bank operates 12 proprietary bank service locations (StoreTeller®) situated in a large area supermarket chain. BSB Bank & Trust has issued approximately 100,000 plastic cards that allow depositors to use the ATMs and in-store facilities.



24



---

##### Table of Contents

|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



There are no material pending legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company or any of its
subsidiaries is a party or of which any of their property is the subject.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



Not Applicable.



PART II



|ITEM 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | -------------------------------------------------------------------------



The common stock of the Company is listed on The NASDAQ Stock Markets National Market System under the symbol
BSBN. As of December 31, 2003, the Company had 2,131 shareholders of record and 9,246,514 shares of common stock issued and outstanding. The number of shareholders does not reflect persons or entities who hold their stock in nominee or
street name through various brokerage firms.



Payment of dividends on the Companys common stock is subject to various restrictions and limitations which may affect the Companys ability to pay cash dividends in the future. See previous Liquidity
and Capital Resources section for a discussion of these restrictions and limitations.



The following table sets forth the market price information for the common stock and the cash dividends paid per share:



|               |  |             |       |                |   |           |  |   |     
|-------------- |  | ----------- | ----- | -------------- | - | --------- |  | - | ----
|               |  | Price Range |       | Cash Dividends
|2003           |  | High        |       | Low            |   | Per Share
|First Quarter  |  | $           | 23.10 |                | $ | 20.50     |  | $ | 0.25
|Second Quarter |  | $           | 28.20 |                | $ | 21.15     |  | $ | 0.25
|Third Quarter  |  | $           | 27.72 |                | $ | 24.25     |  | $ | 0.25
|Fourth Quarter |  | $           | 40.65 |                | $ | 27.55     |  | $ | 0.25



|               |  |             |       |                |   |           |  |   |     
|-------------- |  | ----------- | ----- | -------------- | - | --------- |  | - | ----
|               |  | Price Range |       | Cash Dividends
|2002           |  | High        |       | Low            |   | Per Share
|First Quarter  |  | $           | 30.24 |                | $ | 22.77     |  | $ | 0.25
|Second Quarter |  | $           | 32.80 |                | $ | 21.80     |  | $ | 0.25
|Third Quarter  |  | $           | 26.70 |                | $ | 18.05     |  | $ | 0.25
|Fourth Quarter |  | $           | 23.39 |                | $ | 17.15     |  | $ | 0.25

|
|



25



---

##### Table of Contents

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



BSB BANCORP, INC.

FIVE YEAR SELECTED FINANCIAL DATA

(Dollars in Thousands, Except Per Share Data)



|                                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|--------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|Selected Financial Condition Data:                        | 
|                                                          |  |      |           |   |     
|At December 31,                                           |  | 2003 |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|Total assets                                              |  | $    | 2,212,111 |   |      | $ | 2,034,667 |      |  | $ | 2,062,937 |   |  | $    | 2,315,376 |   |  | $ | 2,242,285 |  
|Total loans                                               |  |      | 1,449,244 |   |      |   | 1,347,431 |      |  |   | 1,484,707 |   |  |      | 1,838,745 |   |  |   | 1,739,585 |  
|Investment securities(1)                                  |  |      | 643,373   |   |      |   | 613,852   |      |  |   | 516,530   |   |  |      | 401,676   |   |  |   | 401,723   |  
|Deposits                                                  |  |      | 1,589,086 |   |      |   | 1,442,756 |      |  |   | 1,496,937 |   |  |      | 1,881,226 |   |  |   | 1,901,204 |  
|Borrowings                                                |  |      | 410,768   |   |      |   | 378,118   |      |  |   | 360,251   |   |  |      | 225,468   |   |  |   | 142,045   |  
|Junior subordinated obligations(2)                        |  |      | 48,202    |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Trust preferred securities(3)                             |  |      |          |   |      |   | 48,000    |      |  |   | 30,000    |   |  |      | 30,000    |   |  |   | 30,000    |  
|Shareholders equity                                      |  |      | 146,303   |   |      |   | 148,926   |      |  |   | 155,825   |   |  |      | 155,785   |   |  |   | 154,493   |  
|Allowance for loan losses                                 |  |      | 47,421    |   |      |   | 63,250    |      |  |   | 58,829    |   |  |      | 59,291    |   |  |   | 29,134    |  
|                                                          |  |      |           |   |     
|Selected Operations Data:                                 |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                                          |  |      |           |   |     
|For years ended December 31,                              |  | 2003 |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|Total interest income                                     |  | $    | 114,801   |   |      | $ | 129,488   |      |  | $ | 163,494   |   |  | $    | 192,346   |   |  | $ | 176,117   |  
|Total interest expense                                    |  |      | 42,965    |   |      |   | 51,219    |      |  |   | 82,167    |   |  |      | 102,189   |   |  |   | 89,576    |  
|                                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income                                       |  |      | 71,836    |   |      |   | 78,269    |      |  |   | 81,327    |   |  |      | 90,157    |   |  |   | 86,541    |  
|Provision for loan losses                                 |  |      | 10,088    |   |      |   | 46,170    |      |  |   | 18,224    |   |  |      | 53,721    |   |  |   | 19,137    |  
|                                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income after provision for loan losses       |  |      | 61,748    |   |      |   | 32,099    |      |  |   | 63,103    |   |  |      | 36,436    |   |  |   | 67,404    |  
|                                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Non-interest income                                       |  |      | 13,540    |   |      |   | 17,763    |      |  |   | 13,532    |   |  |      | 14,748    |   |  |   | 12,975    |  
|Operating expense(4)                                      |  |      | 49,546    |   |      |   | 48,333    |      |  |   | 43,603    |   |  |      | 47,597    |   |  |   | 50,824    |  
|                                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Income before income taxes                                |  |      | 25,742    |   |      |   | 1,529     |      |  |   | 33,032    |   |  |      | 3,587     |   |  |   | 29,555    |  
|Income tax expense (benefit)                              |  |      | 8,725     |   |      |   | (254      | )    |  |   | 12,572    |   |  |      | 1,316     |   |  |   | 11,330    |  
|                                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|NET INCOME                                                |  | $    | 17,017    |   |      | $ | 1,783     |      |  | $ | 20,460    |   |  | $    | 2,271     |   |  | $ | 18,225    |  
|                                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Share and Per Share Data:                                 |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic earnings per share                                  |  | $    | 1.85      |   |      | $ | 0.19      |      |  | $ | 2.05      |   |  | $    | 0.22      |   |  | $ | 1.80      |  
|Diluted earnings per share                                |  | $    | 1.81      |   |      | $ | 0.18      |      |  | $ | 2.02      |   |  | $    | 0.22      |   |  | $ | 1.77      |  
|Cash dividends per share                                  |  | $    | 1.00      |   |      | $ | 1.00      |      |  | $ | 1.00      |   |  | $    | 1.00      |   |  | $ | 0.95      |  
|Book value per share                                      |  | $    | 15.82     |   |      | $ | 15.78     |      |  | $ | 16.19     |   |  | $    | 15.08     |   |  | $ | 15.11     |  
|                                                          |  |      |           |   |     
|Selected Financial Ratios and Other Data:                 |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Weighted average yield of all interest-earning assets     |  |      | 5.60      | % |      |   | 6.49      | %    |  |   | 7.77      | % |  |      | 8.71      | % |  |   | 8.16      | %
|Weighted average cost of all interest-bearing liabilities |  |      | 2.39      | % |      |   | 2.97      | %    |  |   | 4.49      | % |  |      | 5.26      | % |  |   | 4.64      | %
|Interest rate spread during the period                    |  |      | 3.21      | % |      |   | 3.52      | %    |  |   | 3.28      | % |  |      | 3.95      | % |  |   | 3.52      | %
|Interest rate margin during the period                    |  |      | 3.51      | % |      |   | 3.92      | %    |  |   | 3.87      | % |  |      | 4.08      | % |  |   | 4.01      | %
|Return on average assets                                  |  |      | 0.81      | % |      |   | 0.09      | %    |  |   | 0.95      | % |  |      | 0.10      | % |  |   | 0.82      | %
|Return on average equity                                  |  |      | 11.74     | % |      |   | 1.15      | %    |  |   | 12.87     | % |  |      | 1.41      | % |  |   | 11.69     | %
|Efficiency ratio                                          |  |      | 58.03     | % |      |   | 52.59     | %    |  |   | 46.11     | % |  |      | 45.37     | % |  |   | 51.07     | %
|Average equity to average assets                          |  |      | 6.87      | % |      |   | 7.54      | %    |  |   | 7.37      | % |  |      | 7.08      | % |  |   | 6.99      | %
|Dividend payout ratio                                     |  |      | 53.93     | % |      |   | 539.88    | %    |  |   | 48.83     | % |  |      | 452.97    | % |  |   | 52.95     | %

---

|(1) | Includes Federal Home Loan Bank of New York stock
|--- | -------------------------------------------------

|(2) | Represents junior subordinated obligations issued to unconsolidated subsidiary trusts
|--- | -------------------------------------------------------------------------------------

|(3) | Represents mandatorily redeemable preferred trust securities issued by consolidated subsidiary trusts
|--- | -----------------------------------------------------------------------------------------------------

|(4) | Includes merger related expenses of $325,000 in 2003, $2.0 million in 2000 and $5.4 million in 1999
|--- | ---------------------------------------------------------------------------------------------------



26



---

##### Table of Contents

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



General Information



The following section presents highlight information from management to assist with understanding the consolidated financial condition and results of
operations of BSB Bancorp, Inc. and its subsidiaries during the year ended December 31, 2003 and the preceding two years. The consolidated financial statements and related notes, included elsewhere in this Annual Report on Form 10-K, should be read
in conjunction with the discussions in this section. The matters discussed in Managements Discussion and Analysis of Financial Condition and Results of Operations contain certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Statements made that are not historical facts are forward-looking and are based on estimates, forecasts and assumptions involving risks and uncertainties that could cause actual results or outcomes
to differ materially from those expressed in the forward-looking statements. The risks and uncertainties referred to above include, but are not limited to those described under Forward-Looking Statements included previously in this
Annual Report on Form 10-K.



Overview



BSB Bancorp, Inc. (the Company) is a full-service financial
services company, providing a wide variety of loan, deposit and other banking products to its business, individual or retail, and municipal customers, as well as a full range of mortgage banking, trust, investment and insurance services. The Company
is the bank holding company of BSB Bank & Trust Company (the Bank), Binghamton, New York, a New York-chartered commercial bank and trust company. The Company originates real estate mortgages, both residential and commercial, consumer
loans and commercial business loans throughout its primary market area utilizing customer deposits and borrowings. The primary market area of the Bank includes Broome, Chenango, Onondaga and Tioga Counties of New York State with services provided by
20 full-service branches of the Bank as of December 31, 2003. Additional banking services are provided by a network of branch-based and off-premise automatic teller machines, as well as 12 proprietary banking service locations
(Storeteller) within a large area supermarket chain.



From an industry and national perspective, the Companys profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets,
such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Results of operations are also affected by the provision for loan losses, operating expenses such as salaries and employee
benefits, occupancy and other operating expenses, including income taxes, and, to a lesser extent, non-interest income such as trust service fees, checkcard interchange income, loan servicing fees, and service charges on deposit accounts. Economic
conditions, competition and the monetary and fiscal policies of the Federal government in general, significantly affect financial institutions, including the Company. During 2003, the Federal governments focus was marked by steady low interest
rates intended to stabilize the current economy and to provide stimulation to future industrial economic growth. Lending activities are also significantly influenced by regional and local economic factors. Some specific factors may include the
demand for and supply of housing, competition among lenders, interest rate conditions and prevailing market rates on competing investments, customer preferences and levels of personal income and savings in the Companys primary market area.



In the last three years, management recognized that overall
future growth would depend on the Companys success with overall operating efficiency and the continuing efforts to improve overall asset quality, especially relative to its commercial loan portfolio. Another key factor relates to the
Companys ability to minimize credit risk despite the significant influence of national and regional economic factors.



During recent years, the Company has initiated strategic changes to its bank operations intended to enhance the Banks utilization of resources, and
the effectiveness of customer services within its primary market area. In May 2003, the Company opened a new in-house item processing center primarily to facilitate direct control over the technology and operational processing of bank and customer
transactions through the Federal Reserve. In December 2002, the Bank completed the sale of two Elmira, New York branches with deposit liabilities of $44.2 million, and recognized a net gain of $3.1 million from the disposition. In May 2001, the Bank
sold its Oswego supermarket branch office, including $4.3 million of deposit liabilities, and had a net gain of $299,000 on disposition. In March 2002, the Company sold its credit card portfolio and realized a net gain of $1.8 million.



27



---

##### Table of Contents

Since November 2000, the Company has dedicated substantial resources to its goal to improve overall asset
quality. Significant improvements have been achieved relative to collections or recoveries from the disposition of collateral, especially related to the Companys level of non-performing commercial loans. Also, in November 2003, the Company
made the decision to sell and sold certain large, under-performing loans with an aggregate carrying value of $36.7 million. The proceeds from the sale of these loans, net of estimated transaction costs, was $27.2 million. The $9.5 million difference
between the carrying value and the net proceeds from the sale of these loans approximated the Companys previously established loan loss reserves and was charged-off against the allowance for loan losses. Prior to the decision to sell, these
loans were either non-performing or performing loans classified as substandard. As a result of the sale, non-performing loans and substandard performing loans declined, as discussed further below.



Positive achievements related to a reduction of corporate credit risk are
highlighted by the Companys two consecutive years with record levels of residential mortgage loan originations in 2002 and 2003. The Company actively marketed a fixed-rate, bi-weekly mortgage product to its primary market areas to achieve such
volume. Similarly, credit risk has improved in our commercial loan portfolio due to the shift to emphasize growth in the volume of commercial real estate-secured loans.



Pending Merger



On December 24, 2003, Partners Trust Financial Group, Inc. (Partners) announced a definitive agreement to acquire BSB Bancorp, Inc. The merger
is contingent upon the successful conversion and restructuring of Partners and Partners Trust, MHC into a full capital stock corporation. The Company will be merged into the reorganized Partners following the conversion. The conversion, offering and
acquisition are expected to be completed in mid-2004, subject to regulatory and stockholder approvals. The consideration to be paid in the merger will be 40% cash and 60% stock. Shareholders of the Company will be able to elect either $36.00 in cash
or shares of common stock of the reorganized Partners Trust, subject to customary proration and allocation procedures. The exchange ratio for the stock portion will be determined by dividing $36.00 by the price at which shares of Partners Trust
common stock are sold in the conversion. The aggregate value of the transaction is approximately $347 million.



Critical Accounting Policies



In the course of the Companys normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in the consolidated financial
statements of the Company. Some of these policies are more critical than others. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy because of the uncertainty and subjectivity
inherent in estimating the levels of allowance needed to cover probable credit losses within the loan portfolio and the material effect that these estimates can have on the Companys results of operations. While managements evaluation of
the allowance for loan losses as of December 31, 2003 considers the allowance to be adequate, under adversely different conditions or assumptions, the Company would need to increase the allowance. In addition, the assumptions and estimates used in
the internal reviews of the Companys non-performing loans and potential problem loans, as well as the associated evaluation of the related collateral coverage for these loans, has a significant impact on the overall analysis of the adequacy of
the allowance for loan losses. Though management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Companys allowance for loan losses
policy would also require making additional provisions for loan losses. All accounting policies are important and the reader of the financial statements should review these policies, described in Note 1 to the Consolidated Financial Statements, to
gain a greater understanding of how the Companys financial performance is reported.



28



---

##### Table of Contents

FINANCIAL CONDITION



Total assets were $2.2 billion at December 31, 2003 compared to $2.0 billion at December 31, 2002, an increase of 8.7%. Changes in the composition of its
assets relate directly to the Companys strategy to shift and improve the mix of the loan portfolio and to reduce credit risk. The most significant elements relate to the increases of $118.7 million in aggregate net loan portfolio, an increase
of $31.6 million in investment securities, and a $21.0 million increase in bank owned life insurance (BOLI) assets.



The Companys total loan portfolio increased $101.8 million or 7.6% to $1,449.2 million at December 31, 2003 from $1,347.4 million at December 31,
2002. The primary changes related to increases in real estate loans offset by decreases in the commercial and industrial loan (C&I) portfolio. Real estate loans increased by $280.9 million since December 31, 2002 to $758.2 million at
December 31, 2003. The most significant growth has been in residential mortgage loans with an increase of $228.4 million, which represents 81.3% of the year-to-date growth in overall real estate loans.



Throughout 2003, the Company has continued to actively pursue opportunities
to be a leader of the residential mortgage business in its primary markets. Residential mortgage loan originations set annual records each of the last two years with annual originations of $390.8 million in 2003 and $200.5 million in 2002 compared
to $90.6 million in 2001. In response to the higher demand levels, the Company actively marketed a fixed-rate, bi-weekly mortgage loan product, which contributed significantly to the increased origination volume in our key market areas. For 2003,
bi-weekly mortgage loan originations were $264.5 million or 67.8% of the aggregate originations for the same period. Also, 84.0% of all bi-weekly originations were 10- and 15-year loans, which increased the residential loan portfolio in categories
with shorter durations. The bi-weekly mortgage loan products promoted by the Company also require payment by automatic debit to a checking account with the Company. Such deposit account relationships have contributed directly to the Companys
growth in checking accounts, discussed later, since they tend to retain higher than average deposit balances. In 2003, as well as 2002, demand continued to be high for residential mortgage loans due to the historically low interest rate environment.
During the last quarter of 2003, residential mortgage originations slowed dramatically, consistent with the national trends for related interest rates. Despite such slowdown, the Company considers itself well positioned to maintain a leadership role
in the residential mortgage market within the Banks primary geographic areas. In addition, the Company achieved market penetration in Central New York, including other nearby target markets, by developing additional wholesale mortgage
relationships in such areas. For 2003, residential mortgage originations from wholesale sources represented 39.6% of the current year originations compared to 34.4% for 2002. In addition, residential mortgage originations associated with refinancing
of existing mortgages declined to 27.3% of total residential mortgage originations in 2003 from 33.2% in 2002.



The commercial real estate loan portfolio increased 35.7% to $199.4 million at December 31, 2003 compared to $147.0 million at December 31, 2002. Growth
in the commercial real estate portfolio continues as a strategic initiative for the Company despite the overall slow economic growth of moderate-sized commercial organizations within our principal market areas. As a result, recent growth of this
portfolio generally has been from projects within geographic regions of New York outside our primary market area, yet familiar to our loan officers. Commercial real estate loan originations were $97.7 million for the year 2003 compared to $42.8
million for 2002.



During 2003, the C&I loan portfolio had
a net decrease of $168.5 million to $323.6 million at December 31, 2003 from $492.2 million at December 31, 2002. Approximately $32.5 million of this reduction relates to loan charge-offs (see Asset Quality) in 2003, of which $9.5
million relates to those commercial loans included in the November 2003 sale discussed earlier. The November sale of certain C&I loans represents $36.7 million of the overall decline in the portfolio; however, the primary decrease is associated
with principal reductions and loan pay-offs. During 2003, the Company originated $53.8 million of C&I loans compared to $99.4 million for 2002.



29



---

##### Table of Contents

Consumer loans decreased to $367.4 million at December 31, 2003 from $378.0 million at December 31, 2002,
which reflects stability for an important component of a balanced loan mix. Consumer loans provide opportunities to meet the credit needs of our individual customers, and the short-term nature of these loans shortens the duration of the entire loan
portfolio. The decrease in consumer loans reflects overall decline in consumer loan originations, with the most significant declines in new auto loan originations. New auto loans continued to lag due to heavy competition in the new car market from
auto manufacturers incentives provided to market their products. During 2003, the Company has emphasized growth in certain used car loans financed for customers with higher than average FICO scores. Mobile home loans declined $10.3 million in
2003 to $45.1 million at December 31, 2003, primarily due to regular repayment terms for such loans with minimal new originations in 2003. In addition, equity lines of credit have increased $7.2 million or 9.6% for 2003 reducing the impact of the
decline in overall consumer originations. Equity line of credit originations increased to 16.7% of all 2003 consumer originations and tend to have longer repayment terms than the remainder of this portfolio.



The Companys investment portfolio activity continues to reflect the
ongoing role for such assets demands associated with fluctuations in loan demand, as well as fulfilling the regulatory and operational liquidity demands of day-to-day business activities. Despite the continued rapid amortization and call of
securities related to the low interest rate environment, the Company maintained investment securities (including Federal Home Loan Bank of New York stock) at $643.4 million at December 31, 2003 compared to $613.9 million at December 31, 2002.
Mortgage-backed securities, including collateralized mortgage obligations (CMOs), represented approximately 58% of the December 31, 2003 portfolio compared to 65% of the aggregate portfolio at December 31, 2002. Other securities consist
of United States Treasury securities, United States Government Agency securities, as well as obligations of state and local governments and corporate debt and equity securities. Continued high levels of prepayments on mortgage-backed securities
impacted the current year-to-date yield of the investment portfolio; however, they provide sufficient liquidity to fund the increased levels of real estate loans previously described.



In March 2003, the Company sold its entire holdings of certain corporate securities based upon an internal analysis that
anticipated downgrades associated with deteriorating fundamentals of the issuer. These corporate securities have been classified as held to maturity securities from the time of their initial purchase in 2002. Under the provisions of SFAS No. 115,
such sales transactions cast doubt on the Companys intent to hold other held to maturity securities to maturity. As a result, in March 2003, the Company reclassified its entire remaining held to maturity portfolio to available for sale. The
aggregate amortized cost of the held to maturity portfolio was $44.9 million at the time of the transfer. In addition, as a result of the sale and transfer, the Company is precluded from classifying any newly purchased securities as held to maturity
for the foreseeable future.



The Company initially purchased
$20.0 million of bank owned life insurance (BOLI) in December 2002 with an additional $20.0 million acquired in December 2003. The Companys BOLI investment was acquired to provide funding for certain employee benefits, and is
carried at the cash surrender value of the underlying policies. BOLI provides tax-exempt income (recorded as non-interest income) based on increases in the cash surrender value of the underlying policies.



Total deposits increased to $1,589.1 million at December 31, 2003 compared to
$1,442.8 million at December 31, 2002. Money market deposits increased by $90.2 million during the year, primarily related to the $88.9 million increase in municipal accounts, which tend to be cyclical consistent with the related government
activities. Total time deposits increased $51.3 million at December 31, 2003 compared to December 31, 2002. Retail time deposits declined by $39.8 million, while municipal time deposits increased by $9.8 million, moneydesk time deposits increased by
$1.4 million and brokered certificates of deposit increased by $79.9 million in 2003. The increase to brokered time deposits occurred principally in the fourth quarter, and reflects the Companys use of such instruments to provide incremental
funding to meet cash flow needs.



30



---

##### Table of Contents

The following table shows the deposit composition at December 31:



|                                     |  |          |           |         |       |   |          |   |           |  |       |  
|------------------------------------ |  | -------- | --------- | ------- | ----- | - | -------- | - | --------- |  | ----- | -
|                                     |  | 2003     |           |         | 2002  |  
|(Dollars in Thousands)               |  | Deposits |           | Percent |       |   | Deposits |   | Percent   | 
|Savings accounts                     |  | $        | 181,720   |         | 11.4  | % |          | $ | 175,637   |  | 12.2  | %
|Money market deposit accounts        |  |          | 429,376   |         | 27.0  | % |          |   | 339,191   |  | 23.5  | %
|Time deposits                        |  |          | 692,912   |         | 43.6  | % |          |   | 641,635   |  | 44.5  | %
|NOW accounts                         |  |          | 128,400   |         | 8.1   | % |          |   | 131,535   |  | 9.1   | %
|Non-interest-bearing demand accounts |  |          | 156,678   |         | 9.9   | % |          |   | 154,758   |  | 10.7  | %
|                                     |  |          |           |         |       |   |          |   |           |  |       |  
|                                     |  | $        | 1,589,086 |         | 100.0 | % |          | $ | 1,442,756 |  | 100.0 | %
|                                     |  |          |           |         |       |   |          |   |           |  |       |  



The Companys
borrowings increased to $410.8 million at December 31, 2003 from $378.1 million at December 31, 2002. The primary source of borrowings is Federal Home Loan Bank (FHLB) advances which account for $390.8 million and $335.9 million of
aggregate borrowings at December 31, 2003 and 2002, respectively. New FHLB advances for 2003 have a weighted average term of 1.76 years at December 31, 2003. The comparative weighted average term for all FHLB advances outstanding at December 31,
2003 was 3.27 years. Other borrowings at December 31, 2003 were primarily comprised of $18.8 million of securities sold under agreements to repurchase. Borrowings, along with deposits, are used to fund the Companys lending and investment
activities.



Total shareholders equity decreased by $2.6
million in 2003 primarily due to treasury stock purchases of 318,238 shares for $7.1 million. The treasury stock purchases were primarily part of a stock repurchase program authorized by the Companys Board of Directors in October 2002, which
expired in March 2003. Shares were repurchased during the year in open market and unsolicited, negotiated transactions that were subject to availability and prices which were acceptable to the Company. Currently, no additional stock repurchase
program has been authorized. Other decreases in shareholders equity were attributed to cash dividends paid of $9.2 million and $5.9 million of other comprehensive losses, and increases in shareholders equity were attributed to other
comprehensive income and the exercise of stock options.



Asset Quality



In order to improve overall asset quality, the
Company has dedicated itself to implementing a strong credit culture, which is expected to translate into an improved or lower credit risk profile for the future. The Company utilizes a system to rate substantially all of its commercial loans based
on their respective risks. The system assists management in assessing the adequacy of the allowance for loan losses. Loan ratings are continually reviewed to determine the integrity of the respective ratings.



Total non-performing assets were $14.4 million or 0.65% of total assets at
December 31, 2003, compared to $53.7 million or 2.64% of total assets at December 31, 2002. Loans are placed on a non-accrual status when, in the judgment of management, the probability of collection of principal or interest is deemed to be
insufficient to warrant further accrual. When a loan is placed in a non-accrual status, previously accrued but unpaid interest is deducted from interest income. Other than with respect to consumer loans, the Company does not accrue interest on loans
greater than 90 days past due unless the estimated fair value of the collateral and active collection efforts are believed to be adequate to result in full recovery.



31



---

##### Table of Contents

The following table sets forth information regarding non-accrual loans, accruing loans which are 90 days
or more overdue and other real estate owned (ORE) held by the Company at the dates indicated:



|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|(Dollars in Thousands) December
31,                                        |  | 2003 |        |   | 2002 |   |        | 2001 |  |   | 2000   |   |  | 1999 |       
|Non-accrual loans:                                                         |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial loans                                                           |  | $    | 11,186 |   |      | $ | 34,614 |      |  | $ | 42,424 |   |  | $    | 17,104 |   |  | $ | 1,852  |  
|Residential real estate loans                                              |  |      | 622    |   |      |   | 616    |      |  |   | 882    |   |  |      | 2,071  |   |  |   | 2,161  |  
|Commercial real estate loans                                               |  |      | 32     |   |      |   | 2,647  |      |  |   | 4,235  |   |  |      | 1,522  |   |  |   | 53     |  
|Consumer loans                                                             |  |      | 134    |   |      |   | 288    |      |  |   |       |   |  |      |       |   |  |   |       |  
|Troubled debt restructured loans                                           |  |      | 1,126  |   |      |   | 12,172 |      |  |   | 12,255 |   |  |      | 10,660 |   |  |   | 6,596  |  
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total non-accrual loans                                                    |  |      | 13,100 |   |      |   | 50,337 |      |  |   | 59,796 |   |  |      | 31,357 |   |  |   | 10,662 |  
|Accruing loans with principal or interest payments 90 days or more overdue |  |      | 109    |   |      |   | 278    |      |  |   | 879    |   |  |      | 781    |   |  |   | 945    |  
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total non-performing loans                                                 |  |      | 13,209 |   |      |   | 50,615 |      |  |   | 60,675 |   |  |      | 32,138 |   |  |   | 11,607 |  
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Other real estate owned and repossessed assets                             |  |      | 1,231  |   |      |   | 3,109  |      |  |   | 2,034  |   |  |      | 1,805  |   |  |   | 2,442  |  
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total non-performing assets                                                |  | $    | 14,440 |   |      | $ | 53,724 |      |  | $ | 62,709 |   |  | $    | 33,943 |   |  | $ | 14,049 |  
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total non-performing loans to total loans                                  |  |      | 0.91   | % |      |   | 3.76   | %    |  |   | 4.09   | % |  |      | 1.75   | % |  |   | 0.67   | %
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total non-performing assets to total assets                                |  |      | 0.65   | % |      |   | 2.64   | %    |  |   | 3.04   | % |  |      | 1.47   | % |  |   | 0.63   | %
|                                                                           |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  



In addition to the
non-accruing troubled debt restructured loans shown above, the Company also had accruing loans classified as troubled debt restructured loans totaling $13.8 million, $13.8 million, $8.8 million, $4.8 million and $13.1 million at December 31, 2003,
2002, 2001, 2000 and 1999, respectively. The Company does not consider these loans to be non-performing assets.



Commercial loans and troubled debt restructured loans that are in non-accrual status decreased to $12.3 million at December 31, 2003 from $46.8 million at
December 31, 2002. A significant factor in such decreases relates to the November 2003 sale of certain large, under-performing commercial loans with an aggregate carrying value of $36.7 million. Non-performing loans totaling $14.5 million were
included in the November sale. Charge-offs of $32.5 million of commercial loans and non-accruing troubled debt restructured loans amounted to $32.5 million that reduced non-performing loans in 2003. New non-performing commercial loans and
non-accruing troubled debt restructured loans of $25.8 million were added in 2003, partially offset by $13.3 million of pay-downs or pay-offs in these loan categories for the same period.



A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due under the contractual terms of the loan agreement. The measurement of impaired loans may be based upon the present value of expected future cash flows discounted at the contractual
interest rate, or for loans that have become collateral dependent are based on the fair value of the collateral. At December 31, 2003, the Companys recorded investment in loans for which impairment has been recognized in accordance with SFAS
No. 114 totaled $26.1 million with an impairment allowance aggregating $6.8 million. At December 31, 2002, total loans for which impairment has been recognized in accordance with SFAS No. 114 totaled $63.2 million with an impairment allowance
aggregating $15.2 million, with impaired loans of $18.8 million having no impairment allowance. For the years ended December 31, 2003 and 2002, the average recorded investment in impaired loans was approximately $39.0 million and $58.1 million,
respectively. The Company recognized, on a cash basis, $599,000 of interest in 2003 and $544,000 of interest in 2002 on impaired loans during the portion of the respective year they were impaired.



32



---

##### Table of Contents

The allowance for loan losses represents the amount available for probable loan losses in the
Companys loan portfolio as estimated by management. Specific reserves are determined through review of impaired loans, non-performing loans and certain performing loans designated as problems. General reserves are determined through regular
disciplined analysis of the portfolio. The risk profile and experience of the existing portfolio, along with growth, concentration and management resources are also considered. The allowance for loan losses reflects managements best estimate
of probable loan losses.



The allowance for loan losses was
$47.4 million or 3.27% of total loans outstanding at December 31, 2003 providing coverage for non-performing loans of 359.01%. At December 31, 2002, the coverage of non-performing loans was 124.96%, as the allowance for loan losses was $63.3 million
or 4.69% of total loans outstanding. The improved coverage ratio for non-performing loans is consistent with managements priority to strategically balance the mix of the Companys loan portfolio and recognize the influence of general
economic and business conditions, especially those influencing our regional businesses. Managements assessment of the adequacy of the allowance for loan losses incorporates an evaluation of the Companys overall loan portfolio, based on
both general economic factors and specific factors influencing loans covered by the risk-rating system described above.



Performing loans past due 30-89 days increased to $6.9 million at December 31, 2003 from $6.1 million at December 31, 2002. As noted above, over the last
two years the Company has focused on establishing consistent and conservative underwriting standards, as well as identifying and managing non-performing assets. As part of this process, the Company has also expanded the definition of loans
identified as potential problem loans to include all accruing loans classified as substandard in order to focus management efforts to address problems. By identifying these loans under the Companys current rating system, management is focused
on addressing problems associated with loans before they become non-performing. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related borrowers causes management to
have serious doubt as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as non-performing at some time in the future. Performing substandard loans decreased to $53.4
million ($0.8 million of which are accruing troubled debt restructured loans) at December 31, 2003 compared to $78.2 million ($12.2 million of which are accruing troubled debt restructured loans) at December 31, 2002. Potential problem loans at
December 31, 2003 primarily consisted of commercial and industrial loans.



The allowance for loan losses required an aggregate provision for loan losses of $10.1 million in 2003 compared to $46.2 million in 2002. The 2002 provision included a provision of $26.7 million during the second
quarter which reflected specific circumstances affecting specific individual loans and an ongoing analysis of other borrowers whose reported financials revealed further deterioration of collateral and repayment ability. The decreased provision for
loan losses in 2003 was primarily due to the decreased net loan charge-offs, the changed mix of the overall loan portfolio and the reduction of non-performing and problematic loans, discussed above.



33



---

##### Table of Contents

The following table summarizes activity in the Companys allowance for loan losses during the
periods indicated:



|                                                |  |      |           |   |      |   |           |      |  |   |           |  
|----------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|(Dollars in Thousands) Years Ended December
31, |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Average total loans outstanding                 |  | $    | 1,409,653 |   |      | $ | 1,359,891 |      |  | $ | 1,657,154 |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |  
|Allowance at beginning of period                |  | $    | 63,250    |   |      | $ | 58,829    |      |  | $ | 59,291    |  
|                                                |  |      |          
|Charge-offs:                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Commercial loans                                |  |      | 32,527    |   |      |   | 42,934    |      |  |   | 16,688    |  
|Consumer loans                                  |  |      | 4,089     |   |      |   | 4,422     |      |  |   | 6,657     |  
|Residential real estate loans                   |  |      | 94        |   |      |   | 88        |      |  |   | 228       |  
|Commercial real estate loans                    |  |      | 891       |   |      |   | 1,112     |      |  |   | 58        |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |  
|Total loans charged-off                         |  |      | 37,601    |   |      |   | 48,556    |      |  |   | 23,631    |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |  
|Recoveries:                                     |  |      |           |   |      |   |           |      |  |   |           |  
|Commercial loans                                |  |      | 10,212    |   |      |   | 4,578     |      |  |   | 3,459     |  
|Consumer loans                                  |  |      | 1,472     |   |      |   | 2,229     |      |  |   | 1,340     |  
|Commercial real estate loans                    |  |      |          |   |      |   |          |      |  |   | 146       |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |  
|Total recoveries                                |  |      | 11,684    |   |      |   | 6,807     |      |  |   | 4,945     |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |  
|Net charge-offs                                 |  |      | 25,917    |   |      |   | 41,749    |      |  |   | 18,686    |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |  
|Provision for loan losses                       |  |      | 10,088    |   |      |   | 46,170    |      |  |   | 18,224    |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |  
|Allowance at end of period                      |  | $    | 47,421    |   |      | $ | 63,250    |      |  | $ | 58,829    |  
|                                                |  |      |           |   |      |   |           |      |  |   |           |  
|Ratio of net charge-offs to:                    |  |      |           |   |      |   |           |      |  |   |           |  
|Average total loans outstanding                 |  |      | 1.84      | % |      |   | 3.07      | %    |  |   | 1.13      | %
|Ratio of allowance to:                          |  |      |           |   |      |   |           |      |  |   |           |  
|Non-performing loans                            |  |      | 359.01    | % |      |   | 124.96    | %    |  |   | 96.96     | %
|Year-end total loans outstanding                |  |      | 3.27      | % |      |   | 4.69      | %    |  |   | 3.96      | %
|                                                |  |      |           |   |      |   |           |      |  |   |           |  



Other real estate
owned (ORE) and repossessed assets include property acquired by foreclosure or by deed in lieu of foreclosure. At December 31, 2003, total ORE and repossessed assets totaled $1.2 million, representing a decrease of $1.9 million or 60.4%
compared to $3.1 million at December 31, 2002. Other repossessed assets primarily represent commercial equipment representing former collateral on certain commercial loans, as well as consumer loan collateral including vehicles and mobile home
units.



34



---

##### Table of Contents

RESULTS OF OPERATIONS



The operating results of the Company depend primarily on net interest income, which is the difference between interest income on interest-earnings assets,
primarily loans and investments, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. The Companys operating results also are significantly affected by the provision for loan losses, operating expenses,
income taxes, and the level of non-interest income, including gains or losses on sale of loans and securities and other fees.



Comparison of Operating Results for the Years 2003 and 2002



General



For the year ended December 31, 2003, the Company reported net income of $17.0 million compared to $1.8 million for the year ended December 31, 2002.
Basic and diluted earnings per share were $1.85 and $1.81, respectively, for the year ended 2003 compared to basic and diluted earnings per share of $0.19 and $0.18 for the year ended December 31, 2002. The weighted average common shares outstanding
were 9,209,058 for the year ended December 31, 2003, down 4.0% or 380,303 shares from the previous year. The decrease in the average shares outstanding is primarily attributed to the Companys stock repurchase programs which expired in March
2003. Return on average assets for the year ended December 31, 2003 was 0.81% and 0.09% for 2002. The return on average equity was 11.74% for the year ended December 31, 2003 compared to 1.15% for 2002.



Average interest-earning assets increased $54.0 million or 2.71% to $2.0
billion for the year ended December 31, 2003. Changes in average earning assets generally follow the trends discussed earlier under Financial Condition.



Net Interest Income



Net interest income is impacted by the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities (interest
rate spread) and the relative amounts of interest-earning assets and interest-bearing liabilities. The interest income and interest expense of financial institutions are significantly affected by general economic conditions, competition, policies of
regulatory authorities and other factors.



The Company earned
net interest income of $71.8 million and $78.3 million in 2003 and 2002, respectively. The continuing national trend of historically low interest rates produced a decrease in net interest income of 8.2% in 2003 from 2002 despite the increase in
average balances. The changes in the loan and security portfolios, discussed earlier, generally reflect downward trends in rates associated with lower risk assets in addition to the current market rates. As a result, the Companys interest rate
spread decreased to 3.21% in 2003 from 3.52% in 2002 and net interest margin for the year 2003 decreased to 3.51% compared to 3.92% for the year 2002. Average earning asset balances increased 2.71% to $2,048.5 million for 2003 from $1,994.5 million
for 2002.



35



---

##### Table of Contents

The following table sets forth information regarding average balances of the Companys assets and
liabilities and shareholders equity, as well as changes in such amounts from period to period to facilitate an understanding of the comparative elements of overall earnings performance:



|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|------------------------------------------ |  | --------------- | --------- | - | --------------- | - | -------- | ------------ |  | ----- | --------------- |  | - | -------------- | - |  | ------------ | -------- | - | --------------- | ----- | -- |  | - | --------- | -
|Years Ended December 31,                   |  | 2003            |           |   | 2002            |   |          | 2001         | 
|(Dollars in Thousands)                     |  | Average Balance |           |   | Increase Amount |   |          | (Decrease) % |  |       | Average Balance |  |   | IncreaseAmount |   |  | (Decrease) % |          |   | Average Balance |      
|Interest-earning assets:                   |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Commercial loans                           |  | $               | 423,243   |   |                 | $ | (193,166 | )            |  | (31.3 | )%              |  | $ | 616,409        |   |  | $            | (261,985 | ) |                 | (29.8 | )% |  | $ | 878,394   |  
|Consumer loans:                            |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Personal-direct                            |  |                 | 69,374    |   |                 |   | 7,594    |              |  | 12.3  |                 |  |   | 61,780         |   |  |              | 975      |   |                 | 1.6   |    |  |   | 60,805    |  
|Personal-indirect                          |  |                 | 259,780   |   |                 |   | (1,431   | )            |  | (0.5  | )               |  |   | 261,211        |   |  |              | (35,541  | ) |                 | (12.0 | )  |  |   | 296,752   |  
|Other(1)                                   |  |                 | 43,982    |   |                 |   | 2,782    |              |  | 6.8   |                 |  |   | 41,200         |   |  |              | (7,508   | ) |                 | (15.4 | )  |  |   | 48,708    |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Total consumer loans                       |  |                 | 373,136   |   |                 |   | 8,945    |              |  | 2.5   |                 |  |   | 364,191        |   |  |              | (42,074  | ) |                 | (10.4 | )  |  |   | 406,265   |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Real estate loans:                         |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Residential-fixed                          |  |                 | 390,062   |   |                 |   | 207,223  |              |  | 113.3 |                 |  |   | 182,839        |   |  |              | 43,230   |   |                 | 31.0  |    |  |   | 139,609   |  
|Commercial-fixed                           |  |                 | 37,745    |   |                 |   | 17,368   |              |  | 85.2  |                 |  |   | 20,377         |   |  |              | 8,694    |   |                 | 74.4  |    |  |   | 11,683    |  
|Residential-adjustable                     |  |                 | 62,547    |   |                 |   | (8,038   | )            |  | (11.4 | )               |  |   | 70,585         |   |  |              | (10,173  | ) |                 | (12.6 | )  |  |   | 80,758    |  
|Commercial-adjustable                      |  |                 | 125,418   |   |                 |   | 18,811   |              |  | 17.6  |                 |  |   | 106,607        |   |  |              | (34,670  | ) |                 | (24.5 | )  |  |   | 141,277   |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Total real estate loans                    |  |                 | 615,772   |   |                 |   | 235,364  |              |  | 61.9  |                 |  |   | 380,408        |   |  |              | 7,081    |   |                 | 1.9   |    |  |   | 373,327   |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Investment securities(2)                   |  |                 | 622,896   |   |                 |   | 9,135    |              |  | 1.5   |                 |  |   | 613,761        |   |  |              | 204,817  |   |                 | 50.1  |    |  |   | 408,944   |  
|Loans held for sale                        |  |                 | 6,905     |   |                 |   | 3,346    |              |  | 94.0  |                 |  |   | 3,559          |   |  |              | 1,530    |   |                 | 75.4  |    |  |   | 2,029     |  
|Federal funds sold                         |  |                 | 6,569     |   |                 |   | (9,649   | )            |  | (59.5 | )               |  |   | 16,218         |   |  |              | (17,754  | ) |                 | (52.3 | )  |  |   | 33,972    |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Total interest-earning assets              |  |                 | 2,048,526 |   |                 |   | 53,980   |              |  | 2.7   |                 |  |   | 1,994,546      |   |  |              | (108,385 | ) |                 | (5.2  | )  |  |   | 2,102,931 |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Allowance for loan losses                  |  |                 | (61,707   | ) |                 |   | (4,041   | )            |  | 7.0   |                 |  |   | (57,666        | ) |  |              | 1,426    |   |                 | (2.4  | )  |  |   | (59,092   | )
|Non-interest-earning assets                |  |                 | 124,256   |   |                 |   | 13,368   |              |  | 12.1  |                 |  |   | 110,888        |   |  |              | (1,832   | ) |                 | (1.6  | )  |  |   | 112,720   |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Total assets                               |  | $               | 2,111,070 |   |                 | $ | 63,302   |              |  | 3.1   | %               |  | $ | 2,047,768      |   |  | $            | (108,791 | ) |                 | (5.0  | )% |  | $ | 2,156,559 |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Interest-bearing liabilities:              |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Deposits:                                  |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Savings                                    |  | $               | 181,847   |   |                 | $ | 5,642    |              |  | 3.2   | %               |  | $ | 176,205        |   |  | $            | 12,985   |   |                 | 8.0   | %  |  | $ | 163,220   |  
|Money market                               |  |                 | 385,546   |   |                 |   | 12,737   |              |  | 3.4   |                 |  |   | 372,809        |   |  |              | 9,183    |   |                 | 2.5   |    |  |   | 363,626   |  
|Time deposits                              |  |                 | 632,725   |   |                 |   | (43,214  | )            |  | (6.4  | )               |  |   | 675,939        |   |  |              | (207,453 | ) |                 | (23.5 | )  |  |   | 883,392   |  
|NOW                                        |  |                 | 122,955   |   |                 |   | 2,042    |              |  | 1.7   |                 |  |   | 120,913        |   |  |              | 7,124    |   |                 | 6.3   |    |  |   | 113,789   |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Total deposits                             |  |                 | 1,323,073 |   |                 |   | (22,793  | )            |  | (1.7  | )               |  |   | 1,345,866      |   |  |              | (178,161 | ) |                 | (11.7 | )  |  |   | 1,524,027 |  
|Borrowings                                 |  |                 | 429,062   |   |                 |   | 83,924   |              |  | 24.3  |                 |  |   | 345,138        |   |  |              | 71,067   |   |                 | 25.9  |    |  |   | 274,071   |  
|Trust preferred securities(3)              |  |                 | 47,446    |   |                 |   | 11,660   |              |  | 32.6  |                 |  |   | 35,786         |   |  |              | 5,786    |   |                 | 19.3  |    |  |   | 30,000    |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Total interest-bearing liabilities         |  |                 | 1,799,581 |   |                 |   | 72,791   |              |  | 4.2   |                 |  |   | 1,726,790      |   |  |              | (101,308 | ) |                 | (5.5  | )  |  |   | 1,828,098 |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Non-interest-bearing liabilities           |  |                 | 17,087    |   |                 |   | 1,064    |              |  | 6.6   |                 |  |   | 16,023         |   |  |              | (7,018   | ) |                 | (30.5 | )  |  |   | 23,041    |  
|Non-interest-bearing demand accounts       |  |                 | 149,470   |   |                 |   | (1,013   | )            |  | (0.7  | )               |  |   | 150,483        |   |  |              | 3,991    |   |                 | 2.7   |    |  |   | 146,492   |  
|Shareholders equity                       |  |                 | 144,932   |   |                 |   | (9,540   | )            |  | (6.2  | )               |  |   | 154,472        |   |  |              | (4,456   | ) |                 | (2.8  | )  |  |   | 158,928   |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  
|Total liabilities and shareholders equity |  | $               | 2,111,070 |   |                 | $ | 63,302   |              |  | 3.1   | %               |  | $ | 2,047,768      |   |  | $            | (108,791 | ) |                 | (5.0  | )% |  | $ | 2,156,559 |  
|                                           |  |                 |           |   |                 |   |          |              |  |       |                 |  |   |                |   |  |              |          |   |                 |       |    |  |   |           |  

---

|(1) | Other loans include passbook, overdraft, credit cards (portfolio sold in the first quarter of 2002), checkcard reserve and student loans
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(2) | At amortized cost and include securities available for sale, securities held to maturity and Federal Home Loan Bank of New York stock
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(3) | Reflects full year average for trust preferred securities since FASB Interpretation No. 46 R was implemented on last day of 2003 (see Recent Accounting
Pronouncements)
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



36



---

##### Table of Contents

The following table sets forth, for the periods indicated, information regarding (i) the total dollar
amount of interest income from interest-earning assets and the resulting average yields, (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost, (iii) net interest income, (iv) interest rate
spread, (v) interest rate margin and (vi) ratio of interest-earning assets to interest-bearing liabilities. No tax equivalent adjustments were made.



|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|---------------------------------------------------------------- |  | --------------- | --------- | - | -------- | - | ----------- | ---- | ----- | --------------- |  | - | --------- | - | ----------- | - | ------- | --------------- | ----- | - | -------- | - | ----------- | - |  | - | ------- |  | ----- | -
|Years Ended December 31,                                         |  | 2003            |           |   | 2002     |   |             | 2001 |      
|(Dollars in Thousands)                                           |  | Average Balance |           |   | Interest |   | Yield/ Rate |      |       | Average Balance |  |   | Interest  |   | Yield/ Rate |   |         | Average Balance |       |   | Interest |   | Yield/ Rate |  
|Interest-earning assets:                                         |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Commercial loans                                                 |  | $               | 423,243   |   |          | $ | 26,536      |      | 6.27  | %               |  | $ | 616,409   |   |             | $ | 40,565  |                 | 6.58  | % |          | $ | 878,394     |   |  | $ | 70,543  |  | 8.03  | %
|Consumer loans:                                                  |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Personal-direct                                                  |  |                 | 69,374    |   |          |   | 4,753       |      | 6.85  |                 |  |   | 61,780    |   |             |   | 5,201   |                 | 8.42  |   |          |   | 60,805      |   |  |   | 5,817   |  | 9.57  |  
|Personal-indirect                                                |  |                 | 259,780   |   |          |   | 17,294      |      | 6.66  |                 |  |   | 261,211   |   |             |   | 20,780  |                 | 7.96  |   |          |   | 296,752     |   |  |   | 26,551  |  | 8.95  |  
|Other(1)                                                         |  |                 | 43,982    |   |          |   | 2,035       |      | 4.63  |                 |  |   | 41,200    |   |             |   | 2,558   |                 | 6.21  |   |          |   | 48,708      |   |  |   | 4,786   |  | 9.83  |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Total consumer loans                                             |  |                 | 373,136   |   |          |   | 24,082      |      | 6.45  |                 |  |   | 364,191   |   |             |   | 28,539  |                 | 7.84  |   |          |   | 406,265     |   |  |   | 37,154  |  | 9.15  |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Real estate loans:                                               |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Residential-fixed                                                |  |                 | 390,062   |   |          |   | 21,926      |      | 5.62  |                 |  |   | 182,839   |   |             |   | 12,536  |                 | 6.86  |   |          |   | 139,609     |   |  |   | 10,298  |  | 7.38  |  
|Commercial-fixed                                                 |  |                 | 37,745    |   |          |   | 2,588       |      | 6.86  |                 |  |   | 20,377    |   |             |   | 1,587   |                 | 7.79  |   |          |   | 11,683      |   |  |   | 1,037   |  | 8.88  |  
|Residential-adjustable                                           |  |                 | 62,547    |   |          |   | 3,227       |      | 5.16  |                 |  |   | 70,585    |   |             |   | 4,536   |                 | 6.43  |   |          |   | 80,758      |   |  |   | 6,409   |  | 7.94  |  
|Commercial-adjustable                                            |  |                 | 125,418   |   |          |   | 8,930       |      | 7.12  |                 |  |   | 106,607   |   |             |   | 8,583   |                 | 8.05  |   |          |   | 141,277     |   |  |   | 11,755  |  | 8.32  |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Total real estate loans                                          |  |                 | 615,772   |   |          |   | 36,671      |      | 5.96  |                 |  |   | 380,408   |   |             |   | 27,242  |                 | 7.16  |   |          |   | 373,327     |   |  |   | 29,499  |  | 7.90  |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Investment securities(2)                                         |  |                 | 622,896   |   |          |   | 27,032      |      | 4.34  |                 |  |   | 613,761   |   |             |   | 32,622  |                 | 5.32  |   |          |   | 408,944     |   |  |   | 25,008  |  | 6.12  |  
|Loans held for sale                                              |  |                 | 6,905     |   |          |   | 400         |      | 5.79  |                 |  |   | 3,559     |   |             |   | 233     |                 | 6.55  |   |          |   | 2,029       |   |  |   | 189     |  | 9.31  |  
|Federal funds sold                                               |  |                 | 6,569     |   |          |   | 80          |      | 1.22  |                 |  |   | 16,218    |   |             |   | 287     |                 | 1.77  |   |          |   | 33,972      |   |  |   | 1,101   |  | 3.24  |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Total interest-earning assets                                    |  |                 | 2,048,526 |   |          | $ | 114,801     |      | 5.60  | %               |  |   | 1,994,546 |   |             | $ | 129,488 |                 | 6.49  | % |          |   | 2,102,931   |   |  | $ | 163,494 |  | 7.77  | %
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Allowance for loan losses                                        |  |                 | (61,707   | ) |          |   |             |      |       |                 |  |   | (57,666   | ) |             |   |         |                 |       |   |          |   | (59,092     | ) |  |   |         |  |       |  
|Non interest-earning assets                                      |  |                 | 124,256   |   |          |   |             |      |       |                 |  |   | 110,888   |   |             |   |         |                 |       |   |          |   | 112,720     |   |  |   |         |  |       |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Total assets                                                     |  | $               | 2,111,070 |   |          |   |             |      |       |                 |  | $ | 2,047,768 |   |             |   |         |                 |       |   |          | $ | 2,156,559   |   |  |   |         |  |       |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Interest-bearing liabilities:                                    |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Deposits:                                                        |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Savings                                                          |  | $               | 181,847   |   |          | $ | 1,416       |      | 0.78  | %               |  | $ | 176,205   |   |             | $ | 2,551   |                 | 1.45  | % |          | $ | 163,220     |   |  | $ | 4,092   |  | 2.51  | %
|Money market                                                     |  |                 | 385,546   |   |          |   | 4,773       |      | 1.24  |                 |  |   | 372,809   |   |             |   | 5,667   |                 | 1.52  |   |          |   | 363,626     |   |  |   | 11,500  |  | 3.16  |  
|Time deposits                                                    |  |                 | 632,725   |   |          |   | 18,783      |      | 2.97  |                 |  |   | 675,939   |   |             |   | 26,401  |                 | 3.91  |   |          |   | 883,392     |   |  |   | 48,878  |  | 5.53  |  
|NOW                                                              |  |                 | 122,955   |   |          |   | 264         |      | 0.21  |                 |  |   | 120,913   |   |             |   | 710     |                 | 0.59  |   |          |   | 113,789     |   |  |   | 1,522   |  | 1.34  |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Total deposits                                                   |  |                 | 1,323,073 |   |          |   | 25,236      |      | 1.91  |                 |  |   | 1,345,866 |   |             |   | 35,329  |                 | 2.63  |   |          |   | 1,524,027   |   |  |   | 65,992  |  | 4.33  |  
|Borrowings                                                       |  |                 | 429,062   |   |          |   | 14,700      |      | 3.43  |                 |  |   | 345,138   |   |             |   | 13,162  |                 | 3.81  |   |          |   | 274,071     |   |  |   | 13,738  |  | 5.01  |  
|Trust preferred securities(3)                                    |  |                 | 47,446    |   |          |   | 3,029       |      | 6.38  |                 |  |   | 35,786    |   |             |   | 2,728   |                 | 7.62  |   |          |   | 30,000      |   |  |   | 2,437   |  | 8.12  |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Total interest-bearing liabilities                               |  |                 | 1,799,581 |   |          |   | 42,965      |      | 2.39  | %               |  |   | 1,726,790 |   |             |   | 51,219  |                 | 2.97  | % |          |   | 1,828,098   |   |  |   | 82,167  |  | 4.49  | %
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Non-interest-bearing liabilities                                 |  |                 | 17,087    |   |          |   |             |      |       |                 |  |   | 16,023    |   |             |   |         |                 |       |   |          |   | 23,041      |   |  |   |         |  |       |  
|Non-interest-bearing demand accounts                             |  |                 | 149,470   |   |          |   |             |      |       |                 |  |   | 150,483   |   |             |   |         |                 |       |   |          |   | 146,492     |   |  |   |         |  |       |  
|Shareholders equity                                             |  |                 | 144,932   |   |          |   |             |      |       |                 |  |   | 154,472   |   |             |   |         |                 |       |   |          |   | 158,928     |   |  |   |         |  |       |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Total liabilities and shareholders equity                       |  | $               | 2,111,070 |   |          |   |             |      |       |                 |  | $ | 2,047,768 |   |             |   |         |                 |       |   |          | $ | 2,156,559   |   |  |   |         |  |       |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Net interest income                                              |  |                 |           |   |          | $ | 71,836      |      |       |                 |  |   |           |   |             | $ | 78,269  |                 |       |   |          |   |             |   |  | $ | 81,327  |  |       |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Net earning assets                                               |  | $               | 248,945   |   |          |   |             |      |       |                 |  | $ | 267,756   |   |             |   |         |                 |       |   |          | $ | 274,833     |   |  |   |         |  |       |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Net interest rate spread                                         |  |                 |           |   |          |   |             |      | 3.21  | %               |  |   |           |   |             |   |         |                 | 3.52  | % |          |   |             |   |  |   |         |  | 3.28  | %
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Net interest rate margin                                         |  |                 |           |   |          |   |             |      | 3.51  |                 |  |   |           |   |             |   |         |                 | 3.92  |   |          |   |             |   |  |   |         |  | 3.87  |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  
|Ratio of interest-earning assets to interest-bearing liabilities |  |                 |           |   |          |   |             |      | 1.14x |                 |  |   |           |   |             |   |         |                 | 1.16x |   |          |   |             |   |  |   |         |  | 1.15x |  
|                                                                 |  |                 |           |   |          |   |             |      |       |                 |  |   |           |   |             |   |         |                 |       |   |          |   |             |   |  |   |         |  |       |  

---

|(1) | Other loans include passbook, overdraft, credit cards (portfolio sold in the first quarter of 2002), checkcard reserve and student loans
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(2) | At amortized cost and include securities available for sale, securities held to maturity and
Federal Home Loan Bank of New York stock
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(3) | Reflects full year average for trust preferred securities since FASB Interpretation No. 46 R was implemented on last day of 2003 (see Recent Accounting
Pronouncements)
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



37



---

##### Table of Contents

Rate/Volume Analysis



The table below presents changes in interest income and interest expense attributable to (i) changes in volume (change in
volume multiplied by old rate) and (ii) changes in rate (change in rate multiplied by old volume). The net change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change
due to rate.



|                                                  |  |                                           |         |   |                                           |   |         |     |  |   |         |   |  |      |         |   |     |   |         |   |  |   |         |  
|------------------------------------------------- |  | ----------------------------------------- | ------- | - | ----------------------------------------- | - | ------- | --- |  | - | ------- | - |  | ---- | ------- | - | --- | - | ------- | - |  | - | ------- | -
|                                                  |  | 2003 Compared to 2002 Increase (Decrease) |         |   | 2002 Compared to 2001 Increase (Decrease) |  
|(Dollars in Thousands)                            |  | Volume                                    |         |   | Rate                                      |   |         | Net |  |   | Volume  |   |  | Rate |         |   | Net |  
|Interest income on interest-earning assets:       |  |                                           |         |   |                                           |   |         |     |  |   |         |   |  |      |         |   |     |   |         |   |  |   |         |  
|Commercial loans                                  |  | $                                         | (12,190 | ) |                                           | $ | (1,839  | )   |  | $ | (14,029 | ) |  | $    | (18,673 | ) |     | $ | (11,305 | ) |  | $ | (29,978 | )
|Consumer loans                                    |  |                                           | 686     |   |                                           |   | (5,143  | )   |  |   | (4,457  | ) |  |      | (3,616  | ) |     |   | (4,999  | ) |  |   | (8,615  | )
|Real estate loans                                 |  |                                           | 14,624  |   |                                           |   | (5,195  | )   |  |   | 9,429   |   |  |      | 550     |   |     |   | (2,807  | ) |  |   | (2,257  | )
|Investment securities                             |  |                                           | 479     |   |                                           |   | (6,069  | )   |  |   | (5,590  | ) |  |      | 11,227  |   |     |   | (3,613  | ) |  |   | 7,614   |  
|Loans held for sale                               |  |                                           | 197     |   |                                           |   | (30     | )   |  |   | 167     |   |  |      | 112     |   |     |   | (68     | ) |  |   | 44      |  
|Federal funds sold                                |  |                                           | (136    | ) |                                           |   | (71     | )   |  |   | (207    | ) |  |      | (436    | ) |     |   | (378    | ) |  |   | (814    | )
|                                                  |  |                                           |         |   |                                           |   |         |     |  |   |         |   |  |      |         |   |     |   |         |   |  |   |         |  
|Total                                             |  |                                           | 3,660   |   |                                           |   | (18,347 | )   |  |   | (14,687 | ) |  |      | (10,836 | ) |     |   | (23,170 | ) |  |   | (34,006 | )
|                                                  |  |                                           |         |   |                                           |   |         |     |  |   |         |   |  |      |         |   |     |   |         |   |  |   |         |  
|Interest expense on interest-bearing liabilities: |  |                                           |         |   |                                           |   |         |     |  |   |         |   |  |      |         |   |     |   |         |   |  |   |         |  
|Savings                                           |  |                                           | 80      |   |                                           |   | (1,215  | )   |  |   | (1,135  | ) |  |      | 304     |   |     |   | (1,845  | ) |  |   | (1,541  | )
|Money market                                      |  |                                           | 188     |   |                                           |   | (1,082  | )   |  |   | (894    | ) |  |      | 283     |   |     |   | (6,116  | ) |  |   | (5,833  | )
|Time deposits                                     |  |                                           | (1,603  | ) |                                           |   | (6,015  | )   |  |   | (7,618  | ) |  |      | (10,001 | ) |     |   | (12,476 | ) |  |   | (22,477 | )
|NOW                                               |  |                                           | 12      |   |                                           |   | (458    | )   |  |   | (446    | ) |  |      | 90      |   |     |   | (902    | ) |  |   | (812    | )
|                                                  |  |                                           |         |   |                                           |   |         |     |  |   |         |   |  |      |         |   |     |   |         |   |  |   |         |  
|Total deposits                                    |  |                                           | (1,323  | ) |                                           |   | (8,770  | )   |  |   | (10,093 | ) |  |      | (9,324  | ) |     |   | (21,339 | ) |  |   | (30,663 | )
|Borrowings                                        |  |                                           | 2,971   |   |                                           |   | (1,433  | )   |  |   | 1,538   |   |  |      | 3,120   |   |     |   | (3,696  | ) |  |   | (576    | )
|Trust preferred securities                        |  |                                           | 792     |   |                                           |   | (491    | )   |  |   | 301     |   |  |      | 448     |   |     |   | (157    | ) |  |   | 291     |  
|                                                  |  |                                           |         |   |                                           |   |         |     |  |   |         |   |  |      |         |   |     |   |         |   |  |   |         |  
|Total                                             |  |                                           | 2,440   |   |                                           |   | (10,694 | )   |  |   | (8,254  | ) |  |      | (5,756  | ) |     |   | (25,192 | ) |  |   | (30,948 | )
|                                                  |  |                                           |         |   |                                           |   |         |     |  |   |         |   |  |      |         |   |     |   |         |   |  |   |         |  
|Net interest income                               |  | $                                         | 1,220   |   |                                           | $ | (7,653  | )   |  | $ | (6,433  | ) |  | $    | (5,080  | ) |     | $ | 2,022   |   |  | $ | (3,058  | )
|                                                  |  |                                           |         |   |                                           |   |         |     |  |   |         |   |  |      |         |   |     |   |         |   |  |   |         |  



Interest on Commercial Loans



Commercial loans, which represent 22.3% of total
loans at December 31, 2003, tend to increase the interest rate sensitivity of the overall loan portfolio, because interest rates on such loans are generally tied to the Companys Prime Rate. In 2003, general interest rates, including the
Companys commercial loan Prime Rate, stabilized at historically lower levels following a steady decrease that commenced during 2001.



Commercial loans have been a primary focus and concern of management over the last three years due to the negative impact of national interest rate trends
and regional economic conditions on both their interest rate risk and loan quality. Thus, as the Company continues to reallocate its asset balances, the average balance of commercial loans has declined each year since 2001. Lower commercial loan
balances were a primary factor in the overall lower levels of interest income. The average balance of commercial loans decreased by $193.2 million to $423.2 million for the year 2003 from 2002. In addition, the average yield on commercial loans
decreased to 6.27% for 2003 compared to 6.58% for 2002. Also, non-accrual loans, which are primarily commercial loans, impact the overall yield; however, the improvements in the level of non-accruals lessened their impact on the 2003 yield.



38



---

##### Table of Contents

Interest on Consumer Loans



The consumer loan portfolio includes principally fixed-rate loans with short terms. Since consumer loan rates had few
changes during 2003 due to the historically low interest rates, the average yield on the aggregate consumer loan portfolio decreased to 6.45% for 2003 compared to 7.84% in 2002. The average balance of all consumer loans increased $8.9 million to
$373.1 million for the year 2003 from $364.2 million in 2002. Changes in the mix of the consumer loan portfolio also contributed to the decrease in yield from 2002 to 2003. In 2003, the Company shifted to lower risk home equity lines of credit
during a period of very competitive conditions in the new auto loan market. Since 2002, the Company has de-emphasized the origination of mobile home loans, which generally have higher yields than other consumer loan types, but also have increased
credit risk.



Interest on Real Estate Loans



Interest income from total real estate loans increased $9.4 million, or
34.6%, to $36.7 million in 2003 from $27.2 million in 2002. The strategic shift to real estate loans, especially in the residential category, provided the most significant positive impact on net interest income for 2003.



The record setting level of residential originations, discussed earlier, is
reflected in the growth of average residential mortgage balances. Fixed-rate residential mortgages increased 113.3% to average balances of $390.1 million in 2003 from $182.8 million in 2002. Though the average balance of adjustable-rate residential
mortgages decreased in 2003 from 2002, fourth quarter activity was higher than normal as both regional and national market trends showed some reversal in rates, especially for extended term loans. As a result, residential loans provided
approximately $8.1 million or 85.7% of the overall increase in income from all real estate loans.



In 2002, the Company acquired a single facility to house the consolidation of all mortgage lending activities and facilitate the growth of the
Companys real estate loan portfolio. The single facility promotes processing efficiency and improvement in the quality of customer service.



In the commercial real estate category, interest income increased $1.3 million or 13.3% to $11.5 million for 2003 over 2002. The most significant increase
in interest income was attributed to the growth in fixed-rate commercial real estate loans, discussed earlier, which provided average balances that represented 48.0% of the $36.2 million increase in volume and 74.3% of the $1.3 million increase in
related interest income.



Interest on Investment Securities



Income from investment securities decreased to $27.0
million in 2003 compared to $32.6 million in 2002 and yields declined to 4.34% for 2003 compared to 5.32% for 2002. During 2003, the average balance of investment securities was $622.9 million, a minor increase of $9.1 million over the average
balance of $613.8 million for 2002. Such results for 2003 reflect the heavy turnover of investment securities to facilitate the Companys redistribution of assets. As the commercial loan portfolio declined, investment securities were invested,
mainly in mortgage-backed securities, to provide readily available liquidity for corporate requirements. The relative yields were also influenced by the amortization of any premiums incurred to acquire such investment securities, especially
mortgage-backed securities. As prepayments have increased due to the low rate environment, the Company has had to accelerate the premium amortization, thus decreasing yields.



Interest on Deposits



Interest expense on deposits for the year ended December 31, 2003 was $25.2 million, a decrease of $10.1 million or 28.6% from $35.3 million in 2002. The
average cost of interest-bearing deposits declined to 1.91% in 2003 from 2.63% in 2002. National and regional trends of the interest rate environment, as well as competition in the Companys primary markets, are the most significant factors
that influenced the cost of such funds in 2003. Time deposits represent the most influential category of interest-bearing deposits, in terms of both volume and rate, impacting the Companys annual cost for all interest-bearing deposits. The
Company continues to monitor the cost and the availability of deposits against the cost and levels of borrowings to determine the best funding sources for the Companys assets.



39



---

##### Table of Contents

The average balance outstanding for all time deposits was $632.7 million for 2003, a decrease of $43.2
million or 6.4% from $675.9 million for 2002. The cost of funds for all time deposits decreased to $18.8 million in 2003 with an average rate of 2.97%, compared to $26.4 million in 2002 with an average rate of 3.91%. For the first nine months of
2003, the Company maintained sufficient liquidity to reduce its reliance on higher-costing deposits, especially brokered time deposits. In the fourth quarter, the average balance of brokered time deposits increased approximately $40.0 million with
more than $22.9 million having terms in excess of three years.



Interest
on Borrowings and Trust Preferred Securities



Borrowed
funds are used to supplement retail and commercial deposits as needed to fund asset growth, lengthen liabilities and lower the cost of funds, when possible. In general, borrowings remove the volatility that can occur with moneydesk deposits and
enhances planning for liquidity needs, yet the cost of such funds can approximate the costs of wholesale funds. The average balance of borrowings during 2003 increased to $429.1 million, with 89.3% of such borrowings being FHLB advances. The average
interest rate paid on borrowings in 2003 decreased to 3.43% from 3.81% in 2002. The impact of the additional borrowings, though partially offset by the declining rates, resulted in an increase of $1.5 million in interest expense in 2003 on
borrowings to $14.7 million compared to $13.2 million in 2002.



Interest expense on trust preferred securities increased $301,000 to $3.0 million in 2003 from $2.7 million in 2002. The changes in the cost of trust preferred securities correlates directly to the issuance of $25.0 million of new trust
preferred securities from two subsidiary trusts during 2002. The new issues also had lower interest rates that lowered the average rate paid from 7.62% to 6.38%. The Companys adoption of FASB Interpretation No. 46 R (FIN 46 R),
effective December 31, 2003, had no impact on the cost of funds for 2003. See Recent Accounting Pronouncements for a discussion of FIN 46R.



Provision for Loan Losses



The provision for loan losses in 2003 was $10.1 million compared to $46.2 million in 2002. The lower provision for loan losses in 2003 as compared to 2002
is primarily due to the significant reduction in net loan charge-offs, the increase in recoveries, as well as both the reduction in non-performing loans and the changing mix of the overall loan portfolio. As discussed under the allowance for loan
losses, the provision for loan losses reflects managements assessment of the estimated losses inherent in the loan portfolio. Loans charged-off can fluctuate from period to period and the current level of charge-offs should not be considered
an indicator of future levels. The November 2003 sale of certain large, under-performing commercial loans had no impact on the current provision for loan losses; however, the sale eliminated the exposure to any potential future deterioration in the
value of such loans. See Asset Quality for a discussion of the allowance for loan losses and related analysis. See Overview for additional information on the commercial loan sale.



Non-interest Income



The following table summarizes changes in the major components of
non-interest income:



|                                           |  |      |        |      |   |          |  |   |          |   |  |         |   
|------------------------------------------ |  | ---- | ------ | ---- | - | -------- |  | - | -------- | - |  | ------- | --
|(Dollars in Thousands)                     |  | 2003 |        | 2002 |   | $ Change |  |   | % Change |  
|Service charges on deposit accounts        |  | $    | 5,190  |      | $ | 5,176    |  | $ | 14       |   |  | 0.3     | % 
|Checkcard interchange fees                 |  |      | 1,407  |      |   | 1,422    |  |   | (15      | ) |  | (1.1    | )%
|Mortgage servicing fees                    |  |      | 607    |      |   | 832      |  |   | (225     | ) |  | (27.0   | )%
|Fees and commissions - brokerage services  |  |      | 855    |      |   | 886      |  |   | (31      | ) |  | (3.5    | )%
|Trust fees                                 |  |      | 1,210  |      |   | 1,308    |  |   | (98      | ) |  | (7.5    | )%
|Income on bank owned life insurance        |  |      | 1,023  |      |   | 32       |  |   | 991      |   |  | 3,096.9 | % 
|Gain on sale of securities, net            |  |      | 1,339  |      |   | 292      |  |   | 1,047    |   |  | 358.6   | % 
|Gain on sale of branch offices, net        |  |      |       |      |   | 3,063    |  |   | (3,063   | ) |  | (100.0  | )%
|Gain on sale of credit card portfolio, net |  |      |       |      |   | 1,806    |  |   | (1,806   | ) |  | (100.0  | )%
|Other income                               |  |      | 1,909  |      |   | 2,946    |  |   | (1,037   | ) |  | (35.2   | )%
|                                           |  |      |        |      |   |          |  |   |          |   |  |         |   
|                                           |  | $    | 13,540 |      | $ | 17,763   |  | $ | (4,223   | ) |  | (23.8   | )%
|                                           |  |      |        |      |   |          |  |   |          |   |  |         |   



40



---

##### Table of Contents

Non-interest income was $13.5 million for the year ended December 31, 2003, a decrease of $4.2 million or
23.7% from the year ended December 31, 2002. The most significant changes in the year-to-year comparison relate to the Companys 2002 sale of two branch offices and the sale of its credit card portfolio. The December 2002 sale of two branch
offices in the Elmira, New York area resulted in a net gain of $3.1 million. The Company sold these branches, located in the Chemung County area, to concentrate on the further development of its retail branch operations in the Greater Binghamton and
the Central New York regions. Earlier in 2002, the Company sold its credit card portfolio for a net gain of $1.8 million. The increasing costs associated with maintaining the technology to provide a high level of service to our customers and the
higher levels of charge-offs associated with credit card debt made this portfolio less profitable for the Company.



As the serviced mortgage portfolio reduced to $265.0 million at December 31, 2003 from $366.0 million at December 31, 2002, the fee income generated from
these loans serviced for others decreased to $607,000 for 2003 from $832,000 in 2002. Gains on security sales were $1.3 million in 2003 compared to $292,000 in 2002. Other income decreased $1.0 million in 2003 compared to 2002 with approximately
$726,000 attributable to gains recognized on the repurchase of trust preferred securities during 2002.



Bank owned life insurance (BOLI) provided income of $1.0 million for a full year of income in 2003 with minimal comparable income in the
previous year since the initial BOLI investment was in December 2002. BOLI income is expected to continue at a similar rate of return dependent on the current market for such securities, as well as the impact of the additional $20 million BOLI
investment in December 2003.



Operating Expense



The following table summarizes changes in the major components of operating
expense:



|                                                            |  |      |        |      |   |          |  |   |          |   |  |       |   
|----------------------------------------------------------- |  | ---- | ------ | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|(Dollars in Thousands)                                      |  | 2003 |        | 2002 |   | $ Change |  |   | % Change |  
|Salaries, pensions and employee benefits                    |  | $    | 27,044 |      | $ | 24,769   |  | $ | 2,275    |   |  | 9.2   | % 
|Building occupancy                                          |  |      | 4,561  |      |   | 4,259    |  |   | 302      |   |  | 7.1   | % 
|Advertising and promotion                                   |  |      | 1,260  |      |   | 1,293    |  |   | (33      | ) |  | (2.6  | )%
|Professional fees                                           |  |      | 2,374  |      |   | 2,890    |  |   | (516     | ) |  | (17.9 | )%
|Data processing costs                                       |  |      | 4,662  |      |   | 5,534    |  |   | (872     | ) |  | (15.8 | )%
|Services                                                    |  |      | 3,082  |      |   | 2,905    |  |   | 177      |   |  | 6.1   | % 
|System conversion expenses                                  |  |      |       |      |   | 387      |  |   | (387     | ) |  | (100  | )%
|Merger related expenses                                     |  |      | 325    |      |   |         |  |   | 325      |   |  | 100   | % 
|Other real estate owned and repossessed asset expenses, net |  |      | 555    |      |   | 688      |  |   | (133     | ) |  | (19.3 | )%
|Other expenses                                              |  |      | 5,683  |      |   | 5,608    |  |   | 75       |   |  | 1.3   | % 
|                                                            |  |      |        |      |   |          |  |   |          |   |  |       |   
|                                                            |  | $    | 49,546 |      | $ | 48,333   |  | $ | 1,213    |   |  | 2.5   | % 
|                                                            |  |      |        |      |   |          |  |   |          |   |  |       |   



Operating expense
totaled $49.5 million for the year ended December 31, 2003 compared to $48.3 million for the year 2002, an increase of $1.2 million or 2.5%. The most significant factor relates to salaries, pensions and other employee benefits which increased $2.3
million or 9.2% in 2003 compared to 2002. Salary costs increased $1.2 million for 2003 compared to 2002 due to additional performance incentive bonuses of $1.1 million as well as salaries related to the Companys new item processing center,
discussed below. Benefit costs, principally for health insurance and pension costs, represent the remaining increase in personnel-related costs. Defined benefit plan pension costs increased $609,000 and reflect the expected increase in the net
periodic pension costs. The current trend for increased health insurance and pension costs is expected to continue into 2004.



In May 2003, the Company opened a new in-house item processing center primarily to facilitate direct control over the technology and operational
processing of transactions with the Federal Reserve. Prior to such date, these processing costs were included primarily under the data processing category. Year-to-date operating expenses for the item processing center totaled $1.3 million,
including $269,000 for salaries and related benefits. In 2002, such operating expenses were included primarily in data processing costs which declined $872,000 in 2003.



Professional fees associated with loan collections, as well as other real estate owned and repossessed asset expenses,
decreased in 2003 consistent with the reductions of non-performing assets, as described under Asset Quality.



41



---

##### Table of Contents

In 2003, the Company incurred $325,000 for non-tax deductible expenses associated with the pending merger
with Partners Trust Financial Group, Inc. discussed earlier with no similar cost in 2002. Additional merger related costs for the pending merger will be incurred in 2004.



Since a substantial portion of operating expense relates directly to income generation, an effective measurement of the
control of operating expense is the efficiency ratio, which consists of operating expenses divided by revenues (net interest income and non-interest income) on a pre-tax basis. The efficiency ratio for the Company was 58.03% and 52.59% for 2003 and
2002, respectively. The Companys ratio of operating expense to average assets was 2.35% in 2003 and 2.34% in 2002. These ratios increased in 2003 due primarily to the increase in operating expense, primarily salaries, pensions and other
employee benefits combined with the reduced level of net interest income.



Income Taxes



The provision for income
taxes is $8.7 million with an effective tax rate of 33.9% for the year ended December 31, 2003. By comparison, the provision for income taxes for the year ended December 31, 2002 reflects a tax benefit of $254,000 with an effective income tax rate
of (16.6)%. Income tax expense generally fluctuates with the respective level of income before income taxes. The Company had a lower ratio of tax-exempt income to income before taxes in 2003, as compared to 2002, which contributed to the increase in
the effective tax rate. Another factor impacting the Companys annual effective tax rates relates to various tax credits associated with New York States Qualified Empire Zone Enterprise (QEZE) program. QEZE credits recognized
in 2003 were $227,000 compared to $465,000 in 2002.



Comparison of Operating
Results for the Years 2002 and 2001



General



For the year ended December 31, 2002, the Company reported net income of
$1.8 million compared to $20.5 million for the year ended December 31, 2001. Basic and diluted earnings per share were $0.19 and $0.18, respectively, for the year ended 2002, compared to basic and diluted earnings per share of $2.05 and $2.02 for
the year ended December 31, 2001. The weighted average common shares outstanding were 9,589,361 for the year ended December 31, 2002, down 3.7% or 369,591 shares from the previous year. The decrease in the average shares outstanding is primarily
attributed to the Companys repurchase programs.



Net Interest
Income



The Company earned net interest income of
$78.3 million and $81.3 million in 2002 and 2001, respectively. The Companys interest rate spread increased to 3.52% in 2002 from 3.28% in 2001. While net interest margin for the year 2002 increased slightly to 3.92% compared to 3.87% for the
year 2001, the increase was more than offset by the impact of declines in the average balance of earning assets. Average earning asset balances declined 5.2% from $2,102.9 million for 2001 to $1,994.5 million for 2002. The changes in average
balances and rates produced a decrease in net interest income of 3.8% from 2001 to 2002.



Interest on Commercial Loans



Commercial loans, which represented 36.5% of total loans at December 31, 2002, tend to increase the interest rate sensitivity of the overall loan portfolio, because interest rates on such loans are generally tied to
the Companys Prime Rate.



The steady decrease in general
interest rates, including the Companys commercial loan Prime Rate, which commenced during 2001, provided the general low interest rate environment that continued to drive the yield on commercial loans lower into the year 2002. The average
balance of commercial loans declined from the same periods in 2001, as the Company continued to reallocate its asset balances by reducing its total loan portfolio, especially commercial loans, and focusing on improving asset quality. Lower
commercial loan balances were the primary factor in the overall lower levels of interest income. The average balance of commercial loans decreased by $262.0 million from 2001 to $616.4 million for the year 2002. In addition, the average yield on
commercial loans decreased to 6.58% for 2002 compared to 8.03% for 2001. The decline in yield on commercial loans has also been impacted by the level of non-accruing loans.



42



---

##### Table of Contents

Interest on Consumer Loans



The interest income earned from the consumer loan portfolio, which includes principally fixed-rate loans with short terms,
continued to be adversely impacted by declines in volume for the year 2002 when compared to the same periods in 2001. The average balance of all consumer loans decreased $42.1 million to $364.2 million for the year 2002 from $406.3 million in 2001.
The average yield on the aggregate consumer loan portfolio has decreased to 7.84% for 2002 compared to 9.15% in 2001. In addition, the change in the mix of the consumer loan portfolio contributed to the decrease in yield from 2001 to 2002. The
Company has de-emphasized the origination of mobile home loans, which generally have higher yields than other consumer loan types, but also have increased credit risk. In addition, the Companys indirect used auto loan portfolio was fairly flat
during 2002, with year-end balances at approximately $130.0 million, while the indirect new auto loan portfolio increased from $39.5 million at December 31, 2001 to $60.1 million at December 31, 2002. Finally, the sale of the Companys credit
card portfolio during the first quarter of 2002 also contributed to the decrease in yield from 2001 to 2002.



Interest on Real Estate Loans



Interest on residential and commercial real estate loans totaled $27.2 million in 2002 and $29.5 million in 2001. The overall average yield on real estate loans decreased to 7.16% in 2002 from 7.90% in 2001, as the
Company pursued additional real estate loans, especially residential mortgage, as an integral part of the strategy to improve the mix and credit quality of the loan portfolio. This additional volume helped to mitigate the impact of the lower yields
earned in 2002. Residential real estate loans, including both fixed- and adjustable-rate mortgages, had average balances of $253.4 million in 2002, for a net increase of $33.1 million or 15.0% over the year 2001. For 2002, adjustable-rate
residential mortgages represented approximately $70.6 million or 27.9% of the average residential portfolio, which was a decrease of $10.2 million or 12.6% from the comparable averages for 2001. At December 31, 2002, adjustable-rate residential
mortgages were relatively unchanged at $70.6 million compared to $80.8 million at December 31, 2001. Fixed-rate mortgages have grown steadily relative to the aggregate level of residential mortgages representing 72.1% in 2002, up from 63.4% in 2001.
Originations of variable-rate loans have generally declined compared to total originations and reflect recent consumer preferences for fixed-rate mortgages associated with the low rate market trends.



During 2002, the Company completed the consolidation of all mortgage-lending
activities within a single facility to promote processing efficiency and an improvement in the quality of customer service. This new facility and operations aided the growth of the Companys real estate portfolio.



Interest on Investment Securities



During 2002, investment securities, mainly mortgage-backed securities, were
utilized to facilitate the Companys redistribution of liquidity. The average balance of investment securities for 2002 was $613.8 million, an increase of $204.8 million or 50.1%, over the average balance of $408.9 million for 2001. The
increase in investment securities was due in part to the additional funds available from declines in the commercial loan portfolio. Though the income from investment securities increased to $32.6 million in 2002 compared to $25.0 million in 2001
primarily due to increased volume, the impact of the increased volume was partially offset by the lower yields on such investment securities, which declined to 5.32% for 2002 compared to 6.12% for 2001. The relative yields were also influenced by
the amortization of any premiums incurred to acquire such investment securities, especially mortgage-backed securities. As prepayments have increased due to the low rate environment, the Company has had to accelerate the premium amortization, thus
decreasing yields.



Interest on Deposits



Interest expense on deposits for the year ended December 31, 2002 was $35.3
million, a decrease of $30.7 million or 46.7% from $66.0 million in 2001. The average cost of funds declined to 2.63% in 2002 from 4.33% in 2001. The most significant factors impacting this trend were the declines in the average rate paid and volume
of time deposits. The average balance outstanding for all time deposits was $675.9 million for 2002, a decrease of $207.5 million or 23.5% from $883.4 million in 2001. The cost of funds for all time deposits decreased to $26.4 million in 2002 with
an average rate of 3.91%, compared to $48.9 million in 2001 with an average rate of 5.53%. The cost of funds for money market deposit accounts in 2002 declined to $5.7 million from $11.5 million, principally due to the significant decrease in the
average rate which declined to 1.52% from 3.16%.



43



---

##### Table of Contents

Interest on Borrowings and Trust Preferred Securities



The average balance of borrowings increased to $345.1 million in 2002 from
$274.1 million in 2001. As the cost of borrowings decreased to 3.81% in 2002 from 5.01% in 2001, interest paid on borrowings decreased from $13.7 million to $13.2 million from 2001 to 2002. Interest expense on trust preferred securities was $2.7
million for 2002 and $2.4 million for 2001 consistent with the $35.8 million and $30.0 million average balances for 2002 and 2001. The increased volume of trust preferred securities was partially offset by a decrease in the average rate paid from
8.12% to 7.62%.



Provision for Loan Losses



The provision for loan losses was $46.2 million compared to $18.2 million in
2001. The Companys 2002 provision reflected managements assessment of the increased probability of loan losses identified within the loan portfolio, principally for certain commercial loans. In the second quarter of 2002, the Company
recorded a provision for loan losses of $26.7 million primarily due to specific circumstances affecting individual borrowers and our analysis of other borrowers whose reported financial results revealed deterioration of collateral and repayment
ability.



Non-interest Income



The following table summarizes change in the major components of
non-interest income:



|                                           |  |      |        |      |   |          |  |   |          |   |  |       |   
|------------------------------------------ |  | ---- | ------ | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|(Dollars in Thousands)                     |  | 2002 |        | 2001 |   | $ Change |  |   | % Change |  
|Service charges on deposit accounts        |  | $    | 5,176  |      | $ | 5,226    |  | $ | (50      | ) |  | (1.0  | )%
|Checkcard interchange fees                 |  |      | 1,422  |      |   | 1,284    |  |   | 138      |   |  | 10.7  | % 
|Mortgage servicing fees                    |  |      | 832    |      |   | 1,125    |  |   | (293     | ) |  | (26.0 | )%
|Fees and commissions-brokerage services    |  |      | 886    |      |   | 698      |  |   | 188      |   |  | 26.9  | % 
|Trust fees                                 |  |      | 1,308  |      |   | 1,618    |  |   | (310     | ) |  | (19.2 | )%
|Income from bank owned life insurance      |  |      | 32     |      |   |         |  |   | 32       |   |  | 100.0 | % 
|Gain on sale of securities, net            |  |      | 292    |      |   | 379      |  |   | (87      | ) |  | (23.0 | )%
|Gain on sale of branch offices, net        |  |      | 3,063  |      |   | 299      |  |   | 2,764    |   |  | 924.4 | % 
|Gain on sale of credit card portfolio, net |  |      | 1,806  |      |   |         |  |   | 1,806    |   |  | 100.0 | % 
|Other income                               |  |      | 2,946  |      |   | 2,903    |  |   | 43       |   |  | 5.8   | % 
|                                           |  |      |        |      |   |          |  |   |          |   |  |       |   
|                                           |  | $    | 17,763 |      | $ | 13,532   |  | $ | 4,231    |   |  | 31.3  | % 
|                                           |  |      |        |      |   |          |  |   |          |   |  |       |   



Non-interest income
was $17.8 million for the year ended December 31, 2002, an increase of $4.2 million or 31.3% from $13.5 million for the year ended December 31, 2001. A key item in this comparison includes the December 2002 sale of two branch offices in the Elmira,
New York area which resulted in a net gain of $3.1 million. The Company sold its two Elmira branches located in the Chemung County area to concentrate on the further development of its retail branch operations in the Greater Binghamton area and the
Central New York region. Earlier in 2002, the Company sold its credit card portfolio for a net gain of $1.8 million. The increasing costs associated with maintaining the technology to provide a high level of service to our customers and the higher
levels of charge-offs associated with credit card debt made this portfolio less profitable for the Company.



Service charges on deposit accounts, representing 29.1% of total non-interest income in 2002, totaled $5.2 million in both 2002 and 2001, despite a 10.4%
decrease in the average balance of deposits for 2002 compared to 2001. Checkcard interchange fees were $1.4 million, an increase of 10.7% in 2002 over 2001. The increases in the related fees are primarily attributed to increases in transaction
volume.



Mortgage servicing fees for 2002 were $832,000, down
26.0% from $1.1 million, reflecting the high level of prepayments during 2002. Mortgage loans serviced for others were $366.0 million and $460.9 million at December 31, 2002 and 2001, respectively.



Trust fees, which are, for the most part, dependent on the market value of
assets under management, were $1.3 million for the year 2002, a decrease of $310,000 from 2001. The level of trust fees in 2002 represents a decrease of 19.2% with a comparable decrease in the valuation of related trust assets under management.



44



---

##### Table of Contents

Operating Expense



The following table summarizes changes in the major components of operating expense:



|                                                            |  |      |        |      |   |          |  |   |          |   |  |       |   
|----------------------------------------------------------- |  | ---- | ------ | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|(Dollars in Thousands)                                      |  | 2002 |        | 2001 |   | $ Change |  |   | % Change |  
|Salaries, pensions and employee benefits                    |  | $    | 24,769 |      | $ | 21,828   |  | $ | 2,941    |   |  | 13.5  | % 
|Building occupancy                                          |  |      | 4,259  |      |   | 4,304    |  |   | (45      | ) |  | (1.0  | )%
|Advertising and promotion                                   |  |      | 1,293  |      |   | 931      |  |   | 362      |   |  | 38.9  | % 
|Professional fees                                           |  |      | 2,890  |      |   | 2,206    |  |   | 684      |   |  | 31.0  | % 
|Data processing costs                                       |  |      | 5,534  |      |   | 5,213    |  |   | 321      |   |  | 6.2   | % 
|Services                                                    |  |      | 2,905  |      |   | 2,951    |  |   | (46      | ) |  | (1.6  | )%
|System conversion expenses                                  |  |      | 387    |      |   |         |  |   | 387      |   |  | 100.0 | % 
|Other real estate owned and repossessed asset expenses, net |  |      | 688    |      |   | 211      |  |   | 477      |   |  | 226.1 | % 
|Other expenses                                              |  |      | 5,608  |      |   | 5,959    |  |   | (351     | ) |  | (5.9  | )%
|                                                            |  |      |        |      |   |          |  |   |          |   |  |       |   
|                                                            |  | $    | 48,333 |      | $ | 43,603   |  | $ | 4,730    |   |  | 10.8  | % 
|                                                            |  |      |        |      |   |          |  |   |          |   |  |       |   



Operating expense
totaled $48.3 million for the year ended December 31, 2002 compared to $43.6 million for the year 2001, an increase of $4.7 million or 10.8%. The primary factor relates to salaries, pensions and other employee benefits that increased $2.9 million or
13.5% in 2002 compared to 2001. Salary increases were $2.1 million for 2002 compared to 2001 and represented increased staffing in certain areas, principally special assets and credit administration, as well as promotions and merit raises effective
at the start of 2002. Benefit costs, principally in health insurance and pension costs, represent the balance of the increase in personnel-related costs.



Professional fees, which increased 31.0% to $2.9 million in 2002 from $2.2 million in 2001, were impacted by the levels of problematic loans as well a
negotiations related to certain credit recoveries in both years. Advertising and promotion expense increased $362,000 to $1.3 million in 2002 compared to 2001. The increase is generally associated with the Companys new products and efforts to
increase the Companys corporate identity in our core markets. System conversion costs of $387,000 represent one-time expenses related to the Banks conversion to a proof of deposit (POD) process in 2002 to achieve efficiencies
at the teller line, consistency of float management and a more efficient, centralized fee monitoring and assessment system.



Operating costs associated with repossession and maintenance of other real estate owned and repossessed assets totaled $688,000 in 2002 compared to
$211,000 in 2001. The increase in such costs is consistent with the trend for such assets, which increased by 52.9% from December 31, 2001 to December 31, 2002, as well as the higher repossession costs attributed to property representing former
collateral for commercial loans.



Since a substantial portion
of operating expense relates directly to income generation, an effective measurement of the control of operating expense is the efficiency ratio. This ratio consists of operating expense divided by revenues (net interest income and non-interest
income) on a pre-tax basis. The efficiency ratio for the Company was 52.59% and 46.11% for 2002 and 2001, respectively. The Companys ratio of operating expense to average assets was 2.34% in 2002 and 2.02% in 2001. These ratios increased in
2002 due primarily to the increase in operating expense, primarily salaries, pensions and other employee benefits, as well as lower net interest income.



Income Taxes



The provision for income taxes for the year ended December 31, 2002 reflects a tax benefit of $254,000 with an effective income tax rate of (16.6)%. For
comparative purposes, the provision for income tax expense was $12.6 million for the year ended December 31, 2001 with an effective tax rate of 38.1%. The levels of income tax expense generally fluctuate with the respective levels on income before
income taxes. The primary factor impacting the Companys effective tax rate in 2002 relates to various tax credits associated with the previously mentioned QEZE program. QEZE credits recognized in 2002 were $469,000. In addition, the Company
had a higher ratio of tax-exempt income to income before taxes in 2002, as compared to 2001, which also contributed to the reduced effective tax rate.



45



---

##### Table of Contents

SELECTED UNAUDITED QUARTERLY FINANCIAL DATA



Summarized quarterly financial information for the years ended December 31, 2003 and 2002 is as follows:



|                                                           |         |                    |         |                    |         |        |          |   |         |  |         |        |  |         |        |          |   |         |   |  |   |        |  |   |       
|---------------------------------------------------------- | ------- | ------------------ | ------- | ------------------ | ------- | ------ | -------- | - | ------- |  | ------- | ------ |  | ------- | ------ | -------- | - | ------- | - |  | - | ------ |  | - | ------
|(Dollars in Thousands, Except
Per Share Data)              |         | Three Months Ended |         | Three Months Ended
|                                                           | 3/31/03 |                    | 6/30/03 |                    | 9/30/03 |        | 12/31/03 |   | 3/31/02 |  | 6/30/02 |        |  | 9/30/02 |        | 12/31/02
|Total interest income                                      |         | $                  | 29,376  |                    | $       | 28,990 |          | $ | 28,153  |  | $       | 28,284 |  | $       | 33,699 |          | $ | 33,193  |   |  | $ | 31,511 |  | $ | 31,085
|Total interest expense                                     |         |                    | 10,896  |                    |         | 11,101 |          |   | 10,543  |  |         | 10,425 |  |         | 13,454 |          |   | 13,307  |   |  |   | 12,679 |  |   | 11,779
|                                                           |         |                    |         |                    |         |        |          |   |         |  |         |        |  |         |        |          |   |         |   |  |   |        |  |   |       
|Net interest income                                        |         |                    | 18,480  |                    |         | 17,889 |          |   | 17,610  |  |         | 17,859 |  |         | 20,245 |          |   | 19,886  |   |  |   | 18,832 |  |   | 19,306
|Provision for loan losses                                  |         |                    | 3,968   |                    |         | 2,980  |          |   | 2,880   |  |         | 260    |  |         | 5,200  |          |   | 26,720  |   |  |   | 4,500  |  |   | 9,750 
|                                                           |         |                    |         |                    |         |        |          |   |         |  |         |        |  |         |        |          |   |         |   |  |   |        |  |   |       
|Net interest income (loss) after provision for loan losses |         |                    | 14,512  |                    |         | 14,909 |          |   | 14,730  |  |         | 17,599 |  |         | 15,045 |          |   | (6,834  | ) |  |   | 14,332 |  |   | 9,556 
|                                                           |         |                    |         |                    |         |        |          |   |         |  |         |        |  |         |        |          |   |         |   |  |   |        |  |   |       
|Non-interest income                                        |         |                    | 3,358   |                    |         | 3,398  |          |   | 3,610   |  |         | 3,173  |  |         | 4,849  |          |   | 3,172   |   |  |   | 3,124  |  |   | 6,618 
|Operating expense                                          |         |                    | 12,063  |                    |         | 12,327 |          |   | 12,029  |  |         | 13,128 |  |         | 11,845 |          |   | 13,553  |   |  |   | 11,212 |  |   | 11,723
|                                                           |         |                    |         |                    |         |        |          |   |         |  |         |        |  |         |        |          |   |         |   |  |   |        |  |   |       
|Income (loss) before income taxes                          |         |                    | 5,807   |                    |         | 5,980  |          |   | 6,311   |  |         | 7,644  |  |         | 8,049  |          |   | (17,215 | ) |  |   | 6,244  |  |   | 4,451 
|                                                           |         |                    |         |                    |         |        |          |   |         |  |         |        |  |         |        |          |   |         |   |  |   |        |  |   |       
|Income tax expense (benefit)                               |         |                    | 1,930   |                    |         | 2,028  |          |   | 2,066   |  |         | 2,702  |  |         | 3,006  |          |   | (6,058  | ) |  |   | 2,318  |  |   | 480   
|                                                           |         |                    |         |                    |         |        |          |   |         |  |         |        |  |         |        |          |   |         |   |  |   |        |  |   |       
|NET INCOME (LOSS)                                          |         | $                  | 3,877   |                    | $       | 3,952  |          | $ | 4,245   |  | $       | 4,942  |  | $       | 5,043  |          | $ | (11,157 | ) |  | $ | 3,926  |  | $ | 3,971 
|                                                           |         |                    |         |                    |         |        |          |   |         |  |         |        |  |         |        |          |   |         |   |  |   |        |  |   |       
|Earnings (loss) per share:                                 |         |                    |         |                    |         |        |          |   |         |  |         |        |  |         |        |          |   |         |   |  |   |        |  |   |       
|Basic                                                      |         | $                  | 0.42    |                    | $       | 0.43   |          | $ | 0.46    |  | $       | 0.54   |  | $       | 0.52   |          | $ | (1.16   | ) |  | $ | 0.41   |  | $ | 0.42  
|Diluted                                                    |         | $                  | 0.41    |                    | $       | 0.42   |          | $ | 0.45    |  | $       | 0.52   |  | $       | 0.51   |          | $ | (1.16   | ) |  | $ | 0.41   |  | $ | 0.41  
|                                                           |         |                    |         |                    |         |        |          |   |         |  |         |        |  |         |        |          |   |         |   |  |   |        |  |   |       



OFF-BALANCE SHEET ARRANGEMENTS



In the normal course of operations, the Company engages
in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used by the Company for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and
liquidity risk or to optimize capital. Customer transactions are used to manage customers requests for funding.



For the year ended December 31, 2003, the Company engaged in no off-balance sheet transactions reasonably likely to have a material effect on the
Companys consolidated financial condition.



CONTRACTUAL OBLIGATIONS



As of December 31, 2003, the Company is contractually
obliged under long-term agreements as follows:



|                                |  |                        |         |                  |   |              |  |              |         |                   |   |        |  |   |        
|------------------------------- |  | ---------------------- | ------- | ---------------- | - | ------------ |  | ------------ | ------- | ----------------- | - | ------ |  | - | -------
|                                |  | Payments Due by Period
|(Dollars in Thousands)          |  | Total                  |         | Less Than 1 Year |   | 1 to 3 Years |  | 3 to 5 Years |         | More Than 5 Years
|Federal Home Loan Bank advances |  | $                      | 390,823 |                  | $ | 90,051       |  | $            | 150,114 |                   | $ | 30,287 |  | $ | 120,371
|Junior subordinated obligations |  |                        | 48,202  |                  |   |             |  |              |        |                   |   |       |  |   | 48,202 
|Operating leases                |  |                        | 4,282   |                  |   | 734          |  |              | 1,291   |                   |   | 709    |  |   | 1,548  
|Other                           |  |                        | 1,099   |                  |   |             |  |              |        |                   |   |       |  |   | 1,099  
|                                |  |                        |         |                  |   |              |  |              |         |                   |   |        |  |   |        
|                                |  | $                      | 444,406 |                  | $ | 90,785       |  | $            | 151,405 |                   | $ | 30,996 |  | $ | 171,220
|                                |  |                        |         |                  |   |              |  |              |         |                   |   |        |  |   |        



LIQUIDITY AND CAPITAL RESOURCES



A fundamental objective of the Company is to manage its
liquidity effectively. Prudent liquidity management ensures that the Company can fund growth in earning assets, fund liability maturities, meet customers loan demand and deposit withdrawals, pay operating expenses, service outstanding debt,
pay shareholder dividends, as well as purchase treasury shares under the Stock Repurchase Programs. Liquidity is reviewed on an ongoing basis by management, and monthly by the Asset/Liability Committee (ALCO) and the Board of Directors.
Target ratios for liquidity have been established based on historical trends, and appropriate contingency plans are in place for unanticipated, adverse liquidity situations.



46



---

##### Table of Contents

The Companys primary sources of liquidity, on a consolidated basis, are deposits, payments of
principal and interest from its loan and securities portfolios and the ability to use its loan and securities portfolios as collateral for secured borrowings. The Bank is a member of the FHLB of New York. At December 31, 2003, outstanding FHLB
advances totaled $390.8 million. In addition, the Company, through various facilities, has unused capacity to access, per Board approved policy limits, an additional $300.0 million of brokered deposits of which $179.9 million was outstanding at
December 31, 2003. See Note 8 in the Notes to Consolidated Financial Statements for further details on the Companys borrowings.



Factors that effect the Companys liquidity position include loan origination volumes, loan prepayment rates, maturity structure of existing loans,
core deposit growth levels, certificate of deposit maturity structure and retention, investment portfolio cash flows, and characteristics and diversification of wholesale funding sources. The Companys liquidity position is influenced by
changes in interest rate levels, economic conditions and by competition.



Operating activities have provided net cash of $42.1 million for the year ended December 31, 2003 compared to $36.3 million in 2002 and $24.4 million 2001. The comparative impact of net income on operating cash flow
was $17.0 million in 2003, $1.8 million in 2002 and $20.5 million in 2001. The provision for loan losses was generally the most significant difference between net income and net cash provided by operating activities, and amounted to $10.1 million in
2003 compared to $46.2 million in 2002 and $18.2 million in 2001. The sale proceeds of loans held for sale provided operating funds consistent with, and fluctuating, based on the level and turnover of the portfolio. Based on the Companys
assessment of future interest rate fluctuations, loan risk and market conditions during each period, the Company will sell or accumulate loans originated by its banking operations within its market area. Loans held for sale in 2003 are primarily
associated with mortgage loan originations with extended maturities of 20 years of longer. In 2002, the Companys decision to contribute the maximum voluntary contribution allowable to its pension plan required the use of $6.5 million in excess
of the annual pension expense charged to operations. As stated previously, such contribution reduced the future net periodic pension expense determined annually by the plans actuaries.



Investing activities used net cash of $190.8 million for the year ended
December 31, 2003, compared to $19.1 million for 2002. This change primarily represents the deployment of net cash provided by financing activities, especially increases in deposits and FHLB term advances, to expand the loan portfolio. The reduction
in the use of funds for investment activities in 2003 reflects the Companys shift in emphasis from securities investments as alternative investments for liquidity purposes to increased real estate loan activities consistent with current
business strategy. As noted previously, residential mortgage loan activity continued at record levels for most of 2003 and commercial real estate showed significant growth. In 2003, loans to customers exceeded loan repayments by $158.6 million. The
November 2003 sale of certain large, under-performing commercial loans provided $27.2 million to support operations. In 2002, the Company used investments in securities to stabilize earnings during a period that included significant declining trends
in interest rate yields. Proceeds from the 2002 sale of the Companys credit card portfolio provided $12.7 million of cash flow. The Companys investing activities also reflect $20.0 million for its initial investment in BOLI in December
2002, as well as an additional investment of $20.0 million in December 2003.



Financing activities provided net cash of $163.5 million during 2003 compared to a $26.5 million use of funds in 2002 with the primary change associated with increases in deposits. Brokered time deposits provided the
most significant increase of $79.9 million in 2003. Securities sold under repurchase agreements and FHLB line of credit advances decreased by $21.3 million during the period. Sales of branches used cash of $37.1 million and $2.2 million in 2002 and
2001, respectively. FHLB term advances were utilized to provide cash for financing activities with borrowing proceeds exceeding repayments by $54.0 million in 2003 and $97.9 million in 2002. The Company had a net use of funds from financing
activities of $274.5 million in 2001, mainly to pay down higher cost deposits, particularly brokered time deposits as time deposits declined $350.9 million. The net increase in FHLB term advances of $140.0 million in 2001 provided an alternative
resource.



47



---

##### Table of Contents

The Companys main sources of liquidity, as a holding company, are dividends from the Bank,
investment income and net proceeds from borrowings and offerings of junior subordinated obligations. The main uses of liquidity are the payment of dividends to shareholders, repurchases of the Companys common stock, and the payment of interest
to holders of junior subordinated obligations. The ability of the Bank to pay dividends is subject to various regulatory limitations. Due to reduced net income in 2002, coupled with dividends previously paid, the Bank exceeded its dividend
limitations in 2002. However, in October 2002, the Bank received regulatory approval for and paid a special dividend of $30 million to the Company. As a result of that special dividend, and based on regulatory limitations noted above, the Company
did not receive dividends from the Bank in 2003.



The Company
issued a total of $25.0 million of trust preferred securities during 2002. Of the net proceeds, $6.1 million was used to purchase, at a discount, previously issued trust preferred securities (BSB Capital Trust I), approximately $7.9 million was
utilized to repurchase 315,496 shares of the Companys common stock, and the remainder was utilized for liquidity and general corporate purposes. The common shares were repurchased as part of previously announced Stock Repurchase Programs, the
most recent of which was announced during the fourth quarter of 2002. Under this most recent Stock Repurchase Program, which was in effect through March 2003, a total of 316,070 shares have been repurchased at a total cost of approximately $7.0
million with authorization for the repurchase of approximately 316,000 additional shares.



At December 31, 2003, the Company, had immediately available funds totaling $18.2 million. Management believes current levels of cash are adequate to meet the Companys anticipated ordinary obligations in 2004,
to pay customary cash dividends on the Companys common stock in 2004, if so declared. Management anticipates that the Bank will be able to resume the payment of cash dividends to the Company, without regulatory approval, in 2004. However,
circumstances, including additional common stock and trust preferred security repurchases or unanticipated cash obligations, may require the Company to seek additional sources of funding or require the Bank to seek regulatory approval for another
special cash dividend to the Company, should the Bank be otherwise unable to make such cash dividend payments.



At December 31, 2003, the Banks Tier I leverage ratio, as defined by regulatory guidelines, was 7.93%, up from 7.31% at December 31, 2002, and above
the minimum regulatory requirements for the Bank for both periods. The Banks total capital-to-risk-weighted assets ratio, calculated under the regulatory risk-based capital requirements, was 12.64%, up from 11.90% at December 31, 2002, and in
excess of the regulatory requirements for both periods. The improvement in these ratios is primarily the result of positive net income compared to 2002, which was impacted by the net loss in the second quarter of 2002, and the payment of a $30.0
million special dividend to the Company as previously noted.



At December 31, 2003, the Companys Tier I leverage ratio and total capital-to-risk-weighted assets ratios were 8.81% and 13.80%, compared to 9.10% and 14.48%, respectively, at December 31, 2002. The Companys book value per share
was $15.82 at December 31, 2003 compared to $15.78 at December 31, 2002. See Note 17 in the Notes to Consolidated Financial Statements for further details on the Companys and the Banks regulatory capital amounts and ratios.



48



---

##### Table of Contents

RECENT ACCOUNTING PRONOUNCEMENTS



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE need
to be included in a companys consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the companys interest in the VIE is such that the company will absorb a majority
of the VIEs expected losses and/or receive a majority of the entitys expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. FIN 46
was effective for all VIEs created after January 31, 2003. However, the FASB has postponed that effective date to December 31, 2003. In December 2003, the FASB issued a revised FIN 46 (FIN 46 R), which further delayed this effective date until
March 31, 2004 for VIEs created prior to February 1, 2003, except for special purpose entities, which must adopt either FIN 46 or FIN 46 R as of December 31, 2003. The requirements of FIN 46 R resulted in the deconsolidation of the
Companys wholly owned subsidiary trusts, formed to issue mandatorily redeemable preferred securities (trust preferred securities). The deconsolidation, as of December 31, 2003, results in the recognition of the trust preferred
securities as junior subordinated obligations on the related consolidated statement of financial condition. The junior subordinated obligations of the trusts also include common interests, which aggregate approximately $1.7 million, and are offset
by an identical amount representing the Companys investment and included in other assets. The provisions of FIN 46 R had no impact on the Companys consolidated statements of income or cash flows for 2003.



The FASB issued Statement No. 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contacts and for hedging activities. This statement amends Statement 133 for decisions made as part of the Derivatives Implementation
Group process that effectively required amendments to Statement 133, in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a
derivative. The adoption of this statement did not have a significant impact on the Companys consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.
This statement requires an issuer to classify three types of freestanding financial instruments as liabilities. One type is financial instruments issued in the form of shares requiring the issuer to redeem them by transferring its assets. The second
type is financial instruments that embody an obligation to repurchase the issuers equity shares by transferring assets. The third type of financial instruments is one that embodies an unconditional obligation that the issuer must or may settle
by issuing a variable number of its equity shares if, at inception, the monetary value of the obligation meets certain criteria. The statement also requires disclosures about the terms of the instruments and settlement alternatives. The statement
was effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The effective date has been deferred indefinitely for
certain types of mandatorily redeemable financial instruments. The provisions of this statement did not have a material impact on the Companys consolidated financial statements.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



The primary market risk the Company is exposed to currently is interest rate risk since all Company transactions are denominated in U. S. dollars with no
direct currency exchange or changes in commodity price exposures. All market risk-sensitive instruments continue to be available for sale with no financial instruments entered into for trading purposes at December 31, 2003. The Company does not use
derivative financial instruments such as interest rate swaps and caps extensively and did not participate in any derivative financial instruments during the year ended December 31, 2003.



The Company establishes the size and duration of its investment portfolio and wholesale funding sources in order to manage
interest rate risk. The current pricing, structure and composition of retail loans and deposits are primary factors to be considered. In adjusting the Companys asset and liability position, managements goal is to limit the Companys
interest rate risk exposure while attempting to enhance its net interest income. The



49



---

##### Table of Contents

Companys Asset and Liability Committee (ALCO) meets at least monthly to make decisions on the
investment and funding portfolios based on its economic outlook, the Committees interest rate expectations, the overall interest rate risk profile of the Company, and several other factors such as budgeted loan portfolio and core deposit
growth and composition, and liquidity requirements. The Company utilizes simulation analysis to evaluate the impact that changes in interest rates might have on the Companys net interest income and cash flow.



The Company is exposed to interest rate risk when assets and liabilities
re-price at different times and by different amounts and terms as interest rates change. As a result, the net interest income earned by the Company is subject to the effects of changing interest rates. Accordingly, the ALCO focuses on effectively
managing the Companys gap, which is a measure of the mismatch between the dollar amount of the Companys interest-earning assets and interest-bearing liabilities that mature or reprice within certain time frames. If those assets exceed
the liabilities within a prescribed time period, a positive gap results. This could tend to have a favorable impact on earnings during a period of rising interest rates and could have an unfavorable impact during a period of declining
rates. Conversely, if those liabilities exceed the assets during the time period in question, a negative gap results, in which case a rise in the general level of interest rates could have an unfavorable impact on earnings, while a
decline in rates could have a favorable influence on earnings.



The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2003, which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of
the future time periods shown. The following table and associated discussion does not represent a Company forecast and should not be relied upon to predict results of operations. The results shown are based on numerous assumptions and the Company
cannot make assurances these assumptions will not change due to customer preferences, market conditions or actions the Company may take through its ALCO to respond to such changes.



|                                                        |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|------------------------------------------------------- |  | ------------- | -------- | -- | ------------------------- | - | -------- | ----------------------- |  | - | ------------------------ | -- |  | --------------- | ------- | - | --------------------- | - | ------- | - |  | - | ---------
|(Dollars in Thousands)                                  |  | 3 mos or less |          |    | More than 3 mos to 12 mos |   |          | More than 1 yr to 3 yrs |  |   | More than 3 yrs to 5 yrs |    |  | More than 5 yrs |         |   | Total Rate- Sensitive
|Rate-sensitive assets:                                  |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|Commercial and consumer loans:                          |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|Fixed-rate                                              |  | $             | 42,657   |    |                           | $ | 76,268   |                         |  | $ | 172,131                  |    |  | $               | 93,712  |   |                       | $ | 97,276  |   |  | $ | 482,044  
|Adjustable-rate                                         |  |               | 206,504  |    |                           |   | 228      |                         |  |   | 231                      |    |  |                 | 253     |   |                       |   | 1,786   |   |  |   | 209,002  
|Mortgage loans:                                         |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|Fixed-rate                                              |  |               | 30,427   |    |                           |   | 83,649   |                         |  |   | 164,057                  |    |  |                 | 110,569 |   |                       |   | 149,386 |   |  |   | 538,088  
|Adjustable-rate                                         |  |               | 65,470   |    |                           |   | 54,836   |                         |  |   | 52,513                   |    |  |                 | 35,910  |   |                       |   | 11,381  |   |  |   | 220,110  
|Mortgage-backed securities                              |  |               | 43,570   |    |                           |   | 83,034   |                         |  |   | 156,685                  |    |  |                 | 46,720  |   |                       |   | 42,165  |   |  |   | 372,174  
|Other investment securities                             |  |               | 52,968   |    |                           |   | 71,594   |                         |  |   | 63,527                   |    |  |                 | 44,165  |   |                       |   | 38,945  |   |  |   | 271,199  
|                                                        |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|Total rate-sensitive assets                             |  | $             | 441,596  |    |                           | $ | 369,609  |                         |  | $ | 609,144                  |    |  | $               | 331,329 |   |                       | $ | 340,939 |   |  | $ | 2,092,617
|                                                        |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|Rate-sensitive liabilities:                             |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|Money market accounts                                   |  | $             | 429,376  |    |                           | $ |         |                         |  | $ |                         |    |  | $               |        |   |                       | $ |        |   |  | $ | 429,376  
|Savings accounts                                        |  |               | 45,430   |    |                           |   | 45,430   |                         |  |   | 45,430                   |    |  |                 | 45,430  |   |                       |   |        |   |  |   | 181,720  
|NOW accounts                                            |  |               |         |    |                           |   |         |                         |  |   |                         |    |  |                 |        |   |                       |   | 128,400 |   |  |   | 128,400  
|Time deposits                                           |  |               | 122,149  |    |                           |   | 244,661  |                         |  |   | 252,090                  |    |  |                 | 72,468  |   |                       |   | 1,544   |   |  |   | 692,912  
|FHLB advances                                           |  |               | 20,015   |    |                           |   | 70,045   |                         |  |   | 150,131                  |    |  |                 | 30,149  |   |                       |   | 120,483 |   |  |   | 390,823  
|Securities sold under repurchase agreements             |  |               | 18,846   |    |                           |   |         |                         |  |   |                         |    |  |                 |        |   |                       |   |        |   |  |   | 18,846   
|Other borrowings                                        |  |               |         |    |                           |   |         |                         |  |   |                         |    |  |                 |        |   |                       |   | 1,099   |   |  |   | 1,099    
|Junior subordinated obligations                         |  |               |         |    |                           |   |         |                         |  |   |                         |    |  |                 |        |   |                       |   | 48,202  |   |  |   | 48,202   
|                                                        |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|Total rate-sensitive liabilities                        |  | $             | 635,816  |    |                           | $ | 360,136  |                         |  | $ | 447,651                  |    |  | $               | 148,047 |   |                       | $ | 299,728 |   |  | $ | 1,891,378
|                                                        |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|Periodic gap                                            |  | $             | (194,220 | )  |                           | $ | 9,473    |                         |  | $ | 161,493                  |    |  | $               | 183,282 |   |                       | $ | 41,211  |   |  | $ | 201,239  
|                                                        |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|Cumulative gap                                          |  | $             | (194,220 | )  |                           | $ | (184,747 | )                       |  | $ | (23,254                  | )  |  | $               | 160,028 |   |                       | $ | 201,239 |   |  |   |          
|                                                        |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          
|Cumulative gap as a percentage of rate sensitive assets |  |               | (9.28    | )% |                           |   | (8.83    | )%                      |  |   | (1.11                    | )% |  |                 | 7.65    | % |                       |   | 9.62    | % |  |   |          
|                                                        |  |               |          |    |                           |   |          |                         |  |   |                          |    |  |                 |         |   |                       |   |         |   |  |   |          



50



---

##### Table of Contents

With the exception of savings, money market and NOW accounts which have no contractual term, the amounts
of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with their contractual terms. All assets and liabilities are placed in time periods that represent the earlier of their next repricing
or scheduled maturity. Adjustable-rate loans, for example, are placed in the time periods which correspond to their next scheduled rate change. Prepayment assumptions are made to indicate the rate at which rate-sensitive assets prepay in excess of
scheduled amortization. Money market accounts were anticipated to reprice within three months based on the consistent level of current accounts and the current level of interest rates. Savings accounts are assumed to reprice in equal amounts within
five years. NOW accounts are considered stable core deposits, which based on rate and repricing trends, are anticipated to reprice after five years.



Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict the magnitude of changes in interest rates on a short-term basis and over the
life of the assets. Further, in the event of changes in interest rate, prepayment and early withdrawal levels would likely deviate significantly from those assumed in preparing the table. Finally, should interest rates increase, the ability of
borrowers to service their debt may decrease.



Based on
managements December 31, 2003 simulation analysis of an immediate 100 basis point parallel increase in the level of interest rates, the estimated percentage change in net interest income from the flat rate scenario would be an increase of
4.23% over a 12-month horizon. For an immediate 200 basis point parallel increase in the level of interest rates, the estimated change in net interest income from the flat rate scenario would be an increase of 3.77% over a 12-month horizon.
Contributing to this level of increase is the assumption that non-maturity deposit rates would only increase by 25 basis points and retail time deposit rates would only increase by 50 basis points for a 100 basis point increase in overall interest
rates, and non-maturity deposit rates would increase by 50 basis points and retail time deposit rates would only increase by 125 basis points for a 200 basis point increase in overall interest rates. For the 200 basis point increase scenario, the
de-indexing of money market account rates in 2003 will allow the Bank to limit rate increases in response to higher market rates, which eliminates the automatic increase in rates paid on related accounts. The estimated change in net interest income
from the flat rate scenario for a 100 basis point decrease in the level of interest rates (presentation is limited to a 100 basis point decline due to the currently historically low interest rate environment) would be a decrease of 7.83%. The
magnitude of the effects of the declining rate scenario are impacted by the absolute level of rates, and the inability of the Company to reduce its core deposit funding costs by the entire amount of the change assumed. These effects are also
exacerbated by the higher levels of cash flow for reinvestment in a lower interest rate environment that would occur as a result of estimated increases in the level of prepayments on higher yielding loan and mortgage-backed securities in those
scenarios. There can be no assurance that if interest rates did move by the amounts discussed above, that the results of operations would be impacted as indicated.



51



---

##### Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



INDEX TO FINANCIAL STATEMENTS



|                                                                                                                |  |      
|--------------------------------------------------------------------------------------------------------------- |  | -----
|                                                                                                                |  | Page 
|                                                                                                                | 
|Independent Auditors Report                                                                                    |  | 53   
|                                                                                                                | 
|Consolidated Statements of Condition as of December 31, 2003 and 2002                                           |  | 54   
|                                                                                                                | 
|Consolidated Statements of Income for years ended December 31, 2003, 2002 and 2001                              |  | 55   
|                                                                                                                | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2003, 2002 and 2001 |  | 56   
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                      |  | 57-58
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | 59   



52



---

##### Table of Contents

INDEPENDENT AUDITORS REPORT



The Board of Directors and Shareholders

BSB Bancorp, Inc.:



We have audited the accompanying consolidated statements of condition of BSB Bancorp, Inc.
and subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders equity, and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The accompanying consolidated statements of income, changes in shareholders
equity and cash flows for the year ended December 31, 2001, were audited by other auditors whose report thereon dated January 25, 2002, expressed an unqualified opinion on those statements.



We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



In our
opinion, the accompanying consolidated statements of condition as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders equity, and cash flows for the years then ended, present fairly, in all
material respects, the financial position of BSB Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.



/s/ KPMG LLP



Albany, New York

February 12, 2004



53



---

##### Table of Contents

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(In Thousands, Except Share and Per Share Data)



|                                                                                                                  |  |      |           |   |      |   |           |  
|----------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|December 31,                                                                                                      |  | 2003 |           |   | 2002 |  
|ASSETS                                                                                                            |  |      |           |   |      |   |           |  
|Cash and due from banks                                                                                           |  | $    | 45,670    |   |      | $ | 46,912    |  
|Federal funds sold                                                                                                |  |      | 16,000    |   |      |   |          |  
|                                                                                                                  |  |      |           |   |      |   |           |  
|Cash and cash equivalents                                                                                         |  |      | 61,670    |   |      |   | 46,912    |  
|                                                                                                                  |  |      |           |   |      |   |           |  
|Investment securities available for sale, at fair value                                                           |  |      | 623,832   |   |      |   | 538,545   |  
|Investment securities held to maturity (fair value of $56,093 at December 31, 2002)                               |  |      |          |   |      |   | 55,373    |  
|Federal Home Loan Bank of New York stock                                                                          |  |      | 19,541    |   |      |   | 19,934    |  
|Loans held for sale                                                                                               |  |      | 1,144     |   |      |   | 4,001     |  
|                                                                                                                  |  |     
|Loans:                                                                                                            |  |      |           |   |      |   |           |  
|Commercial                                                                                                        |  |      | 323,634   |   |      |   | 492,171   |  
|Consumer                                                                                                          |  |      | 367,412   |   |      |   | 377,961   |  
|Residential real estate                                                                                           |  |      | 558,781   |   |      |   | 330,344   |  
|Commercial real estate                                                                                            |  |      | 199,417   |   |      |   | 146,955   |  
|                                                                                                                  |  |      |           |   |      |   |           |  
|Total loans                                                                                                       |  |      | 1,449,244 |   |      |   | 1,347,431 |  
|Net deferred costs                                                                                                |  |      | 2,953     |   |      |   | 1,863     |  
|Allowance for loan losses                                                                                         |  |      | (47,421   | ) |      |   | (63,250   | )
|                                                                                                                  |  |      |           |   |      |   |           |  
|Net loans                                                                                                         |  |      | 1,404,776 |   |      |   | 1,286,044 |  
|                                                                                                                  |  |      |           |   |      |   |           |  
|Bank premises and equipment, net                                                                                  |  |      | 15,223    |   |      |   | 14,545    |  
|Accrued interest receivable                                                                                       |  |      | 7,981     |   |      |   | 9,875     |  
|Other real estate owned and repossessed assets                                                                    |  |      | 1,231     |   |      |   | 3,109     |  
|Bank owned life insurance                                                                                         |  |      | 41,054    |   |      |   | 20,032    |  
|Other assets                                                                                                      |  |      | 35,659    |   |      |   | 36,297    |  
|                                                                                                                  |  |      |           |   |      |   |           |  
|Total assets                                                                                                      |  | $    | 2,212,111 |   |      | $ | 2,034,667 |  
|                                                                                                                  |  |      |           |   |      |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                              |  |      |           |   |      |   |           |  
|Deposits                                                                                                          |  | $    | 1,589,086 |   |      | $ | 1,442,756 |  
|Borrowings                                                                                                        |  |      | 410,768   |   |      |   | 378,118   |  
|Other liabilities                                                                                                 |  |      | 17,752    |   |      |   | 16,867    |  
|Junior subordinated obligations issued to unconsolidated subsidiary trusts (Junior subordinated obligations)      |  |      | 48,202    |   |      |   |          |  
|Mandatorily redeemable preferred securities issued by consolidated subsidiary trusts (Trust preferred securities) |  |      |          |   |      |   | 48,000    |  
|                                                                                                                  |  |      |           |   |      |   |           |  
|Total liabilities                                                                                                 |  |      | 2,065,808 |   |      |   | 1,885,741 |  
|                                                                                                                  |  |      |           |   |      |   |           |  
|Commitments and contingent liabilities (Note 11)                                                                  |  |      |           |   |      |   |           |  
|                                                                                                                  |  |     
|Shareholders Equity:                                                                                             |  |      |           |   |      |   |           |  
|Preferred stock, par value $.01 per share; 2,500,000 shares authorized; none issued                               |  |      |          |   |      |   |          |  
|Common stock, par value $.01 per share; 30,000,000 shares authorized; 11,788,182 and 11,660,726 shares issued     |  |      | 118       |   |      |   | 117       |  
|Additional paid-in capital                                                                                        |  |      | 44,243    |   |      |   | 41,704    |  
|Retained earnings                                                                                                 |  |      | 142,743   |   |      |   | 134,903   |  
|Accumulated other comprehensive income                                                                            |  |      | 3,049     |   |      |   | 8,970     |  
|Treasury stock, at cost; 2,541,668 and 2,223,430 shares                                                           |  |      | (43,850   | ) |      |   | (36,768   | )
|                                                                                                                  |  |      |           |   |      |   |           |  
|Total shareholders equity                                                                                        |  |      | 146,303   |   |      |   | 148,926   |  
|                                                                                                                  |  |      |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                                        |  | $    | 2,212,111 |   |      | $ | 2,034,667 |  
|                                                                                                                  |  |      |           |   |      |   |           |  



See
accompanying notes to consolidated financial statements.



54



---

##### Table of Contents

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data)



|                                                            |  |      |         |      |   |         |      |  |   |        
|----------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | ---- |  | - | -------
|Years Ended December 31,                                    |  | 2003 |         | 2002 |   |         | 2001
|Interest income:                                            |  |      |         |      |   |         |      |  |   |        
|Interest and fees on loans                                  |  | $    | 87,289  |      | $ | 96,346  |      |  | $ | 137,196
|Interest on federal funds sold                              |  |      | 80      |      |   | 287     |      |  |   | 1,101  
|Interest on investment securities                           |  |      | 27,032  |      |   | 32,622  |      |  |   | 25,008 
|Interest on loans held for sale                             |  |      | 400     |      |   | 233     |      |  |   | 189    
|                                                            |  |      |         |      |   |         |      |  |   |        
|Total interest income                                       |  |      | 114,801 |      |   | 129,488 |      |  |   | 163,494
|                                                            |  |      |         |      |   |         |      |  |   |        
|Interest expense:                                           |  |      |         |      |   |         |      |  |   |        
|Interest on savings deposits                                |  |      | 1,416   |      |   | 2,551   |      |  |   | 4,092  
|Interest on time accounts                                   |  |      | 18,783  |      |   | 26,401  |      |  |   | 48,878 
|Interest on money market deposit accounts                   |  |      | 4,773   |      |   | 5,667   |      |  |   | 11,500 
|Interest on NOW accounts                                    |  |      | 264     |      |   | 710     |      |  |   | 1,522  
|Interest on borrowings                                      |  |      | 14,700  |      |   | 13,162  |      |  |   | 13,738 
|Interest on trust preferred securities                      |  |      | 3,029   |      |   | 2,728   |      |  |   | 2,437  
|                                                            |  |      |         |      |   |         |      |  |   |        
|Total interest expense                                      |  |      | 42,965  |      |   | 51,219  |      |  |   | 82,167 
|                                                            |  |      |         |      |   |         |      |  |   |        
|Net interest income                                         |  |      | 71,836  |      |   | 78,269  |      |  |   | 81,327 
|Provision for loan losses                                   |  |      | 10,088  |      |   | 46,170  |      |  |   | 18,224 
|                                                            |  |      |         |      |   |         |      |  |   |        
|Net interest income after provision for loan losses         |  |      | 61,748  |      |   | 32,099  |      |  |   | 63,103 
|                                                            |  |      |         |      |   |         |      |  |   |        
|Non-interest income:                                        |  |      |         |      |   |         |      |  |   |        
|Service charges on deposit accounts                         |  |      | 5,190   |      |   | 5,176   |      |  |   | 5,226  
|Checkcard interchange fees                                  |  |      | 1,407   |      |   | 1,422   |      |  |   | 1,284  
|Mortgage servicing fees                                     |  |      | 607     |      |   | 832     |      |  |   | 1,125  
|Fees and commissions-brokerage services                     |  |      | 855     |      |   | 886     |      |  |   | 698    
|Trust fees                                                  |  |      | 1,210   |      |   | 1,308   |      |  |   | 1,618  
|Income from bank owned life insurance                       |  |      | 1,023   |      |   | 32      |      |  |   |       
|Gain on sale of securities, net                             |  |      | 1,339   |      |   | 292     |      |  |   | 379    
|Gain on sale of branch offices, net                         |  |      |        |      |   | 3,063   |      |  |   | 299    
|Gain on sale of credit card portfolio, net                  |  |      |        |      |   | 1,806   |      |  |   |       
|Other income                                                |  |      | 1,909   |      |   | 2,946   |      |  |   | 2,903  
|                                                            |  |      |         |      |   |         |      |  |   |        
|Total non-interest income                                   |  |      | 13,540  |      |   | 17,763  |      |  |   | 13,532 
|                                                            |  |      |         |      |   |         |      |  |   |        
|Operating expense:                                          |  |      |         |      |   |         |      |  |   |        
|Salaries, pensions and other employee benefits              |  |      | 27,044  |      |   | 24,769  |      |  |   | 21,828 
|Building occupancy                                          |  |      | 4,561   |      |   | 4,259   |      |  |   | 4,304  
|Advertising and promotion                                   |  |      | 1,260   |      |   | 1,293   |      |  |   | 931    
|Professional fees                                           |  |      | 2,374   |      |   | 2,890   |      |  |   | 2,206  
|Data processing costs                                       |  |      | 4,662   |      |   | 5,534   |      |  |   | 5,213  
|Services                                                    |  |      | 3,082   |      |   | 2,905   |      |  |   | 2,951  
|System conversion expenses                                  |  |      |        |      |   | 387     |      |  |   |       
|Merger related expenses                                     |  |      | 325     |      |   |        |      |  |   |       
|Other real estate owned and repossessed asset expenses, net |  |      | 555     |      |   | 688     |      |  |   | 211    
|Other expenses                                              |  |      | 5,683   |      |   | 5,608   |      |  |   | 5,959  
|                                                            |  |      |         |      |   |         |      |  |   |        
|Total operating expense                                     |  |      | 49,546  |      |   | 48,333  |      |  |   | 43,603 
|                                                            |  |      |         |      |   |         |      |  |   |        
|Income before income taxes                                  |  |      | 25,742  |      |   | 1,529   |      |  |   | 33,032 
|Income tax expense (benefit)                                |  |      | 8,725   |      |   | (254    | )    |  |   | 12,572 
|                                                            |  |      |         |      |   |         |      |  |   |        
|NET INCOME                                                  |  | $    | 17,017  |      | $ | 1,783   |      |  | $ | 20,460 
|                                                            |  |      |         |      |   |         |      |  |   |        
|Earnings per share:                                         |  |      |         |      |   |         |      |  |   |        
|Basic                                                       |  | $    | 1.85    |      | $ | 0.19    |      |  | $ | 2.05   
|Diluted                                                     |  | $    | 1.81    |      | $ | 0.18    |      |  | $ | 2.02   
|                                                            |  |      |         |      |   |         |      |  |   |        



See
accompanying notes to consolidated financial statements.



55



---

##### Table of Contents

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  
|----------------------------------------------------- |  | --------------------- |  | ----------- | --- | ------------------------ | - | ---------------- |  | - | ------------------------------------------ | - |  | ------------- | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|(In Thousands, Except Share and Per Share
Data)       |  | Number ofSharesIssued |  | CommonStock |     | AdditionalPaid-InCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TreasuryStock |        |   | Total |  
|Balance at December 31, 2000                          |  | 11,503,272            |  | $           | 115 |                          | $ | 38,789           |  | $ | 132,277                                    |   |  | $             | (1,912 | ) |       | $ | (13,484 | ) |  | $ | 155,785 |  
|                                                      |  |                       |  |             |     |                          |  
|Net income                                            |  |                       |  |             |     |                          |   |                  |  |   | 20,460                                     |   |  |               |        |   |       |   |         |   |  |   | 20,460  |  
|Other comprehensive income                            |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               | 4,432  |   |       |   |         |   |  |   | 4,432   |  
|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  
|Comprehensive income                                  |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   | 24,892  |  
|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  
|Stock options exercised                               |  | 32,228                |  |             |     |                          |   | 440              |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   | 440     |  
|Tax benefit on stock options                          |  |                       |  |             |     |                          |   | 102              |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   | 102     |  
|Cash dividends paid on common stock ($1.00 per share) |  |                       |  |             |     |                          |   |                  |  |   | (9,989                                     | ) |  |               |        |   |       |   |         |   |  |   | (9,989  | )
|Treasury stock purchased (732,410 shares)             |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   | (15,405 | ) |  |   | (15,405 | )
|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  
|Balance at December 31, 2001                          |  | 11,535,500            |  |             | 115 |                          |   | 39,331           |  |   | 142,748                                    |   |  |               | 2,520  |   |       |   | (28,889 | ) |  |   | 155,825 |  
|                                                      |  |                       |  |             |     |                          |  
|Net income                                            |  |                       |  |             |     |                          |   |                  |  |   | 1,783                                      |   |  |               |        |   |       |   |         |   |  |   | 1,783   |  
|Other comprehensive income                            |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               | 6,450  |   |       |   |         |   |  |   | 6,450   |  
|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  
|Comprehensive income                                  |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   | 8,233   |  
|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  
|Stock options exercised                               |  | 125,226               |  |             | 2   |                          |   | 2,046            |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   | 2,048   |  
|Tax benefit on stock options                          |  |                       |  |             |     |                          |   | 327              |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   | 327     |  
|Cash dividends paid on common stock ($1.00 per share) |  |                       |  |             |     |                          |   |                  |  |   | (9,628                                     | ) |  |               |        |   |       |   |         |   |  |   | (9,628  | )
|Treasury stock purchased (315,496 shares)             |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   | (7,879  | ) |  |   | (7,879  | )
|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  
|Balance at December 31, 2002                          |  | 11,660,726            |  |             | 117 |                          |   | 41,704           |  |   | 134,903                                    |   |  |               | 8,970  |   |       |   | (36,768 | ) |  |   | 148,926 |  
|                                                      |  |                       |  |             |     |                          |  
|Net income                                            |  |                       |  |             |     |                          |   |                  |  |   | 17,017                                     |   |  |               |        |   |       |   |         |   |  |   | 17,017  |  
|Other comprehensive loss                              |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               | (5,921 | ) |       |   |         |   |  |   | (5,921  | )
|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  
|Comprehensive income                                  |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   | 11,096  |  
|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  
|Stock options exercised                               |  | 127,456               |  |             | 1   |                          |   | 2,223            |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   | 2,224   |  
|Tax benefit on stock options                          |  |                       |  |             |     |                          |   | 316              |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   | 316     |  
|Cash dividends paid on common stock ($1.00 per share) |  |                       |  |             |     |                          |   |                  |  |   | (9,177                                     | ) |  |               |        |   |       |   |         |   |  |   | (9,177  | )
|Treasury stock purchased (318,238 shares)             |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   | (7,082  | ) |  |   | (7,082  | )
|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  
|Balance at December 31, 2003                          |  | 11,788,182            |  | $           | 118 |                          | $ | 44,243           |  | $ | 142,743                                    |   |  | $             | 3,049  |   |       | $ | (43,850 | ) |  | $ | 146,303 |  
|                                                      |  |                       |  |             |     |                          |   |                  |  |   |                                            |   |  |               |        |   |       |   |         |   |  |   |         |  



See
accompanying notes to consolidated financial statements.



56



---

##### Table of Contents

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



|                                                                                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|Years Ended December 31,                                                                                                |  | 2003 |          |   | 2002 |   |          | 2001 | 
|Operating activities:                                                                                                   |  |      |          |   |      |   |          |      |  |   |          |  
|Net income                                                                                                              |  | $    | 17,017   |   |      | $ | 1,783    |      |  | $ | 20,460   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                       |  |      |          |   |      |   |          |      |  |   |          |  
|Deferred tax expense (benefit)                                                                                          |  |      | 7,197    |   |      |   | 15       |      |  |   | (1,174   | )
|Provision for loan losses                                                                                               |  |      | 10,088   |   |      |   | 46,170   |      |  |   | 18,224   |  
|Gain on sale of securities, net                                                                                         |  |      | (1,339   | ) |      |   | (292     | )    |  |   | (379     | )
|Gain on repurchase of trust preferred securities, net                                                                   |  |      | (6       | ) |      |   | (726     | )    |  |   |         |  
|Gain on sale of credit card portfolio                                                                                   |  |      |         |   |      |   | (1,806   | )    |  |   |         |  
|Gain on sale of branch offices, net                                                                                     |  |      |         |   |      |   | (3,063   | )    |  |   | (299     | )
|Loss (gain) on sale of loans held for sale, bank premises and equipment, other real estate owned and repossessed assets |  |      | 250      |   |      |   | (56      | )    |  |   | (125     | )
|Depreciation and amortization                                                                                           |  |      | 2,264    |   |      |   | 2,376    |      |  |   | 2,642    |  
|Net amortization of premiums and discounts on investment securities                                                     |  |      | 2,799    |   |      |   | 1,913    |      |  |   | 79       |  
|Tax benefit from exercise of stock options                                                                              |  |      | 316      |   |      |   | 327      |      |  |   | 102      |  
|Income from bank owned life insurance                                                                                   |  |      | (1,022   | ) |      |   | (32      | )    |  |   |         |  
|Proceeds from sale of loans held for sale                                                                               |  |      | 55,819   |   |      |   | 24,726   |      |  |   | 8,690    |  
|Loans originated and held for sale                                                                                      |  |      | (53,166  | ) |      |   | (18,830  | )    |  |   | (20,162  | )
|Writedowns of other real estate owned and repossessed assets                                                            |  |      | 71       |   |      |   | 1,526    |      |  |   | 1,089    |  
|Net change in other assets and liabilities                                                                              |  |      | 1,857    |   |      |   | (17,749  | )    |  |   | (4,743   | )
|                                                                                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                                               |  |      | 42,145   |   |      |   | 36,282   |      |  |   | 24,404   |  
|                                                                                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|Investing activities:                                                                                                   |  |      |          |   |      |   |          |      |  |   |          |  
|Proceeds from calls of held to maturity investment securities                                                           |  |      | 9,061    |   |      |   | 8,055    |      |  |   | 2,069    |  
|Purchases of held to maturity investment securities                                                                     |  |      | (1,317   | ) |      |   | (54,011  | )    |  |   | (7,298   | )
|Principal collected on held to maturity investment securities                                                           |  |      | 889      |   |      |   | 4,383    |      |  |   | 1,171    |  
|Proceeds from sales and calls of available for sale investment securities                                               |  |      | 216,619  |   |      |   | 162,842  |      |  |   | 167,696  |  
|Purchases of available for sale investment securities                                                                   |  |      | (575,206 | ) |      |   | (351,955 | )    |  |   | (323,647 | )
|Principal collected on available for sale investment securities                                                         |  |      | 308,678  |   |      |   | 147,284  |      |  |   | 47,306   |  
|Purchases of Federal Home Loan Bank (FHLB) stock                                                                      |  |      | (7,974   | ) |      |   | (8,039   | )    |  |   | (4,174   | )
|Redemptions of FHLB stock                                                                                               |  |      | 8,367    |   |      |   | 3,176    |      |  |   | 9,927    |  
|Proceeds from sale of credit card portfolio                                                                             |  |      |         |   |      |   | 12,749   |      |  |   |         |  
|Net loans (made to) repaid by customers                                                                                 |  |      | (158,631 | ) |      |   | 71,982   |      |  |   | 343,002  |  
|Proceeds from sale of classified commercial loans                                                                       |  |      | 27,248   |   |      |   |         |      |  |   |         |  
|Proceeds from sale of other real estate owned and repossessed assets                                                    |  |      | 4,370    |   |      |   | 6,123    |      |  |   | 4,243    |  
|Investment in bank owned life insurance                                                                                 |  |      | (20,000  | ) |      |   | (20,000  | )    |  |   |         |  
|Purchases of bank premises and equipment                                                                                |  |      | (2,942   | ) |      |   | (1,694   | )    |  |   | (2,712   | )
|                                                                                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by investing activities                                                                     |  |      | (190,838 | ) |      |   | (19,105  | )    |  |   | 237,583  |  
|                                                                                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|Financing activities:                                                                                                   |  |      |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in deposits, exclusive of branch sales                                                          |  |      | 146,330  |   |      |   | (10,781  | )    |  |   | (382,065 | )
|Net payment for sale of branches                                                                                        |  |      |         |   |      |   | (37,066  | )    |  |   | (2,224   | )
|Net decrease in repurchase agreements and FHLB line of credit advances                                                  |  |      | (21,321  | ) |      |   | (80,034  | )    |  |   | (5,118   | )
|Proceeds from FHLB term advances                                                                                        |  |      | 125,000  |   |      |   | 115,000  |      |  |   | 192,000  |  
|Repayments of FHLB term advances                                                                                        |  |      | (71,029  | ) |      |   | (17,099  | )    |  |   | (52,099  | )
|Net proceeds from issuance of trust preferred securities                                                                |  |      |         |   |      |   | 25,000   |      |  |   |         |  
|Repurchase of trust preferred securities                                                                                |  |      | (1,494   | ) |      |   | (6,098   | )    |  |   |         |  
|Proceeds from exercise of stock options                                                                                 |  |      | 2,224    |   |      |   | 2,048    |      |  |   | 440      |  
|Purchases of treasury stock                                                                                             |  |      | (7,082   | ) |      |   | (7,879   | )    |  |   | (15,405  | )
|Dividends paid                                                                                                          |  |      | (9,177   | ) |      |   | (9,628   | )    |  |   | (9,989   | )
|                                                                                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                                                                     |  |      | 163,451  |   |      |   | (26,537  | )    |  |   | (274,460 | )
|                                                                                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                                    |  |      | 14,758   |   |      |   | (9,360   | )    |  |   | (12,473  | )
|Cash and cash equivalents at beginning of year                                                                          |  |      | 46,912   |   |      |   | 56,272   |      |  |   | 68,745   |  
|                                                                                                                        |  |      |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                                                                |  | $    | 61,670   |   |      | $ | 46,912   |      |  | $ | 56,272   |  
|                                                                                                                        |  |      |          |   |      |   |          |      |  |   |          |  



(continued)



57



---

##### Table of Contents

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In Thousands)



|                                                                                                 |  |      |         |   |      |   |        |  |   |       
|------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------ |  | - | ------
|Years Ended December 31,                                                                         |  | 2003 |         |   | 2002 |   | 2001  
|Supplemental disclosures to statements of cash flow information:                                 |  |      |         |   |      |   |        |  |   |       
|                                                                                                 |  |      |        
|Cash paid during the year for:                                                                   |  |      |         |   |      |   |        |  |   |       
|Interest on deposits and borrowings                                                              |  | $    | 42,842  |   |      | $ | 52,771 |  | $ | 85,339
|Income taxes (refunded) paid                                                                     |  | $    | (588    | ) |      | $ | 5,737  |  | $ | 8,553 
|                                                                                                 |  |      |         |   |      |   |        |  |   |       
|Non-cash investing activity:                                                                     |  |      |         |   |      |   |        |  |   |       
|Transfers from loans to other real estate owned and repossessed assets                           |  | $    | 2,563   |   |      | $ | 8,712  |  | $ | 5,480 
|Transfer of securities from held to maturity to available for sale (amortized cost of $44,926)   |  | $    | 45,238  |   |      |   |       |  |   |      
|Adjustment of available for sale investment securities to fair value, net of tax                 |  | $    | (5,921  | ) |      | $ | 6,540  |  | $ | 4,432 
|Impact of deconsolidation of subsidiary trusts upon adoption of FIN 46 R as described in Note 1: |  |      |         |   |      |   |        |  |   |       
|Increase in junior subordinated obligations                                                      |  | $    | 48,202  |   |      |   |       |  |   |      
|Increase in other assets representing investment in subsidiary trusts                            |  | $    | (1,702  | ) |      |   |       |  |   |      
|Decrease in trust preferred securities                                                           |  | $    | (46,500 | ) |      |   |       |  |   |      



See
accompanying notes to consolidated financial statements.



58



---

##### Table of Contents

BSB BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1: Summary of Significant Accounting Policies



Nature of Operations



BSB Bancorp, Inc. (the Company) is the bank holding
company of BSB Bank & Trust Company (the Bank). The Bank is a New York-chartered commercial bank and trust company and, at December 31, 2003, operated 20 full-service branches in Broome, Chenango, Onondaga and Tioga Counties of New
York State. The Bank is in the business of providing a wide variety of loan and deposit products to its commercial and consumer customers, and also provides mortgage banking, trust, municipal and other related services.



Principles of Consolidation



The consolidated financial statements of the Company include the
accounts of the Company and its consolidated wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.



Use of Estimates in the Preparation of Financial Statements



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.



Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of other real estate owned and repossessed
assets acquired in connection with foreclosures and repossessions. In connection with the determination of the allowance for loan losses and the valuation of other real estate owned and repossessed assets, management obtains appraisals of related
collateral.



Management believes that the allowance for loan
losses is adequate and that other real estate owned and repossessed assets are recorded at the lesser of the recorded investment in the loan at the time of foreclosure or repossession, or the fair value less an estimate of the costs to sell the
properties or assets. While management uses available information to recognize losses on loans and other real estate owned and repossessed assets, future additions to the allowance for loan losses or writedowns of other real estate owned and
repossessed assets may be necessary based on changes in economic conditions. In addition, Federal and state bank regulatory agencies, as an integral part of their examination process, periodically review the Companys allowance for loan losses
and other real estate owned and repossessed assets. Such agencies may require the Company to recognize additions to the allowance for loan losses or writedowns of other real estate owned and repossessed assets based on their judgments about
information available to them at the time of their examination, which may not be currently available to management.



A substantial portion of the Companys loans are secured by real estate and business related assets located throughout the New York State counties of
Broome, Chenango, Onondaga and Tioga. In addition, a substantial portion of the other real estate owned is located in the same markets. Accordingly, the ultimate collectibility of a substantial portion of the Companys loan portfolio and the
recovery of a substantial portion of the carrying amount of other real estate owned is dependent upon general economic and real estate market conditions in these counties.



Cash and Cash Equivalents



Cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are sold or purchased for one-day periods.



59



---

##### Table of Contents

Investment Securities and Federal Home Loan Bank of New York Stock



Management determines the classification of securities at the time of
purchase. In March 2003, the Company sold its entire holdings of $9.1 million in certain corporate securities based upon an internal analysis concerned with anticipated downgrades due to deteriorating fundamentals of the issuer. These corporate
securities have been classified as held to maturity securities from the time of their initial purchase in 2002. Under the provisions of SFAS No. 115, such sale transactions cast doubt on the Companys intent to hold other held to maturity
securities to maturity. As a result, in March 2003, the Company reclassified its entire remaining held to maturity portfolio as available for sale and recognized the unrealized gain of $312,000 on the transferred securities as a credit to other
comprehensive income as of the transfer date. The aggregate amortized cost value of the held to maturity portfolio was $44.9 million with a fair value of $45.2 million at the time of the transfer. In addition, as a result of the sale and transfer,
the Company is precluded from classifying any newly purchased securities as held to maturity for the foreseeable future.



Securities that are identified as trading securities for resale over a short period are stated at fair value with unrealized gains and losses reflected in
current earnings. All other debt and marketable equity securities are classified as securities available for sale and are reported at fair value, with net unrealized gains or losses reported, net of income taxes, in accumulated other comprehensive
income or loss (a separate component of shareholders equity). None of the Companys securities have been classified as trading securities at December 31, 2003 or 2002. Debt securities classified as held to maturity prior to March 2003
were reported at amortized cost.



Purchases and sales of
securities are recorded as of the trade date. Premiums and discounts on securities are amortized and accreted, respectively, on a systematic basis over the period to maturity or estimated life of the related security. Gains or losses on securities
sold are computed based on the net proceeds received and the amortized cost of the specific security sold. If unrealized losses on securities reflect a decline in value which is other than temporary, they are charged against income.



As a member of the Federal Home Loan Bank of New York (FHLB), the
Company is required to hold FHLB stock, which is carried at cost since there is no readily available market value.



Loans Held For Sale



Loans held for sale are recorded at the lower of cost or fair value, in the aggregate. It is managements intention to sell these loans. Loans held
for sale, as well as the commitments to sell the loans that are originated for sale, are regularly evaluated. If necessary, a valuation allowance is established with a charge to income for unrealized losses attributable to a change in market rates.



Loans



Loans are reported at the principal amount outstanding, net of deferred loan
fees and costs and the allowance for loan losses. Non-refundable loan fees and related direct costs are deferred and amortized over the life of the loan as an adjustment of loan yield.



Income Recognition on Non-accrual and Impaired Loans



Loans are placed on a non-accrual status when, in the judgment of management, the probability of collection of principal or
interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. The Company generally does not accrue interest on loans greater
than 90 days or more past due for the payment of principal or interest, unless the value of the collateral and active collection efforts indicate that full recovery is probable. Cash receipts on non-accrual loans are generally applied to reduce the
unpaid principal balance, however, interest on non-accrual loans may also be recognized as cash is received. Amortization of the related net deferred loan fees and costs is suspended when a loan is placed on non-accrual status. Loans are removed
from non-accrual status when they become current as to principal and interest or when, in the opinion of management, the loans are expected to be fully collectible as to principal and interest.



Commercial and commercial real estate loans are considered impaired when it
is probable that the borrower will not repay the loan according to the original contractual terms of the loan agreement, or when a loan (of any loan type) is restructured in a troubled debt restructuring. The allowance for loan losses related to
impaired loans is based on discounted cash flows using the loans initial effective interest rate or the fair value of the collateral for certain loans where repayment of the loan is expected to be provided solely by the underlying collateral
(collateral dependent loans).



60



---

##### Table of Contents

Allowance for Loan Losses



The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans, or portions
thereof, are charged against the allowance for loan losses when management believes that the collectibility of all or a portion of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan losses when received.
The allowance is an amount that management believes will be necessary to absorb probable losses on existing loans. Managements evaluation of the allowance for loan losses is performed on a periodic basis and takes into consideration such
factors as the historical loan loss experience by loan type, review of specific problem loans, changes in the composition and volume of the loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers
ability to pay.



Troubled Debt Restructured Loans



A loan is considered to be a troubled debt restructured loan
(TDR) when the Company grants a concession to the borrower because of the borrowers financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or
interest, or other modifications at interest rates that are less than the current market rate for new obligations with similar risk. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR
status after a period of performance.



Bank Premises and Equipment



Bank premises and equipment are recorded at cost,
less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful life of the asset (15-50 years for bank premises and 3-10 years for furniture and equipment). Maintenance and repairs are charged to
operating expense as incurred.



Other Real Estate Owned and Repossessed
Assets



Other real estate owned and repossessed assets
is comprised of property or assets acquired in the settlement of loans. These assets are initially established at the lesser of the recorded investment in the loan, or at the estimated fair value of the asset reduced by estimated disposal costs. At
the time of foreclosure or repossession, the amount, if any, by which the recorded investment in the loan exceeds the fair value of the asset received is charged against the allowance for loan losses. Any subsequent declines in estimated fair value
of the property or asset, or expenses incurred to maintain the property or asset, are charged to operating expense. An asset may be considered an in-substance foreclosure or repossession if the Company has taken possession of the asset serving as
collateral for the loan, regardless of whether the Company has legal title to the asset. The final disposition of the property or asset is dependent upon many factors and the final disposition price may differ from the recorded value at that time.
Any gains or losses upon disposition are recorded in operating expense.



Bank Owned Life Insurance



Bank owned
life insurance (BOLI) is carried at the cash surrender value of the underlying policies. Income on the investments in the policies, net of insurance costs, is recorded as non-interest income.



Mortgage Servicing Rights



The Company recognizes as separate assets the rights to service mortgage
loans for others, regardless of how those servicing rights were acquired. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. Additionally, capitalized mortgage servicing rights are
assessed for impairment based on the fair value of those rights, and any impairment is recognized through a valuation allowance by a charge to mortgage servicing fee income.



61



---

##### Table of Contents

Securities Sold Under Agreements to Repurchase



Under securities repurchase agreements, the Company transfers the underlying
securities to a third party custodians account that explicitly recognizes the Companys interest in the securities. These agreements are accounted for as secured financing transactions provided the Company maintains effective control over
the transferred securities and meets other criteria for such accounting as specified in Statement of Financial Account Standards (SFAS) No. 140. The Companys agreements are accounted for as secured financings; accordingly, the
transaction proceeds are recorded as borrowed funds and the underlying securities continue to be carried in the Companys securities available for sale portfolio.



Income Taxes



The Company accounts for income taxes in accordance with the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized subject to managements judgment that
those assets will more likely than not be realized. A valuation allowance is recognized if, based on an analysis of available evidence, management believes that all or a portion of the deferred tax assets will not be realized. Adjustments to
increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.



Pension and Postretirement Benefits



The Company maintains a non-contributory, tax-qualified defined benefit
pension plan covering substantially all employees. The Company also maintains a non-qualified supplemental plan for certain former executives. The costs of these plans, based on actuarial computations of current and future benefits for employees,
are charged to current operating expenses. For purposes of computing net periodic pension expense for the qualified plan, the Company uses a market-related value of assets, which distributes asset gains and losses over a two-year period. Asset gains
and losses are determined by the difference between the expected return on assets and the actual return.



The Company also provides certain post-retirement life and health insurance benefits to substantially all employees and retirees. The cost of
post-retirement benefits other than pensions is recognized on an accrual basis as employees perform services to earn the benefits.



Stock-Based Compensation



The Company has two stock-based compensation plans, which are described more fully in Note 15. The Company accounts for those plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based compensation cost has been reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to its stock-based compensation plans.



|                                                                                                                           |  |      |        |   |      |   |       |      |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|(Dollars in Thousands, Except Per Share Data)                                                                              |  | 2003 |        |   | 2002 |   |       | 2001 | 
|Net income, as reported:                                                                                                   |  | $    | 17,017 |   |      | $ | 1,783 |      |  | $ | 20,460 |  
|Deduct:                                                                                                                    |  |      |        |   |      |   |       |      |  |   |        |  
|Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |  |      | (1,044 | ) |      |   | (918  | )    |  |   | (852   | )
|                                                                                                                           |  |      |        |   |      |   |       |      |  |   |        |  
|Pro forma net income                                                                                                       |  | $    | 15,973 |   |      | $ | 865   |      |  | $ | 19,608 |  
|                                                                                                                           |  |      |        |   |      |   |       |      |  |   |        |  
|Earnings Per Share:                                                                                                        |  |      |        |   |      |   |       |      |  |   |        |  
|Basic - as reported                                                                                                        |  | $    | 1.85   |   |      | $ | 0.19  |      |  | $ | 2.05   |  
|                                                                                                                           |  |      |        |   |      |   |       |      |  |   |        |  
|Basic - pro forma                                                                                                          |  | $    | 1.73   |   |      | $ | 0.09  |      |  | $ | 1.97   |  
|                                                                                                                           |  |      |        |   |      |   |       |      |  |   |        |  
|Diluted - as reported                                                                                                      |  | $    | 1.81   |   |      | $ | 0.18  |      |  | $ | 2.02   |  
|                                                                                                                           |  |      |        |   |      |   |       |      |  |   |        |  
|Diluted - pro forma                                                                                                        |  | $    | 1.70   |   |      | $ | 0.09  |      |  | $ | 1.94   |  
|                                                                                                                           |  |      |        |   |      |   |       |      |  |   |        |  



62



---

##### Table of Contents

The weighted average fair value of options granted during 2003, 2002 and 2001 was $8.11, $7.13 and $4.91,
respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2003, 2002 and 2001, respectively: dividend yield of
3.7%, 3.8% and 3.9% ; expected volatility of 32.5%, 31.7% and 29.1%; risk-free interest rate of 3.40%, 4.71% and 5.09%; and expected life of 7.4 years in each year.



The Companys stock options have characteristics significantly different from those of traded options for which the
Black-Scholes model was developed. Since changes in the subjective input assumptions can materially affect the fair value estimates, the existing model, in managements opinion, does not necessarily provide a single reliable measure of the fair
value of its stock options. In addition, the pro forma effect on reported net income and earnings per share for the years ended December 31, 2003, 2002 and 2001, may not be representative of the pro forma effects on reported net income and earnings
per share for future years.



Trust Department Assets and Fees



Assets held in fiduciary or agency capacities for
customers are not included in the accompanying consolidated statements of condition, since such items are not assets of the Company. Fees associated with providing trust management services are recorded on the accrual basis and are included in
non-interest income.



Earnings Per Share



Basic earnings per share are calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased
to include the net additional common shares that would have been outstanding if all potentially dilutive common shares (such as stock options) were issued during the reporting period, computed using the treasury stock method.



Financial Instruments



In the normal course of business, the Company is a party to
certain financial instruments with off-balance-sheet risk, such as commitments to extend credit, unused lines of credit and standby letters of credit. The Companys policy is to record such instruments when funded.



Fair Value of Financial Instruments



The following methods and assumptions were used by the Company in estimating
the fair values of its financial instruments for purposes of disclosure:



Cash and cash equivalents and accrued interest receivable/payable: The carrying amounts reported in the consolidated statements of condition for these instruments approximate fair value.



Investment securities and FHLB stock: Fair values for investment securities
are based on quoted market prices or dealer quotes. The fair value of FHLB stock is assumed to equal the carrying value since the stock is non-marketable but redeemable at its par value.



Loans and loans held for sale: Fair values for loans are estimated using a discounted cash flow analysis, based on interest
rates approximating those currently being offered for loans with similar terms and credit quality. Fair values for loans held for sale are estimated using quoted market values.



Deposits: The fair values disclosed for non-interest-bearing accounts and accounts with no stated maturities are, by
definition, equal to the amount payable on demand at the reporting date. The fair value of time deposits was estimated by discounting expected monthly maturities at interest rates approximating those currently being offered on time deposits of
similar terms.



Borrowings, junior subordinated obligations
and trust preferred securities: The carrying amounts of repurchase agreements and FHLB line of credit advances approximate fair value. Fair values for FHLB term advances, other borrowings, junior subordinated obligations and trust preferred
securities are estimated using discounted cash flows, based on current market rates for similar instruments.



63



---

##### Table of Contents

Off-balance-sheet instruments: Off-balance-sheet financial instruments consist of letters of credit and
commitments to extend credit standby. Standby letters of credit and commitments to extend credit are fair valued based on fees and interest rates currently charged to enter into agreements with similar terms and credit quality.



Comprehensive Income



Comprehensive income consists of the sum of net income and items of other
comprehensive income or loss, which are reported directly in shareholders equity, net of tax, such as the change in net unrealized gain or loss on securities available for sale. The Company has reported comprehensive income in the consolidated
statements of changes in shareholders equity. Accumulated other comprehensive income or loss, which is a component of shareholders equity, represents the net unrealized gain or loss on securities available for sale, net of tax.



Segment Reporting



The Company operates a single business segment solely in the financial
services industry, which includes providing traditional banking services to its customers. The Company operates primarily in the geographical regions of Broome, Chenango, Onondaga and Tioga counties of New York. Management makes operating decisions
and assesses performance based on an ongoing review of the Companys traditional banking operations, which constitute the Companys only reportable segment.



Reclassifications



Certain data for prior years has been reclassified to conform to the current years presentation. These reclassifications had no effect on net income
or shareholders equity.



Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities. The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets,
liabilities, non-controlling interests and results of operations of a VIE need to be included in a companys consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the
companys interest in the VIE is such that the company will absorb a majority of the VIEs expected losses and/or receive a majority of the entitys expected residual returns, if they occur. FIN 46 also requires additional disclosures
by primary beneficiaries and other significant variable interest holders. FIN 46 was effective for all VIEs created after January 31, 2003. However, the FASB has postponed that effective date to December 31, 2003. In December 2003, the FASB
issued a revised FIN 46 (FIN 46 R), which further delayed this effective date until March 31, 2004 for VIEs created prior to February 1, 2003, except for special purpose entities, which must adopt either FIN 46 or FIN 46 R as of December 31,
2003. The requirements of FIN 46 R resulted in the deconsolidation of the Companys wholly owned subsidiary trusts, formed to issue mandatorily redeemable preferred securities (trust preferred securities). The deconsolidation, as of
December 31, 2003, results in the recognition of the trust preferred securities as junior subordinated obligations on the related consolidated statement of financial condition. The junior subordinated obligations of the trusts also include common
interests, which aggregate approximately $1.7 million, and are offset by an identical amount representing the Companys investment and included in other assets. The provisions of FIN 46 R had no impact on the Companys consolidated
statements of income or cash flows for 2003.



The FASB issued
Statement No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contacts and for hedging activities. This statement amends Statement 133 for
decisions made as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133, in connection with other FASB projects dealing with financial instruments and in connection with implementation issues
raised in relation to the application of the definition of a derivative. The adoption of this statement did not have a significant impact on the Companys consolidated financial statements.



64



---

##### Table of Contents

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This statement requires an issuer to classify three types of freestanding financial instruments as liabilities. One type is financial instruments issued in the form of shares requiring the issuer
to redeem them by transferring its assets. The second type is financial instruments that embody an obligation to repurchase the issuers equity shares by transferring assets. The third type of financial instruments is one that embodies an
unconditional obligation that the issuer must or may settle by issuing a variable number of its equity shares if, at inception, the monetary value of the obligation meets certain criteria. The statement also requires disclosures about the terms of
the instruments and settlement alternatives. The statement was effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15,
2003. The effective date has been deferred indefinitely for certain types of mandatorily redeemable financial instruments. The provisions of this statement did not have a material impact on the Companys consolidated financial statements.



Note 2: Pending Merger



On December 23, 2003, the Company executed a definitive agreement
with Partners Trust Financial Group, Inc. (Partners) to acquire all the assets of the Company. The merger is contingent upon the successful conversion and restructuring of Partners and Partners Trust, MHC into a full capital stock
corporation. The Company will be merged into the reorganized Partners following the conversion. The conversion, offering and acquisition are expected to be completed in mid-2004, subject to regulatory and stockholder approvals. The consideration to
be paid in the merger will be 40% cash and 60% stock. Shareholders of the Company will be able to elect either $36.00 in cash or shares of common stock of the reorganized Partners Trust, subject to customary proration and allocation procedures. The
merger is also contingent upon the approval of certain regulatory authorities, as well as the shareholders of the Company and Partners.



Under terms of the definitive agreement, the Company will continue to conduct operations in the normal course of business consistent with past practices
and all applicable laws and regulations, except as relates to certain dividends and distributions by the Company. The Company covenants not to change any of its capital stock; not to issue or authorize any additional shares, except as available from
the exercise of currently outstanding options under the Companys current plan; and, not to purchase, redeem or acquire any capital stock, except as authorized under the terms of the Companys current stock option plan.



65



---

##### Table of Contents

Note 3: Investment Securities and Other Comprehensive Income



The amortized cost and fair value of the investment securities portfolios at
December 31 are summarized as follows:



|                                       |  |               |         |                       |   |                       |  |            |       |  |   |        
|-------------------------------------- |  | ------------- | ------- | --------------------- | - | --------------------- |  | ---------- | ----- |  | - | -------
|(Dollars in Thousands) 2003            |  | AmortizedCost |         | Gross UnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Available for sale portfolio:          |  |               |         |                       |   |                       |  |            |       |  |   |        
|U. S. Government and agency securities |  | $             | 162,231 |                       | $ | 1,813                 |  | $          | 593   |  | $ | 163,451
|Municipal obligations                  |  |               | 22,990  |                       |   | 842                   |  |            | 59    |  |   | 23,773 
|Mortgage-backed securities             |  |               | 105,655 |                       |   | 2,760                 |  |            | 75    |  |   | 108,340
|Collateralized mortgage obligations    |  |               | 263,078 |                       |   | 1,885                 |  |            | 1,128 |  |   | 263,835
|Equity securities                      |  |               | 23,592  |                       |   | 37                    |  |            | 446   |  |   | 23,183 
|Corporate debt securities              |  |               | 41,189  |                       |   | 112                   |  |            | 51    |  |   | 41,250 
|                                       |  |               |         |                       |   |                       |  |            |       |  |   |        
|                                       |  | $             | 618,735 |                       | $ | 7,449                 |  | $          | 2,352 |  | $ | 623,832
|                                       |  |               |         |                       |   |                       |  |            |       |  |   |        



|                                       |  |               |         |                       |   |                       |  |            |     |  |   |        
|-------------------------------------- |  | ------------- | ------- | --------------------- | - | --------------------- |  | ---------- | --- |  | - | -------
|(Dollars in Thousands) 2002            |  | AmortizedCost |         | Gross UnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Available for sale portfolio:          |  |               |         |                       |   |                       |  |            |     |  |   |        
|U. S. Government and agency securities |  | $             | 101,564 |                       | $ | 2,891                 |  | $          | 2   |  | $ | 104,453
|Municipal obligations                  |  |               | 10,934  |                       |   | 673                   |  |            |    |  |   | 11,607 
|Mortgage-backed securities             |  |               | 213,209 |                       |   | 8,053                 |  |            | 9   |  |   | 221,253
|Collateralized mortgage obligations    |  |               | 172,396 |                       |   | 3,436                 |  |            | 15  |  |   | 175,817
|Equity securities                      |  |               | 23,946  |                       |   | 25                    |  |            | 198 |  |   | 23,773 
|Corporate debt securities              |  |               | 1,497   |                       |   | 145                   |  |            |    |  |   | 1,642  
|                                       |  |               |         |                       |   |                       |  |            |     |  |   |        
|                                       |  | $             | 523,546 |                       | $ | 15,223                |  | $          | 224 |  | $ | 538,545
|                                       |  |               |         |                       |   |                       |  |            |     |  |   |        
|Held to maturity portfolio:            |  |               |         |                       |   |                       |  |            |     |  |   |        
|Corporate debt securities              |  | $             | 33,179  |                       | $ | 589                   |  | $          | 66  |  | $ | 33,702 
|Municipal obligations                  |  |               | 15,682  |                       |   | 342                   |  |            | 158 |  |   | 15,866 
|Mortgage-backed securities             |  |               | 6,480   |                       |   | 42                    |  |            | 31  |  |   | 6,491  
|Collateralized mortgage obligations    |  |               | 32      |                       |   | 2                     |  |            |    |  |   | 34     
|                                       |  |               |         |                       |   |                       |  |            |     |  |   |        
|                                       |  | $             | 55,373  |                       | $ | 975                   |  | $          | 255 |  | $ | 56,093 
|                                       |  |               |         |                       |   |                       |  |            |     |  |   |        



The following table
summarizes other comprehensive (loss) income, which is comprised of the net unrealized gains (losses) on available for sale securities less the related taxes for the respective years ended December 31:



|                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|(In Thousands)                                                                         |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Other comprehensive (loss) income:                                                     |  |      |        |   |      |   |        |      |  |   |        |  
|Net unrealized (loss) gains on securities available for sale arising during the period |  | $    | (8,563 | ) |      | $ | 10,970 |      |  | $ | 7,983  |  
|Reclassification adjustment for net realized gains included in net income              |  |      | (1,339 | ) |      |   | (292   | )    |  |   | (379   | )
|                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Other comprehensive (loss) income before tax                                           |  |      | (9,902 | ) |      |   | 10,678 |      |  |   | 7,604  |  
|Income tax benefit (expense) on other comprehensive (loss) income                      |  |      | 3,981  |   |      |   | (4,228 | )    |  |   | (3,172 | )
|                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Other comprehensive (loss) income, net of tax                                          |  |      | (5,921 | ) |      |   | 6,450  |      |  |   | 4,432  |  
|                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Comprehensive income                                                                   |  | $    | 11,096 |   |      | $ | 8,233  |      |  | $ | 24,892 |  
|                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  



66



---

##### Table of Contents

Information on temporarily impaired securities at December 31, 2003, segregated according to the length
of time such securities had been in a continuous unrealized loss position, is summarized as follows:



|                                       |  |                     |         |                     |   |            |  |                  |       |            |   |                  |  |   |         |  |   |      
|-------------------------------------- |  | ------------------- | ------- | ------------------- | - | ---------- |  | ---------------- | ----- | ---------- | - | ---------------- |  | - | ------- |  | - | -----
|                                       |  | Less than 12 months |         | 12 months or longer |   | Total     
|                                       |  | Fair Value          |         | UnrealizedLosses    |   | Fair Value |  | UnrealizedLosses |       | Fair Value |   | UnrealizedLosses
|Available for sale portfolio:          |  |                     |         |                     |   |            |  |                  |       |            |   |                  |  |   |         |  |   |      
|U. S. Government and agency securities |  | $                   | 44,229  |                     | $ | 593        |  | $                |      |            | $ |                 |  | $ | 44,229  |  | $ | 593  
|Municipal obligations                  |  |                     | 1,251   |                     |   | 29         |  |                  | 700   |            |   | 30               |  |   | 1,951   |  |   | 59   
|Mortgage-backed securities             |  |                     | 13,061  |                     |   | 53         |  |                  | 5,713 |            |   | 22               |  |   | 18,775  |  |   | 75   
|Collateralized mortgage obligations    |  |                     | 103,677 |                     |   | 1,128      |  |                  |      |            |   |                 |  |   | 103,677 |  |   | 1,128
|Equity securities                      |  |                     | 12,533  |                     |   | 446        |  |                  |      |            |   |                 |  |   | 12,533  |  |   | 446  
|Corporate debt securities              |  |                     | 4,949   |                     |   | 51         |  |                  |      |            |   |                 |  |   | 4,949   |  |   | 51   
|                                       |  |                     |         |                     |   |            |  |                  |       |            |   |                  |  |   |         |  |   |      
|                                       |  | $                   | 179,700 |                     | $ | 2,300      |  | $                | 6,413 |            | $ | 52               |  | $ | 186,114 |  | $ | 2,352
|                                       |  |                     |         |                     |   |            |  |                  |       |            |   |                  |  |   |         |  |   |      



The above table
represents 53 investment securities where the current fair value is less than the related amortized cost. These unrealized losses do not reflect any deterioration of the credit worthiness of the issuing entities. No security has a current rating
that is below investment grade, and 38 of the securities are rated AAA. The lowest rated securities represent 3 BBB rated securities. The unrealized losses on these temporarily impaired securities are a result of changes in
interest rates for fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar securities, changes in market spreads as a result of shifts in supply and demand, and changes in the level
of prepayments for mortgage related securities.



The amortized
cost and fair value of debt securities (mortgage-backed securities and collateralized mortgage obligations are shown separately) at December 31, 2003, by contractual maturity, are shown below. Actual maturities will differ from contractual
maturities because borrowers may have the right to call or prepay certain obligations with or without penalties.



|                                                                   |  |               |         |            |   |        
|------------------------------------------------------------------ |  | ------------- | ------- | ---------- | - | -------
|Securities available for sale: (Dollars in
Thousands)              |  | AmortizedCost |         | Fair Value
|Within one year                                                    |  | $             | 12,247  |            | $ | 12,522 
|After one year but within five years                               |  |               | 39,588  |            |   | 41,035 
|After five years but within ten years                              |  |               | 114,852 |            |   | 115,344
|After ten years                                                    |  |               | 59,723  |            |   | 59,573 
|Mortgage-backed securities and collateralized mortgage obligations |  |               | 368,733 |            |   | 372,175
|                                                                   |  |               |         |            |   |        
|                                                                   |  | $             | 595,143 |            | $ | 600,649
|                                                                   |  |               |         |            |   |        



The gross realized
gains and gross realized losses on available for sale investment securities transactions are summarized below:



|                                                |  |      |       |      |   |      |  |   |    
|----------------------------------------------- |  | ---- | ----- | ---- | - | ---- |  | - | ---
|Years ended December 31, (Dollars in
Thousands) |  | 2003 |       | 2002 |   | 2001
|Gross gains                                     |  | $    | 1,738 |      | $ | 518  |  | $ | 905
|Gross losses                                    |  |      | 399   |      |   | 226  |  |   | 526
|                                                |  |      |       |      |   |      |  |   |    
|Net gains                                       |  | $    | 1,339 |      | $ | 292  |  | $ | 379
|                                                |  |      |       |      |   |      |  |   |    



Investment securities
at December 31, 2003 and 2002 include approximately $460.0 million and $470.0 million, respectively, pledged under various agreements, principally for municipal deposits, letters of credit, lines of credit and borrowings.



67



---

##### Table of Contents

Note 4: Loans and Allowance for Loan Losses



Changes in the allowance for loan losses for the years ended December 31 are presented in the following summary:



|                             |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|(Dollars in Thousands)       |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Balance at beginning of year |  | $    | 63,250  |   |      | $ | 58,829  |      |  | $ | 59,291  |  
|Provision for loan losses    |  |      | 10,088  |   |      |   | 46,170  |      |  |   | 18,224  |  
|Loans charged-off            |  |      | (37,601 | ) |      |   | (48,556 | )    |  |   | (23,631 | )
|Recoveries credited          |  |      | 11,684  |   |      |   | 6,807   |      |  |   | 4,945   |  
|                             |  |      |         |   |      |   |         |      |  |   |         |  
|Balance at end of year       |  | $    | 47,421  |   |      | $ | 63,250  |      |  | $ | 58,829  |  
|                             |  |      |         |   |      |   |         |      |  |   |         |  



Non-performing loans at December 31
are presented in the following summary:



|                                                                            |  |      |        |      |   |        |  |   |       
|--------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                                            |  |      |       
|(Dollars in Thousands)                                                      |  | 2003 |        | 2002 |   | 2001  
|Non-accrual loans                                                           |  | $    | 13,100 |      | $ | 50,337 |  | $ | 59,796
|Accruing loans with principal or interest payments 90 days or more past due |  |      | 109    |      |   | 278    |  |   | 879   
|                                                                            |  |      |        |      |   |        |  |   |       
|Total non-performing loans                                                  |  | $    | 13,209 |      | $ | 50,615 |  | $ | 60,675
|                                                                            |  |      |        |      |   |        |  |   |       



The table of
non-performing loans above does not include accruing loans classified as troubled debt restructurings totaling $13.8 million, $13.8 million and $8.8 million at December 31, 2003, 2002 and 2001, respectively.



In November 2003, the Company made the decision to sell and sold certain
large, under-performing loans with an aggregate carrying value of $36.7 million. The proceeds from the sale of these loans, net of estimated transactions costs, was $27.2 million. The $9.5 million difference between the carrying value and the net
proceeds from the sale of these loans approximated the Companys previously established loan loss reserves and was charged-off against the allowance for loan losses. Prior to the decision to sell, these loans were either non-performing or
performing loans classified as substandard.



At December 31,
2003 and 2002, the recorded investment in impaired loans totaled $26.1 million and $63.2 million, respectively. An impairment allowance aggregating $6.8 million and $15.2 million was recorded against these loans at December 31, 2003 and 2002,
respectively. Impaired loans of $26.1 million in 2003 and $44.7 million in 2002 had an impairment allowance, with the remainder of $18.5 million in 2002 having no impairment allowance. The average recorded investment in impaired loans was
approximately $39.0 million in 2003, $58.1 million in 2002 and $53.5 million in 2001. The Company recognized, on a cash basis, interest on impaired loans of $599,000, $544,000 and $799,000 during 2003, 2002 and 2001, respectively, for the portion of
the year they were impaired.



At December 31, 2003 and 2002,
loans to directors, officers or their affiliates were $12.2 million and $17.3 million, respectively. During 2003, new loans to such related parties amounted to $1.3 million and repayments were $6.4 million. In 2002, new loans to such related parties
were $1.9 million with repayments of $5.6 million. Loans made by the Company to directors, officers or their affiliates 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. However, the Company currently permits certain employees, excluding officers and directors, to obtain certain loans at preferential interest rates and/or with discounted
processing fees.



Note 5: Loan Servicing and Mortgage Servicing Rights



Mortgage loans serviced for others are not included in
the accompanying consolidated statements of condition. The unpaid principal balances of mortgage loans serviced for others were $265.0 million and $366.0 million at December 31, 2003 and 2002, respectively.



The carrying value of mortgage servicing rights was $825,000 and $453,000 at
December 31, 2003 and 2002, respectively.



68



---

##### Table of Contents

Note 6: Other Real Estate Owned and Repossessed Assets



A summary of other real estate owned and repossessed assets at December 31
is shown below:



|                                 |  |      |       |      |   |      
|-------------------------------- |  | ---- | ----- | ---- | - | -----
|(Dollars in Thousands)           |  | 2003 |       | 2002
|Other real estate owned (ORE)  |  | $    | 1,129 |      | $ | 1,532
|Repossessed assets               |  |      | 102   |      |   | 1,577
|                                 |  |      |       |      |   |      
|Total ORE and repossessed assets |  | $    | 1,231 |      | $ | 3,109
|                                 |  |      |       |      |   |      



Note 7: Bank Premises and Equipment



A summary of bank premises and equipment at December 31
is as follows:



|                               |  |      |        |      |   |       
|------------------------------ |  | ---- | ------ | ---- | - | ------
|(Dollars in Thousands)         |  | 2003 |        | 2002
|Land                           |  | $    | 1,872  |      | $ | 1,872 
|Banking premises               |  |      | 22,757 |      |   | 22,227
|Furniture and equipment        |  |      | 20,562 |      |   | 18,252
|                               |  |      |        |      |   |       
|                               |  |      | 45,191 |      |   | 42,351
|Less: Accumulated depreciation |  |      | 29,968 |      |   | 27,806
|                               |  |      |        |      |   |       
|                               |  | $    | 15,223 |      | $ | 14,545
|                               |  |      |        |      |   |       



Note 8: Deposits



A summary of deposits at December 31 is as follows:



|                                     |  |      |           |      |   |          
|------------------------------------ |  | ---- | --------- | ---- | - | ---------
|(Dollars in Thousands)               |  | 2003 |           | 2002
|Savings accounts                     |  | $    | 181,720   |      | $ | 175,637  
|Money market deposit accounts        |  |      | 429,376   |      |   | 339,191  
|Time deposit accounts                |  |      | 692,912   |      |   | 641,635  
|NOW accounts                         |  |      | 128,400   |      |   | 131,535  
|Non-interest-bearing demand accounts |  |      | 156,678   |      |   | 154,758  
|                                     |  |      |           |      |   |          
|                                     |  | $    | 1,589,086 |      | $ | 1,442,756
|                                     |  |      |           |      |   |          



Time deposits with
balances of $100,000 or greater amounted to approximately $293.2 million and $212.7 million at December 31, 2003 and 2002, respectively.



The contractual maturity of time deposits at December 31, 2003 is as follows:



|                                                 |  |        |         |         |       |  
|------------------------------------------------ |  | ------ | ------- | ------- | ----- | -
|(Dollars in Thousands) Years ending
December 31, |  | Amount |         | Percent |      
|2004                                             |  | $      | 366,858 |         | 52.9  | %
|2005                                             |  |        | 135,693 |         | 19.6  |  
|2006                                             |  |        | 116,354 |         | 16.8  |  
|2007                                             |  |        | 48,761  |         | 7.1   |  
|2008                                             |  |        | 23,709  |         | 3.4   |  
|2009 and later                                   |  |        | 1,537   |         | 0.2   |  
|                                                 |  |        |         |         |       |  
|                                                 |  | $      | 692,912 |         | 100.0 | %
|                                                 |  |        |         |         |       |  



69



---

##### Table of Contents

Note 9: Borrowings, Junior Subordinated Obligations and Trust Preferred Securities



The following is a summary of borrowings, junior subordinated obligations
and trust preferred securities at December 31:



|                                                                                     |  |      |         |      |   |        
|------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|(Dollars in Thousands)                                                               |  | 2003 |         | 2002
|Federal Home Loan Bank (FHLB) advances                                             |  | $    | 390,823 |      | $ | 335,871
|FHLB line of credit advances                                                         |  |      |        |      |   | 5,000  
|Securities sold under repurchase agreements                                          |  |      | 18,846  |      |   | 35,167 
|Other                                                                                |  |      | 1,099   |      |   | 2,080  
|                                                                                     |  |      |         |      |   |        
|Total borrowings                                                                     |  |      | 410,768 |      |   | 378,118
|Junior subordinated obligations issued to unconsolidated subsidiary trusts           |  |      | 48,202  |      |   |       
|Mandatorily redeemable preferred securities issued by consolidated subsidiary trusts |  |      |        |      |   | 48,000 
|                                                                                     |  |      |         |      |   |        
|                                                                                     |  | $    | 458,970 |      | $ | 426,118
|                                                                                     |  |      |         |      |   |        



Certain FHLB term
advances are callable by the FHLB at pre-determined dates. Scheduled repayments of FHLB term advances and a schedule of callable advances by the first call date as of December 31, 2003 are as follows:



|                                                      |  |                   |         |                             |      |   |                 |   |                             |  |      |  
|----------------------------------------------------- |  | ----------------- | ------- | --------------------------- | ---- | - | --------------- | - | --------------------------- |  | ---- | -
|(Dollars in Thousands)                                |  | ScheduledPayments |         | WeightedAverageInterestRate |      |   | CallableAmounts |   | WeightedAverageInterestRate | 
|Maturing or callable in the years ending December 31, |  |                   |         |                             |      |   |                 |   |                             |  |      |  
|2004                                                  |  | $                 | 90,051  |                             | 2.60 | % |                 | $ | 165,000                     |  | 4.71 | %
|2005                                                  |  |                   | 110,055 |                             | 3.31 |   |                 |   |                            |  |     |  
|2006                                                  |  |                   | 40,059  |                             | 2.62 |   |                 |   |                            |  |     |  
|2007                                                  |  |                   | 261     |                             | 6.98 |   |                 |   |                            |  |     |  
|2008                                                  |  |                   | 30,026  |                             | 4.18 |   |                 |   |                            |  |     |  
|2009 and later                                        |  |                   | 120,371 |                             | 4.49 |   |                 |   |                            |  |     |  
|                                                      |  |                   |         |                             |      |   |                 |   |                             |  |      |  
|                                                      |  | $                 | 390,823 |                             | 3.51 | % |                 | $ | 165,000                     |  | 4.71 | %
|                                                      |  |                   |         |                             |      |   |                 |   |                             |  |      |  



Information related to
FHLB line of credit advances for the years ended December 31 is as follows:



|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|(Dollars in Thousands)                 |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Outstanding balance at end of year     |  | $    |       |   |      | $ | 5,000  |      |  | $ | 63,500 |  
|Weighted average rate at year-end      |  |      |       |   |      |   | 1.35   | %    |  |   | 1.85   | %
|Maximum outstanding at any month-end   |  | $    | 62,000 |   |      | $ | 58,000 |      |  | $ | 63,500 |  
|Average amount outstanding during year |  | $    | 16,401 |   |      | $ | 10,024 |      |  | $ | 7,954  |  
|Average rate during year               |  |      | 1.19   | % |      |   | 1.77   | %    |  |   | 5.35   | %
|                                       |  |      |        |   |      |   |        |      |  |   |        |  



Information related to
securities sold under repurchase agreements for the years ended December 31 is as follows:



|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|(Dollars in Thousands)                 |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Outstanding balance at end of year     |  | $    | 18,846 |   |      | $ | 35,167 |      |  | $ | 56,701 |  
|Weighted average rate at year-end      |  |      | 1.02   | % |      |   | 1.11   | %    |  |   | 2.08   | %
|Maximum outstanding at any month-end   |  | $    | 32,586 |   |      | $ | 55,394 |      |  | $ | 83,709 |  
|Average amount outstanding during year |  | $    | 27,735 |   |      | $ | 46,970 |      |  | $ | 59,603 |  
|Average rate during year               |  |      | 0.95   | % |      |   | 2.85   | %    |  |   | 3.94   | %
|                                       |  |      |        |   |      |   |        |      |  |   |        |  



70



---

##### Table of Contents

In 1998, the Company formed a wholly owned subsidiary business trust, BSB Capital Trust I, L.L.C.
(Trust I), for the purpose of issuing trust preferred securities which qualify as Tier I capital of the Company. Trust I issued at par $30.0 million of 8.125% trust preferred securities in an exempt offering. The trust preferred
securities are non-voting, mandatorily redeemable in 2028 and guaranteed by the Company. The entire net proceeds to Trust I from the offering were invested in junior subordinated obligations of the Company, which are the sole assets of Trust I.
During 2002, $7.0 million of these securities were repurchased at a net gain of approximately $726,000; then during 2003, $1.5 million were repurchased at a net gain of approximately $6,000.



During 2002, two new subsidiaries were formed for the purpose of issuing
additional trust preferred securities which are non-voting and guaranteed by the Company. BSB Capital Trust II, L.L.C. (Trust II) was formed for the purpose of issuing trust preferred securities which qualify as Tier I capital for the
Company. Trust II issued at par $10.0 million of floating rate securities maturing in 2032. These securities pay interest at the six-month London InterBank Offering Rate (LIBOR) plus 370 basis points. BSB Capital Trust III, L.L.C.
(Trust III) was formed for the purpose of issuing trust preferred securities which qualify as Tier I capital for the Company. Trust III issued at par $15.0 million of floating rate securities maturing in 2033. These securities pay
interest at the three-month LIBOR plus 335 basis points. The entire net proceeds from Trust II and Trust III offerings were invested in junior subordinated obligations of the Company, which are the sole assets of the respective trusts. The proceeds
from each issue of the subordinated obligations were used by the Company for general corporate purposes.



As of December 31, 2003, the Company deconsolidated all of its subsidiary trusts, which had issued trust preferred securities (discussed above), and
replaced the presentation of such instruments with the Companys junior subordinated obligations issued to the subsidiary trusts. Such presentation reflects the adoption of FASB Interpretation No. 46 (FIN 46 R) issued in December
2003.



At December 31, 2003, the Company had available lines of
credit of $150.0 million with the FHLB, subject to the amount of available collateral, and had no balance outstanding as of December 31, 2003. This outstanding balance and other borrowings with the FHLB are collateralized by certain mortgage loans,
mortgage-backed securities, other investment securities, and FHLB stock under a blanket pledge agreement with the FHLB.



Note 10: Employee Benefits



Defined Benefit Pension Plan



The Company has a non-contributory, tax-qualified defined benefit pension plan with Retirement System Group, Inc. (RS Group) covering
substantially all employees. Under the plan, retirement benefits are primarily a function of both the years of service and the level of compensation. Plan contributions are determined annually on the basis of (a) the maximum amount that can be
deducted for Federal income tax purposes, or (b) the amount certified by an actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not
only for benefits attributed to service to date, but also those expected to be earned in the future.



Investment Policies and Strategy



Plan assets are invested in six diversified investment funds of the RSI Retirement Trust (the Trust), a no load series open-ended mutual funds. RS Group, a company related to the Trust, provides actuarial
services for the plan. The investment funds include four equity mutual funds and two bond mutual funds, each with its own investment objectives, investment strategies and risks, as detailed in the Trusts prospectus. The Trust has been given
discretion by the Company to determine the appropriate strategic asset allocation versus plan liabilities, as governed by the Trusts Statement of Investment Objectives and Guidelines (the Guidelines).



71



---

##### Table of Contents

The long-term investment objective is to be invested 65% in equity securities (equity mutual funds) and
35% in debt securities (bond mutual funds). If the plan is underfunded under the Guidelines, the bond fund portion will be temporarily increased to 50% in order to lessen asset value volatility. When the plan is no longer underfunded, the bond fund
portion will be decreased back to 35%. Asset rebalancing is performed at least annually, with interim adjustments made when the investment mix varies more than 5% from the target (i.e., a 10% target range). In general, the plan is considered
underfunded if the actuarial value of the ratio of plan assets to plan liabilities under ERISA is less than 90%. Accordingly, the Company does not consider the plan to be underfunded.



Current Asset Allocation



The investment goal is to achieve investment results that will contribute to
the proper funding of the pension plan by exceeding the rate of inflation over the long-term. In addition, investment managers for the Trust are expected to provide above average performance when compared to their peer managers. Performance
volatility is also monitored. Risk/volatility is further managed by the distinct investment objectives of each of the Trust funds and the diversification within each fund.



The Banks pension plan weighted-average asset allocations at October 1, 2003 and 2002, by asset category are as
follows:



|                                    |  |                               |   |  |                               |  
|----------------------------------- |  | ----------------------------- | - |  | ----------------------------- | -
|Asset Category                      |  | Plan assets atOctober 1, 2003 |   |  | Plan assets atOctober 1, 2002 |  
|Equity securities                   |  | 65                            | % |  | 62                            | %
|Debt securities (bond mutual funds) |  | 35                            | % |  | 38                            | %
|                                    |  |                               |   |  |                               |  
|Total                               |  | 100                           | % |  | 100                           | %
|                                    |  |                               |   |  |                               |  



Contribution Cash Flow



For the fiscal year ending December 31, 2004, the Bank
expects to contribute approximately $500,000 to the Plan.



Postretirement
Welfare Plan



The Company also provides certain life
and health insurance benefits to substantially all employees and eligible retirees through an unfunded plan. The Company makes contributions to the plan, as premiums are due. Retiree contributions may be required based upon years of service with the
employer and the retirees election for dependent coverage provided under the plan.



In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) became law in the United States. The Act introduces a prescription drug benefit under Medicare as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In accordance with FASB Staff Position FAS 106-1, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Company has elected to defer recognition of the effects of the Act in any measures of the benefit obligation or cost. Specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. Currently, the Company does not believe it will need to amend its plan to benefit from the Act.



Supplemental Executive Retirement Plans



The Company also sponsors a Supplemental Executive Retirement Plan
(SERP) for the purpose of paying full pension benefits under the terms of the tax-qualified plan without regard to limits imposed under the Internal Revenue Code (IRC) limiting compensation. The benefit under the SERP is
determined as the total pension benefit that would be payable from the tax-qualified plan without applying IRC limits, less what is actually paid from the tax- qualified plan. Two former executives are covered under the SERP.



For one executive, the Company has agreed that he will receive his full
benefit under the terms of the tax-qualified plan in the event he terminates employment prior to becoming fully vested in the tax-qualified plan. If the executive terminates prior to becoming fully vested in the tax-qualified plan, the vested
benefit payable under the tax-qualified plan will be supplemented with a payment under the Employment Agreement. If the executive terminates after becoming fully vested in the tax-qualified plan, there is no additional benefit payable through his
Employment Agreement.



72



---

##### Table of Contents

Plan Funding Status, Benefit Costs and Assumptions



The following table represents a reconciliation of the funded status of the
plans at October 1 (the measurement date of the plans) in which the benefit obligation at the end of the year represents the projected benefit obligation for pension and SERP benefits, and the accumulated benefit obligation for life and health
benefits:



|                                               |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |        |   |      |   |      |   |  |   |      |  
|---------------------------------------------- |  | ---------------- | ------ | - | ------------------------ | - | ------ | ------------- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ---- | - |  | - | ---- | -
|                                               |  | Pension Benefits |        |   | Life and Health Benefits |   |        | SERP Benefits | 
|(Dollars in Thousands)                         |  | 2003             |        |   | 2002                     |   |        | 2003          |  |   | 2002   |   |  | 2003 |        |   | 2002 |  
|Change in benefit obligation:                  |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |        |   |      |   |      |   |  |   |      |  
|Benefit obligation at beginning of year        |  | $                | 24,812 |   |                          | $ | 20,588 |               |  | $ | 5,154  |   |  | $    | 4,531  |   |      | $ | 209  |   |  | $ | 191  |  
|Service cost                                   |  |                  | 1,139  |   |                          |   | 850    |               |  |   | 164    |   |  |      | 152    |   |      |   |     |   |  |   |     |  
|Interest cost                                  |  |                  | 1,694  |   |                          |   | 1,561  |               |  |   | 338    |   |  |      | 329    |   |      |   | 14   |   |  |   | 14   |  
|Actuarial loss                                 |  |                  | 2,301  |   |                          |   | 3,130  |               |  |   | 389    |   |  |      | 427    |   |      |   | 10   |   |  |   | 16   |  
|Annuity payments                               |  |                  | (1,238 | ) |                          |   | (1,295 | )             |  |   |       |   |  |      |       |   |      |   | (13  | ) |  |   | (12  | )
|Premiums paid                                  |  |                  |       |   |                          |   |       |               |  |   | (273   | ) |  |      | (285   | ) |      |   |     |   |  |   |     |  
|Plan amendments                                |  |                  |       |   |                          |   | 1      |               |  |   |       |   |  |      |       |   |      |   |     |   |  |   |     |  
|Settlements                                    |  |                  | (33    | ) |                          |   | (23    | )             |  |   |       |   |  |      |       |   |      |   |     |   |  |   |     |  
|                                               |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |        |   |      |   |      |   |  |   |      |  
|Benefit obligations at end of year             |  |                  | 28,675 |   |                          |   | 24,812 |               |  |   | 5,772  |   |  |      | 5,154  |   |      |   | 220  |   |  |   | 209  |  
|                                               |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |        |   |      |   |      |   |  |   |      |  
|Change in plan assets:                         |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |        |   |      |   |      |   |  |   |      |  
|Fair value of plan assets at beginning of year |  |                  | 22,582 |   |                          |   | 18,982 |               |  |   |       |   |  |      |       |   |      |   |     |   |  |   |     |  
|Actual gain (loss) on plan assets              |  |                  | 2,713  |   |                          |   | (2,400 | )             |  |   |       |   |  |      |       |   |      |   |     |   |  |   |     |  
|Employer contributions                         |  |                  | 1,271  |   |                          |   | 7,318  |               |  |   | 273    |   |  |      | 285    |   |      |   | 13   |   |  |   | 12   |  
|Annuity payments                               |  |                  | (1,238 | ) |                          |   | (1,295 | )             |  |   |       |   |  |      |       |   |      |   | (13  | ) |  |   | (12  | )
|Premiums paid                                  |  |                  |       |   |                          |   |       |               |  |   | (273   | ) |  |      | (285   | ) |      |   |     |   |  |   |     |  
|Settlements                                    |  |                  | (33    | ) |                          |   | (23    | )             |  |   |       |   |  |      |       |   |      |   |     |   |  |   |     |  
|                                               |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |        |   |      |   |      |   |  |   |      |  
|Fair value of plan assets at end of year       |  |                  | 25,295 |   |                          |   | 22,582 |               |  |   |       |   |  |      |       |   |      |   |     |   |  |   |     |  
|                                               |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |        |   |      |   |      |   |  |   |      |  
|Unfunded status                                |  |                  | (3,380 | ) |                          |   | (2,230 | )             |  |   | (5,772 | ) |  |      | (5,154 | ) |      |   | (220 | ) |  |   | (209 | )
|Unrecognized transition obligation             |  |                  |       |   |                          |   |       |               |  |   | 1,559  |   |  |      | 1,732  |   |      |   |     |   |  |   |     |  
|Unrecognized loss (gain)                       |  |                  | 10,299 |   |                          |   | 9,050  |               |  |   | (150   | ) |  |      | (541   | ) |      |   | (55  | ) |  |   | (68  | )
|Unrecognized past service (credit) cost        |  |                  | (20    | ) |                          |   | (45    | )             |  |   |       |   |  |      |       |   |      |   | 45   |   |  |   | 50   |  
|                                               |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |        |   |      |   |      |   |  |   |      |  
|Prepaid (accrued) benefit cost                 |  | $                | 6,899  |   |                          | $ | 6,775  |               |  | $ | (4,363 | ) |  | $    | (3,963 | ) |      | $ | (230 | ) |  | $ | (227 | )
|                                               |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |        |   |      |   |      |   |  |   |      |  



The accumulated
benefit obligation of the pension plan was $24.7 million and $21.3 million at the measurement dates for 2003 and 2002, respectively.



The components of net periodic benefit cost for the above plans for the years ended December 31, 2003, 2002 and 2001 are as follows:



|                                                   |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |     |   |      |   |     |      |  |   |      |   |  |      |    |   |  |   |    |   |  |   |    |  
|-------------------------------------------------- |  | ---------------- | ------ | - | ------------------------ | - | ------ | ------------- |  | - | ------ | - |  | ---- | --- | - | ---- | - | --- | ---- |  | - | ---- | - |  | ---- | -- | - |  | - | -- | - |  | - | -- | -
|                                                   |  | Pension Benefits |        |   | Life and Health Benefits |   |        | SERP Benefits | 
|(Dollars in Thousands)                             |  | 2003             |        |   | 2002                     |   |        | 2001          |  |   | 2003   |   |  | 2002 |     |   | 2001 |   |     | 2003 |  |   | 2002 |   |  | 2001 |   
|Service cost                                       |  | $                | 1,139  |   |                          | $ | 850    |               |  | $ | 828    |   |  | $    | 164 |   |      | $ | 152 |      |  | $ | 182  |   |  | $    |   |   |  | $ |   |   |  | $ |   |  
|Interest cost                                      |  |                  | 1,694  |   |                          |   | 1,561  |               |  |   | 1,498  |   |  |      | 338 |   |      |   | 329 |      |  |   | 350  |   |  |      | 14 |   |  |   | 14 |   |  |   | 14 |  
|Expected return on assets                          |  |                  | (2,146 | ) |                          |   | (1,942 | )             |  |   | (1,978 | ) |  |      |    |   |      |   |    |      |  |   |     |   |  |      |   |   |  |   |   |   |  |   |   |  
|Amortization of unrecognized transition obligation |  |                  |       |   |                          |   |       |               |  |   |       |   |  |      | 173 |   |      |   | 173 |      |  |   | 173  |   |  |      |   |   |  |   |   |   |  |   |   |  
|Unrecognized (gain) loss                           |  |                  | 484    |   |                          |   |       |               |  |   | (70    | ) |  |      | (2  | ) |      |   | (39 | )    |  |   | (24  | ) |  |      | (2 | ) |  |   | (4 | ) |  |   | (4 | )
|Unrecognized past (credit) cost                    |  |                  | (25    | ) |                          |   | (24    | )             |  |   | (25    | ) |  |      |    |   |      |   |    |      |  |   |     |   |  |      | 5  |   |  |   | 5  |   |  |   | 5  |  
|                                                   |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |     |   |      |   |     |      |  |   |      |   |  |      |    |   |  |   |    |   |  |   |    |  
|Net periodic benefit cost                          |  | $                | 1,146  |   |                          | $ | 445    |               |  | $ | 253    |   |  | $    | 673 |   |      | $ | 615 |      |  | $ | 681  |   |  | $    | 17 |   |  | $ | 15 |   |  | $ | 15 |  
|                                                   |  |                  |        |   |                          |   |        |               |  |   |        |   |  |      |     |   |      |   |     |      |  |   |      |   |  |      |    |   |  |   |    |   |  |   |    |  





73



---

##### Table of Contents

The following weighted average assumptions were used in the determination of the benefit obligations and
net periodic benefit costs in the tables above. The discount rate and rate of compensation increase disclosed are as of the end of the plan year measurement date, or September 30 for the respective plans. Since the expected return on plan assets
only impacts the net periodic benefit cost for the subsequent year, this rate is disclosed as of the beginning of the respective years.



|                                                                                                      |  |                  |   |  |                          |   |  |               |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ---------------- | - |  | ------------------------ | - |  | ------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                                                      |  | Pension Benefits |   |  | Life and Health Benefits |   |  | SERP Benefits |  
|                                                                                                      |  | 2003             |   |  | 2002                     |   |  | 2001          |   |  | 2003 |   |  | 2002 |   |  | 2001 |   |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Weighted average assumptions used to determine benefit obligations at December 31:                    |  |                  |   |  |                          |   |  |               |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |  
|Discount rate                                                                                         |  | 6.25             | % |  | 6.75                     | % |  | 7.50          | % |  | 6.25 | % |  | 6.75 | % |  | 7.50 | % |  | 6.25 | % |  | 6.75 | % |  | 7.50 | %
|Rate of compensation increase                                                                         |  | 3.50             | % |  | 4.00                     | % |  | 4.00          | % |  | 3.50 | % |  | 4.00 | % |  | 4.00 | % |  |     |   |  |     |   |  |     |  
|                                                                                                      |  |                  |   |  |                          |   |  |               |  
|Weighted average assumptions used to determine net periodic benefit cost for years ended December 31: |  |                  |   |  |                          |   |  |               |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |  
|Discount rate                                                                                         |  | 6.75             | % |  | 7.50                     | % |  | 8.00          | % |  | 6.75 | % |  | 7.50 | % |  | 8.00 | % |  | 6.75 | % |  | 7.50 | % |  | 8.00 | %
|Expected return on plan assets                                                                        |  | 8.75             | % |  | 9.00                     | % |  | 9.00          | % |  |     |   |  |     |   |  |     |   |  |     |   |  |     |   |  |     |  
|Rate of compensation increase                                                                         |  | 4.00             | % |  | 4.00                     | % |  | 5.50          | % |  | 4.00 | % |  | 4.00 | % |  | 5.50 | % |  |     |   |  |     |   |  |     |  



The long-term
rate-of-return-on-assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plans target allocation of asset classes. Equities and
fixed income securities were assumed to earn real rates of return in the ranges of 5-9% and 2-6%, respectively. The long-term inflation rate was estimated to be 3%. When these overall return expectations are applied to the plans target
allocation, the current expected rate of return is determined to be 8.75%.



For measurement purposes, a 10.00% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2004. The rate was assumed to decrease steadily to 3.75% in 2010.



The health care cost trend rate assumptions can have a significant effect on
the amounts reported. To illustrate, a one-percentage-point change in assumed health care cost trend rates would have the following effect on the amounts reported for life and health benefits at and for the year ended October 1, 2003 as follows:



|                                                        |  |                                  |    |                                  |   |     |  
|------------------------------------------------------- |  | -------------------------------- | -- | -------------------------------- | - | --- | -
|(Dollars in Thousands)                                  |  | 1-Percentage-PointPoint Increase |    | 1-Percentage-PointPoint Decrease |  
|Effect on total of service and interest cost components |  | $                                | 4  |                                  | $ | (6  | )
|Effect on postretirement benefit obligation             |  |                                  | 30 |                                  |   | (41 | )



Target Benefit Plans



In October 2003, the Company executed non-qualified
Target Benefit Supplemental Retirement Benefit agreements (Target Benefit Plans) with certain officers wherein the target benefit was based on providing incremental benefits equivalent to full pension benefits under the Companys
tax-qualified plan without regard to limits imposed by ERISA and the IRC. Seven officers are covered under the target benefit plans. The target benefit for each plan, established as of the effective date, is based on actuarial assumptions used to
determine the enhanced benefit to commence at age 65. The Company allocates assets to fund the plans annually. The target benefit plans also provide for voluntary deferrals by each officer based on written elections filed prior to each annual
effective date. The assets related to each plan are Company assets invested in the Companys name or irrevocable trust arrangements established for such purpose. Such assets are invested in certain equity or fixed income investments selected in
the sole discretion of the Bank. The Companys obligation under the plans, subject to the vesting requirements, equals the value of the allocated assets for the respective plans, including any earnings and appreciation or depreciation with
respect to such assets prior to payment of the benefits. The target benefit plans provide for vesting in plan funds after five (5) years of service from the effective date or death. Vesting in the respective plans benefits also occurs in a
change in control as defined within the plans. In December 2003, the Company amended the Target Benefit Plans of two officers such that, prior to the closing date of the pending merger, these officers would receive a fixed lump sum
payment in full satisfaction of their Target Benefit Plans. The initial allocation of assets to the target benefit plans was $258,000. During 2003, the Company recognized expense of $43,000 for the target benefit plans.



74



---

##### Table of Contents

Defined Contribution 401 (k) Plan



The Company also has a defined contribution 401(k) plan. The Company matches 100% of basic contributions up to 2.0% of each
participants annual contribution and 50% of contributions over 2.0%, with the Companys total match not to exceed 3%. The Companys contributions to the plan amounted to $453,000 in 2003, $418,000 in 2002 and $338,000 in 2001.



Note 11: Commitments and Contingent Liabilities



The Company rents facilities under operating lease agreements expiring at
various dates through 2016. Rent expense totaled approximately $747,000 in 2003, $746,000 in 2002 and $832,000 in 2001. Approximate minimum rental commitments under existing noncancelable operating leases with remaining terms of one year or more are
presented below:



|                             |  |   |      
|---------------------------- |  | - | -----
|(Dollars in Thousands)       |  |  
|Years ending December 31,    |  |  
|2004                         |  | $ | 734  
|2005                         |  |   | 701  
|2006                         |  |   | 590  
|2007                         |  |   | 427  
|2008                         |  |   | 282  
|Later years                  |  |   | 1,548
|                             |  |   |      
|Total minimum lease payments |  | $ | 4,282
|                             |  |   |      



The Company is a party
to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and letters of credit, which involve,
to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of condition. The contract amount of those commitments and letters of credit reflects the extent of involvement the Company has in those
particular classes of financial instruments. The Companys exposure to loss in the event of non-performance by the counterparty to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual
amount of the instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for on-balance-sheet instruments.



Financial instruments whose contract amounts represent credit risk at December 31 were as follows:



|                             |  |      |         |      |   |        
|---------------------------- |  | ---- | ------- | ---- | - | -------
|(Dollars in Thousands)       |  | 2003 |         | 2002
|Commitments to extend credit |  | $    | 131,475 |      | $ | 269,266
|Standby letters of credit    |  |      | 8,430   |      |   | 17,006 



Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of
the commitment amounts are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.



Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions. Most of these guarantees extend for periods ranging from one month to five years. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan facilities to customers. Since some of the letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.



75



---

##### Table of Contents

For both commitments to extend credit and standby letters of credit, the amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the counterparty. Collateral held varies, but includes residential and commercial real estate and business related assets. As required by
a standby letter of credit agreement for one commercial relationship, the Company has $280,000 in a pledged deposit account at a commercial bank. With respect to a second standby letter of credit agreement, the Company has $1.7 million in corporate
securities pledged to the Bank at December 31, 2003. The estimated fair value of standby letters of credit was insignificant at December 31, 2003 and 2002.



The Company has sold certain pools of adjustable-rate residential real estate loans in the secondary market with recourse. Outstanding loans sold with
recourse approximated $6.5 million and $7.8 million as of December 31, 2003 and 2002, respectively. Due to the adequacy of the collateral related to these loans, no reserve is considered necessary at December 31, 2003 and 2002.



The Company generally enters into rate lock agreements at the time that
residential mortgage loan applications are taken. These rate lock agreements fix the interest rate at which the loan, if ultimately made, will be originated. Such agreements may exist with borrowers with whom commitments to extend loans have been
made, as well as with individuals who have not yet received a commitment. The Company makes its determination of whether or not to identify a loan as held for sale at the time rate lock agreements are entered into. Accordingly, the Company is
exposed to interest rate risk to the extent that a rate lock agreement is associated with a loan application or a loan commitment which is intended to be held for sale, as well as with respect to loans held for sale.



At December 31, 2003 and 2002, the Company had rate lock agreements (certain
of which relate to loan applications for which no formal commitment has been made) and conventional mortgage loans held for sale equal to approximately $6.3 million and $10.2 million, respectively.



In order to reduce the interest rate risk associated with the portfolio of
conventional mortgage loans held for sale, as well as outstanding loan commitments and uncommitted loan applications with rate lock agreements which are intended to be held for sale, the Company enters into mandatory forward sales commitments to
sell loans in the secondary market to unrelated investors. At December 31, 2003 and 2002, the Company had mandatory commitments to sell certain conventional fixed-rate mortgage loans at set prices amounting to approximately $3.2 million and $9.1
million, respectively. The Company believes that it will be able to meet the mandatory commitments without incurring any material losses. The fair value of outstanding loan commitments, uncommitted loan applications with rate lock agreements which
are intended to be held for sale, and mandatory forward sales commitments were not significant as of December 31, 2003 and 2002.



The Company is required to maintain a reserve balance, as established by the Federal Reserve Board. The required average total reserve for the 14-day
maintenance period ended December 24, 2003 was $17.4 million, of which $6.4 million was required to be on deposit with the Federal Reserve Bank of New York. The remaining $11.0 million was represented by cash on hand.



In the ordinary course of business, there are various legal proceedings
pending against the Company. Based on consultation with outside counsel, management believes that the aggregate exposure, if any, arising from such litigation would not have a material adverse effect on the Companys consolidated financial
statements.



Note 12: Limits on Dividends



The Companys ability to pay dividends to its shareholders is largely
dependent on the Banks ability to pay dividends to the Company. The circumstances under which the Bank may pay dividends are limited by federal and state statutes, regulations and policies. The Bank must obtain the approval of the New York
State Superintendent of Banks for payment of dividends if the total of all dividends declared in any calendar year would exceed the total of the Banks net profits (as defined by applicable regulations) for that year, combined with its retained
net profits for the preceding two years. Furthermore, the Bank may not pay a dividend in an amount greater than its retained earnings, as defined by applicable regulations. Due to the reduced net income in 2002, coupled with dividends previously
paid, the Bank exceeded its dividend limitations for 2002. However, in October 2002, the Bank received regulatory approval for and paid a special dividend of $30 million to the Company. As a result of this special dividend, and based on regulatory
limitations noted above, the Company does not anticipate receiving dividends from the Bank until 2004. At December 31, 2003, the Company had immediately available funds



76



---

##### Table of Contents

totaling $18.2 million. Management anticipates that the Bank will be able to resume the payment of cash dividends to the
Company, without regulatory approval, in 2004. However, circumstances, including additional common stock and trust preferred security repurchases or unanticipated cash obligations, may require the Company to seek additional sources of funding or
require the Bank to seek regulatory approval for another special cash dividend to the Company, should the Bank be otherwise unable to make such cash dividend payments.



In addition, the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) are authorized to
determine under certain circumstances that the payment of dividends would be an unsafe or unsound practice and to prohibit payment of such dividends. The payment of dividends that deplete a banks capital base could be deemed to constitute such
an unsafe or an unsound practice. There are also statutory limits on the transfer of funds to the Company by its banking subsidiary, whether in the form of loans or other extensions of credit, investments or asset purchases. Such transfers by the
Bank to the Company generally are limited in amount to 10% of the Banks capital and surplus. Furthermore, such loans and extensions of credit are required to be collateralized in specific amounts.



Note 13: Income Taxes



The components of income tax expense (benefit) for the years ended December 31 are as follows:



|                             |  |      |       |      |   |      |      |  |   |        |  
|---------------------------- |  | ---- | ----- | ---- | - | ---- | ---- |  | - | ------ | -
|(Dollars in Thousands)       |  | 2003 |       | 2002 |   |      | 2001 | 
|Current expense (benefit)    |  | $    | 1,400 |      | $ | (269 | )    |  | $ | 13,746 |  
|Deferred expense (benefit)   |  |      | 7,325 |      |   | 15   |      |  |   | (1,174 | )
|                             |  |      |       |      |   |      |      |  |   |        |  
|Income tax expense (benefit) |  | $    | 8,725 |      | $ | (254 | )    |  | $ | 12,572 |  
|                             |  |      |       |      |   |      |      |  |   |        |  



A reconciliation
between the federal statutory income tax rate and the effective income tax rate for the years ended December 31 follows:



|                                           |  |      |   |  |       |    |  |      |  
|------------------------------------------ |  | ---- | - |  | ----- | -- |  | ---- | -
|                                           |  | 2003 |   |  | 2002  |    |  | 2001 |  
|Federal statutory income tax rate          |  | 35.0 | % |  | 35.0  | %  |  | 35.0 | %
|State income taxes, net of federal benefit |  | 2.5  |   |  | (24.5 | )  |  | 4.2  |  
|Tax-exempt interest income                 |  | (1.9 | ) |  | (21.3 | )  |  | (0.8 | )
|Dividends received deduction               |  | (1.2 | ) |  | (5.2  | )  |  | (0.2 | )
|Other                                      |  | (0.5 | ) |  | (0.6  | )  |  | (0.1 | )
|                                           |  |      |   |  |       |    |  |      |  
|Effective income tax rate                  |  | 33.9 | % |  | (16.6 | )% |  | 38.1 | %
|                                           |  |      |   |  |       |    |  |      |  



During 2003 and 2002,
the Company recognized various tax credits related to New York States Qualified Empire Zone Enterprise (QEZE) program. QEZE credits recognized in 2003 and 2002 totaled $227,000 and $469,000, respectively.



The components of deferred income taxes at December 31 included in other
assets are as follows:



|                                                                |  |      |        |      |   |       
|--------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|(Dollars in Thousands)                                          |  | 2003 |        | 2002
|Assets:                                                         |  |      |        |      |   |       
|Allowance for loan losses                                       |  | $    | 19,388 |      | $ | 26,218
|Postretirement benefits                                         |  |      | 1,740  |      |   | 1,580 
|State operating losses and tax credits                          |  |      | 1,096  |      |   | 298   
|Non-accrual loans                                               |  |      | 426    |      |   | 1,189 
|Deferred compensation                                           |  |      | 539    |      |   | 588   
|Other                                                           |  |      | 762    |      |   | 431   
|                                                                |  |      |        |      |   |       
|                                                                |  |      | 23,951 |      |   | 30,304
|                                                                |  |      |        |      |   |       
|Liabilities:                                                    |  |      |        |      |   |       
|Net unrealized gain on investment securities available for sale |  |      | 2,049  |      |   | 6,029 
|Pension benefits                                                |  |      | 2,615  |      |   | 2,567 
|Depreciation                                                    |  |      | 895    |      |   | 663   
|Deferred loan costs                                             |  |      | 1,177  |      |   | 743   
|Other                                                           |  |      | 604    |      |   | 346   
|                                                                |  |      |        |      |   |       
|                                                                |  |      | 7,340  |      |   | 10,348
|                                                                |  |      |        |      |   |       
|Net deferred tax asset                                          |  | $    | 16,611 |      | $ | 19,956
|                                                                |  |      |        |      |   |       



77



---

##### Table of Contents

Deferred tax assets are recognized subject to managements judgment that these tax benefits will
more likely than not be realized. Based on the sufficiency of taxable temporary items, historical taxable income, anticipated future taxable income, as well as available tax planning strategies, management believes it is more likely than not that
the deferred tax assets at December 31, 2003 will be realized.



At December 31, 2003 and 2002, the Company had state net operating loss carryforwards of $15.8 million and $8.7 million, respectively, which expire at various dates through 2023. At December 31, 2003 and 2002, the Company also has New York
State tax credit carryforwards of $795,000 and $198,000, respectively, which may be carried forward indefinitely.



Note 14: Earnings Per Share



The following table provides information on the calculation of basic earnings per share and diluted earnings per share for the years ended December 31:



|                                          |  |           |        |                        |            |                   |   |     
|----------------------------------------- |  | --------- | ------ | ---------------------- | ---------- | ----------------- | - | ----
|(Dollars in Thousands, Except Share Data) |  | NetIncome |        | WeightedAverage Shares |            | EarningsPer Share
|2003                                      |  |           |        |                        |            |                   |   |     
|Basic earnings per share                  |  | $         | 17,017 |                        | 9,209,058  |                   | $ | 1.85
|Dilutive effect of stock options          |  |           |        |                        | 170,978    |                   |   |     
|                                          |  |           |        |                        |            |                   |   |     
|Diluted earnings per share                |  | $         | 17,017 |                        | 9,380,036  |                   | $ | 1.81
|                                          |  |           |        |                        |            |                   |   |     
|Anti-dilutive stock options               |  |           |        |                        | 17,813     |                   |   |     
|                                          |  |           |        |                        |            |                   |   |     
|2002:                                     |  |           |        |                        |            |                   |   |     
|Basic earnings per share                  |  | $         | 1,783  |                        | 9,589,361  |                   | $ | 0.19
|Dilutive effect of stock options          |  |           |        |                        | 150,902    |                   |   |     
|                                          |  |           |        |                        |            |                   |   |     
|Diluted earnings per share                |  | $         | 1,783  |                        | 9,740,263  |                   | $ | 0.18
|                                          |  |           |        |                        |            |                   |   |     
|Anti-dilutive stock options               |  |           |        |                        | 44,179     |                   |   |     
|                                          |  |           |        |                        |            |                   |   |     
|2001:                                     |  |           |        |                        |            |                   |   |     
|Basic earnings per share                  |  | $         | 20,460 |                        | 9,958,952  |                   | $ | 2.05
|Dilutive effect of stock options          |  |           |        |                        | 155,245    |                   |   |     
|                                          |  |           |        |                        |            |                   |   |     
|Diluted earnings per share                |  | $         | 20,460 |                        | 10,114,197 |                   | $ | 2.02
|                                          |  |           |        |                        |            |                   |   |     
|Anti-dilutive stock options               |  |           |        |                        | 102,082    |                   |   |     
|                                          |  |           |        |                        |            |                   |   |     



Note 15: Stock Option Plans and
Shareholder Rights Plan



The Company has a 1996 Long-Term
Incentive and Capital Accumulation Plan (the 1996 Incentive Plan) for the benefit of officers and certain other employees of the Company and its subsidiaries. The 1996 Incentive Plan, as approved by shareholders at the 1996 Annual
Meeting of Shareholders, and as amended at the 1998, 1999, and 2003 Annual Meetings of Shareholders, provides for options to purchase a total of 2.05 million shares of authorized common stock. Options to purchase 1,430,244 shares have been granted
as of December 31, 2003 under the 1996 Incentive Plan and a previous incentive plan. At December 31, 2003, there were 619,756 options to purchase shares available for future grant under the 1996 Incentive Plan, subject to the covenant limitations of
the pending merger. Four kinds of awards are contained in the 1996 Incentive Plan and are available for grant: incentive stock options, non-qualified options, stock appreciation rights and performance share awards. Options under the 1996 Incentive
Plan have a 10-year term, and vest and become exercisable at 25% per year at the end of each of the first four years following the grant date, as long as the optionee remains an employee of the Company or its subsidiaries, or as otherwise determined
by the Companys Compensation Committee.



78



---

##### Table of Contents

The Directors Stock Option Plan (the Directors Plan), as approved by shareholders
at the 1994 Annual Meeting of Shareholders, provides for options to purchase 393,750 shares of authorized common stock by incumbent and future non-employee directors of the Company; 306,000 options to purchase shares have been granted as of December
31, 2003. At December 31, 2003, 87,750 options to purchase shares were available for future grant under the Directors Plan. All options granted under the Directors Plan are intended to be non-qualified options. Vesting occurs on the
grant date, and options may be exercised beginning or commencing six months after the grant date and have a 10-year term. Under the Directors Plan, to the extent options remain available for grant, upon initial election or appointment as a
director, new non-employee directors of the Company each receive a grant of an option to purchase 6,750 shares of common stock. Furthermore, to the extent options remain available for grant, in January of each year, each non-employee director is
granted an option to purchase 2,250 shares of common stock.



Activity in the plans during 2001, 2002 and 2003 was as follows:



|                                          |  |                                          |  |           |                                 |  |   |      
|----------------------------------------- |  | ---------------------------------------- |  | --------- | ------------------------------- |  | - | -----
|(Dollars in Thousands, Except Share Data) |  | Number ofShares                          |  |           | Weighted Average Exercise Price
|                                          |  | Outstanding options at December 31, 2000 |  | 846,094   |                                 |  | $ | 20.57
|2001:                                     |  | Options forfeited                        |  | (105,675  | )                               |  |   | 25.75
|                                          |  | Options exercised                        |  | (32,228   | )                               |  |   | 13.65
|                                          |  | Options granted                          |  | 195,000   |                                 |  |   | 13.65
|                                          |  |                                          |  |           |                                 |  |   |      
|                                          |  | Outstanding options at December 31, 2001 |  | 903,191   |                                 |  |   | 19.94
|2002:                                     |  | Options forfeited                        |  | (44,044   | )                               |  |   | 23.22
|                                          |  | Options exercised                        |  | (125,226  | )                               |  |   | 16.34
|                                          |  | Options granted                          |  | 256,660   |                                 |  |   | 26.48
|                                          |  |                                          |  |           |                                 |  |   |      
|                                          |  | Outstanding options at December 31, 2002 |  | 990,581   |                                 |  |   | 19.94
|2003:                                     |  | Options forfeited                        |  | (31,246   | )                               |  |   | 25.20
|                                          |  | Options exercised                        |  | (127,456  | )                               |  |   | 17.45
|                                          |  | Options granted                          |  | 536,112   |                                 |  |   | 30.94
|                                          |  |                                          |  |           |                                 |  |   |      
|                                          |  | Outstanding options at December 31, 2003 |  | 1,367,991 |                                 |  | $ | 25.78
|                                          |  |                                          |  |           |                                 |  |   |      



The following table summarizes
information about options outstanding at December 31, 2003:



|                        |  |                    |  |                                                   |  |                               |       |                   |         |                               |   |      
|----------------------- |  | ------------------ |  | ------------------------------------------------- |  | ----------------------------- | ----- | ----------------- | ------- | ----------------------------- | - | -----
|                        |  | Outstanding        |  | Exercisable                                      
|Range ofExercise Prices |  | OptionsOutstanding |  | WeightedAverageRemaining ContractualLife in Years |  | WeightedAverage ExercisePrice |       | NumberExercisable |         | WeightedAverage ExercisePrice
|$10.167 to $14.50       |  | 150,122            |  | 5.33                                              |  | $                             | 13.65 |                   | 143,872 |                               | $ | 13.66
|$15.08 to $19.85        |  | 207,325            |  | 5.21                                              |  | $                             | 17.93 |                   | 167,166 |                               | $ | 18.03
|$20.82 to $27.065       |  | 589,898            |  | 8.09                                              |  | $                             | 23.96 |                   | 200,910 |                               | $ | 26.29
|$28.75 to $32.75        |  | 130,650            |  | 4.97                                              |  | $                             | 29.94 |                   | 114,636 |                               | $ | 29.88
|$39.50                  |  | 289,996            |  | 10.00                                             |  | $                             | 39.50 |                   |        |                               |   |     
|                        |  |                    |  |                                                   |  |                               |       |                   |         |                               |   |      
|                        |  | 1,367,991          |  | 7.46                                              |  | $                             | 25.78 |                   | 626,584 |                               | $ | 21.84
|                        |  |                    |  |                                                   |  |                               |       |                   |         |                               |   |      



Options exercisable
and the weighted average exercise price thereon were 650,833 and $20.87 at December 31, 2002 and 633,375 and $19.33 at December 31, 2001.



The Company maintains a shareholders rights plan pursuant to which the Companys Board of Directors declared a dividend of one right for each
outstanding share of common stock. These rights will also be attached to common stock issued subsequent to the adoption of the plan. The rights can only be exercised when an individual or group intends to acquire or has acquired a defined amount of
the Companys outstanding common shares. Each right will entitle the holder to receive common stock having a market value equivalent to two times the exercise price (as defined). The rights will expire on June 4, 2009 and may be redeemed by the
Company in whole at a price of $.01 per right. In December 2003, the Companys Board of Directors amended the rights plan to render the stock purchase rights under the plan inapplicable to the proposed merger with Partners Trust Financial
Group, Inc.



79



---

##### Table of Contents

Note 16: Fair Value of Financial Instruments



SFAS No. 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the
consolidated statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, certain fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The fair value of off-balance-sheet financial instruments is not significant.



Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the Companys financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.



Fair value estimates
are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the
Company has a trust and investment management operation that contributes net fee income annually. The trust and investment management operation is not considered a financial instrument, and its value has not been incorporated into the fair value
estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market, bank owned life insurance and premises and equipment. In
addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value.



The net carrying amount and fair values of financial instruments at December
31 are as follows:



|                                |  |                 |           |            |   |                 |  |            |           |  |   |          
|------------------------------- |  | --------------- | --------- | ---------- | - | --------------- |  | ---------- | --------- |  | - | ---------
|                                |  | 2003            |           | 2002      
|(Dollars in Thousands)          |  | Carrying Amount |           | Fair Value |   | Carrying Amount |  | Fair Value
|Financial assets:               |  |                 |           |            |   |                 |  |            |           |  |   |          
|Cash and cash equivalents       |  | $               | 61,670    |            | $ | 61,670          |  | $          | 46,912    |  | $ | 46,912   
|Investment securities           |  |                 | 623,832   |            |   | 623,832         |  |            | 593,918   |  |   | 594,638  
|FHLB of New York stock          |  |                 | 19,541    |            |   | 19,541          |  |            | 19,934    |  |   | 19,934   
|Loans held for sale             |  |                 | 1,144     |            |   | 1,160           |  |            | 4,001     |  |   | 4,001    
|Net loans                       |  |                 | 1,404,776 |            |   | 1,415,234       |  |            | 1,286,044 |  |   | 1,314,533
|Accrued interest receivable     |  |                 | 7,981     |            |   | 7,981           |  |            | 9,875     |  |   | 9,875    
|                                |  |                 |           |            |   |                 |  |            |           |  |   |          
|Financial liabilities:          |  |                 |           |            |   |                 |  |            |           |  |   |          
|Deposits                        |  | $               | 1,589,086 |            | $ | 1,595,049       |  | $          | 1,442,756 |  | $ | 1,452,586
|Borrowings                      |  |                 | 410,768   |            |   | 423,585         |  |            | 378,118   |  |   | 400,659  
|Junior subordinated obligations |  |                 | 48,202    |            |   | 48,202          |  |            |          |  |   |         
|Trust preferred securities      |  |                 |          |            |   |                |  |            | 48,000    |  |   | 48,000   
|Accrued interest payable        |  |                 | 4,176     |            |   | 4,176           |  |            | 4,299     |  |   | 4,299    



80



---

##### Table of Contents

Note 17: Regulatory Matters



The Company and the Bank each are subject to various regulatory capital guidelines and a framework for prompt corrective
action that are administered by the Federal banking agencies. Under these guidelines and this framework, the Company and the Bank must each meet specific capital levels that are based on the amount of their assets, liabilities and certain
off-balance-sheet items, as calculated under various regulatory capital definitions and accounting practices. The Companys and the Banks capital amounts and classifications also are subject to qualitative judgments by regulators about
asset and capital components, risk-weightings and other factors. Failure by the Company or the Bank to meet minimum capital requirements necessitates certain mandatory actions and authorizes further discretionary actions by regulators, which could
have a direct material effect on the Companys and the Banks financial statements.



Quantitative measures established by regulation to ensure capital adequacy require that the Company and the Bank each maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2003, the Company and the Bank each met all capital adequacy guidelines
to which they are subject.



The Companys and the
Banks capital amounts and ratios at December 31 are shown in the table below:



BSB BANCORP, INC. (CONSOLIDATED)



|                                    |  |                |         |       |                         |   |  |                                     |   |  |      |  
|----------------------------------- |  | -------------- | ------- | ----- | ----------------------- | - |  | ----------------------------------- | - |  | ---- | -
|                                    |  |                |         |       | Minimum Required Ratios |  
|                                    |  | Actual Capital |         |       | For CapitalAdequacy     |   |  | ForClassificationas WellCapitalized |  
|(Dollars in Thousands)              |  | Amount         |         | Ratio |                         |   | 
|As of December 31, 2003             |  |                |         |       |                         |   |  |                                     |   |  |      |  
|Total capital/risk-weighted assets  |  | $              | 208,510 |       | 13.80                   | % |  | 8.0                                 | % |  | 10.0 | %
|Tier I capital/risk-weighted assets |  | $              | 190,355 |       | 12.52                   | % |  | 4.0                                 | % |  | 6.0  | %
|Tier I capital/average assets       |  | $              | 190,355 |       | 8.76                    | % |  | 4.0                                 | % |  | 5.0  | %
|                                    |  |                |         |      
|As of December 31, 2002             |  |                |         |       |                         |   |  |                                     |   |  |      |  
|Total capital/risk-weighted assets  |  | $              | 206,049 |       | 14.48                   | % |  | 8.0                                 | % |  | 10.0 | %
|Tier I capital/risk-weighted assets |  | $              | 186,266 |       | 13.09                   | % |  | 4.0                                 | % |  | 6.0  | %
|Tier I capital/average assets       |  | $              | 186,266 |       | 9.10                    | % |  | 4.0                                 | % |  | 5.0  | %



BSB BANK & TRUST COMPANY



|                                    |  |                |         |       |                         |   |  |                                     |   |  |      |  
|----------------------------------- |  | -------------- | ------- | ----- | ----------------------- | - |  | ----------------------------------- | - |  | ---- | -
|                                    |  |                |         |       | Minimum Required Ratios |  
|                                    |  | Actual Capital |         |       | For CapitalAdequacy     |   |  | ForClassificationas WellCapitalized |  
|(Dollars in Thousands)              |  | Amount         |         | Ratio |                         |   | 
|As of December 31, 2003             |  |                |         |       |                         |   |  |                                     |   |  |      |  
|Total capital/risk-weighted assets  |  | $              | 190,419 |       | 12.64                   | % |  | 8.0                                 | % |  | 10.0 | %
|Tier I capital/risk-weighted assets |  | $              | 171,239 |       | 11.37                   | % |  | 4.0                                 | % |  | 6.0  | %
|Tier I capital/average assets       |  | $              | 171,239 |       | 7.93                    | % |  | 4.0                                 | % |  | 5.0  | %
|                                    |  |                |         |      
|As of December 31, 2002             |  |                |         |       |                         |   |  |                                     |   |  |      |  
|Total capital/risk-weighted assets  |  | $              | 167,910 |       | 11.90                   | % |  | 8.0                                 | % |  | 10.0 | %
|Tier I capital/risk-weighted assets |  | $              | 149,708 |       | 10.61                   | % |  | 4.0                                 | % |  | 6.0  | %
|Tier I capital/average assets       |  | $              | 149,708 |       | 7.31                    | % |  | 4.0                                 | % |  | 5.0  | %



81



---

##### Table of Contents

Note 18: Parent Company Financial Information



The following financial statements for the parent company should be read in conjunction with the Companys consolidated
financial statements and notes thereto.



STATEMENTS OF CONDITION

(Dollars in Thousands)



|                                                            |  |      |         |      |   |        
|----------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|December 31,                                                |  | 2003 |         | 2002
|ASSETS                                                      |  |      |         |      |   |        
|Cash and due from banks                                     |  | $    | 18,182  |      | $ | 37,660 
|Investment in Bank, at equity                               |  |      | 174,776 |      |   | 158,934
|Investment in trust subsidiaries                            |  |      | 1,702   |      |   | 1,702  
|Prepaid expenses                                            |  |      | 1,220   |      |   | 1,282  
|Other assets                                                |  |      | 42      |      |   | 39     
|                                                            |  |      |         |      |   |        
|Total assets                                                |  | $    | 195,922 |      | $ | 199,617
|                                                            |  |      |         |      |   |        
|LIABILITIES & SHAREHOLDERS EQUITY                          |  |      |         |      |   |        
|Accrued interest payable                                    |  | $    | 1,027   |      | $ | 940    
|Other liabilities                                           |  |      | 390     |      |   | 49     
|Junior subordinated obligations issued to subsidiary trusts |  |      | 48,202  |      |   | 49,702 
|                                                            |  |      |         |      |   |        
|Total liabilities                                           |  |      | 49,619  |      |   | 50,691 
|                                                            |  |      |         |      |   |        
|Total shareholders equity                                  |  |      | 146,303 |      |   | 148,926
|                                                            |  |      |         |      |   |        
|Total liabilities and shareholders equity                  |  | $    | 195,922 |      | $ | 199,617
|                                                            |  |      |         |      |   |        



STATEMENTS OF INCOME

(Dollars in Thousands)



|                                                 |  |      |        |      |   |         |      |  |   |       
|------------------------------------------------ |  | ---- | ------ | ---- | - | ------- | ---- |  | - | ------
|Years Ended December 31,                         |  | 2003 |        | 2002 |   |         | 2001
|Income:                                          |  |      |        |      |   |         |      |  |   |       
|Dividends from Bank                              |  | $    |       |      | $ | 33,007  |      |  | $ | 22,509
|Interest income                                  |  |      | 129    |      |   | 97      |      |  |   | 75    
|Other income                                     |  |      | 6      |      |   | 727     |      |  |   |      
|Effect of the Banks earnings and distributions: |  |      |        |      |   |         |      |  |   |       
|Equity in undistributed earnings                 |  |      | 19,857 |      |   |        |      |  |   | 66    
|Distributions in excess of earnings              |  |      |        |      |   | (29,247 | )    |  |   |       
|                                                 |  |      |        |      |   |         |      |  |   |       
|Total income                                     |  |      | 19,992 |      |   | 4,584   |      |  |   | 22,650
|                                                 |  |      |        |      |   |         |      |  |   |       
|Expense:                                         |  |      |        |      |   |         |      |  |   |       
|Interest on junior subordinated obligations      |  |      | 3,141  |      |   | 2,818   |      |  |   | 2,513 
|Merger related expenses                          |  |      | 325    |      |   |        |      |  |   |      
|Other expenses                                   |  |      | 1,106  |      |   | 1,095   |      |  |   | 922   
|                                                 |  |      |        |      |   |         |      |  |   |       
|Total expense                                    |  |      | 4,572  |      |   | 3,913   |      |  |   | 3,435 
|                                                 |  |      |        |      |   |         |      |  |   |       
|Income before income tax benefit                 |  |      | 15,420 |      |   | 671     |      |  |   | 19,215
|Income tax benefit                               |  |      | 1,597  |      |   | 1,112   |      |  |   | 1,245 
|                                                 |  |      |        |      |   |         |      |  |   |       
|Net income                                       |  | $    | 17,017 |      | $ | 1,783   |      |  | $ | 20,460
|                                                 |  |      |        |      |   |         |      |  |   |       



82



---

##### Table of Contents

STATEMENTS OF CASH FLOWS

(Dollars in Thousands)



|                                                                                            |  |      |         |   |      |   |        |      |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|Years Ended December 31,                                                                    |  | 2003 |         |   | 2002 |   |        | 2001 | 
|Operating activities:                                                                       |  |      |         |   |      |   |        |      |  |   |         |  
|Net income                                                                                  |  | $    | 17,017  |   |      | $ | 1,783  |      |  | $ | 20,460  |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |      |         |   |      |   |        |      |  |   |         |  
|Effect of the Banks earnings and distributions                                             |  |      | (19,857 | ) |      |   | 29,247 |      |  |   | (66     | )
|Net gain on repurchase of trust preferred securities                                        |  |      | (6      | ) |      |   | (726   | )    |  |   |        |  
|Net change in other assets and liabilities                                                  |  |      | (1,103  | ) |      |   | (2,151 | )    |  |   | (515    | )
|                                                                                            |  |      |         |   |      |   |        |      |  |   |         |  
|Net cash (used in) provided by operating activities                                         |  |      | (3,949  | ) |      |   | 28,153 |      |  |   | 19,879  |  
|Investing activities:                                                                       |  |      |         |   |      |   |        |      |  |   |         |  
|Capital contributions to subsidiaries                                                       |  |      |        |   |      |   | (774   | )    |  |   |        |  
|                                                                                            |  |      |         |   |      |   |        |      |  |   |         |  
|Net cash used in investing activities                                                       |  |      |        |   |      |   | (774   | )    |  |   |        |  
|                                                                                            |  |      |         |   |      |   |        |      |  |   |         |  
|Financing activities:                                                                       |  |      |         |   |      |   |        |      |  |   |         |  
|Net proceeds from the issuance of trust preferred securities                                |  |      |        |   |      |   | 25,774 |      |  |   |        |  
|Repurchase of trust preferred securities                                                    |  |      | (1,494  | ) |      |   | (6,098 | )    |  |   |        |  
|Proceeds from exercise of stock options                                                     |  |      | 2,224   |   |      |   | 2,048  |      |  |   | 440     |  
|Purchases of treasury stock                                                                 |  |      | (7,082  | ) |      |   | (7,879 | )    |  |   | (15,405 | )
|Dividends paid                                                                              |  |      | (9,177  | ) |      |   | (9,628 | )    |  |   | (9,989  | )
|                                                                                            |  |      |         |   |      |   |        |      |  |   |         |  
|Net cash (used in) provided by financing activities                                         |  |      | (15,529 | ) |      |   | 4,217  |      |  |   | (24,954 | )
|                                                                                            |  |      |         |   |      |   |        |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                        |  |      | (19,478 | ) |      |   | 31,596 |      |  |   | (5,075  | )
|Cash and cash equivalents at beginning of year                                              |  |      | 37,660  |   |      |   | 6,064  |      |  |   | 11,139  |  
|                                                                                            |  |      |         |   |      |   |        |      |  |   |         |  
|Cash and cash equivalents at end of year                                                    |  | $    | 18,182  |   |      | $ | 37,660 |      |  | $ | 6,064   |  
|                                                                                            |  |      |         |   |      |   |        |      |  |   |         |  



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



In 2003, BSB Bancorp, Inc. had no change in or disagreements with its accountants on accounting and financial disclosures
required in the annual report.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



The Companys management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation
of the Companys disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of December 31, 2003. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



There were no changes made in the Companys internal controls or in other factors that could significantly affect these
internal controls subsequent to the date of the evaluation performed by the Companys Chief Executive Officer and Chief Financial Officer.



83



---

##### Table of Contents

PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------



Listed below are our executive officers and members of our board of directors, their ages as of December 31, 2003 and their positions with our company. All directors of
the Company are also directors of the Companys wholly owned subsidiary, BSB Bank & Trust Company (the Bank). Mr. Ferris G. Akel was a member of the Board of Directors until his retirement in April 2003. The Board of Directors
currently consists of nine members. The Companys Certificate of Incorporation and Bylaws provide that the directors shall be divided into three classes as nearly equal in number as possible.



|                    |  |     |  |                                                                            
|------------------- |  | --- |  | ---------------------------------------------------------------------------
|Name                |  | Age |  | Position                                                                   
|Robert W. Allen     |  | 60  |  | Director                                                                   
|Diana J. Bendz      |  | 57  |  | Director                                                                   
|William C. Craine   |  | 55  |  | Director, Chairman of the Boards of the Company and the Bank               
|John P. Driscoll    |  | 63  |  | Director and Executive Vice President  Central New York of the Bank       
|Ann G. Higbee       |  | 61  |  | Director                                                                   
|David A. Niermeyer  |  | 62  |  | Director                                                                   
|Mark T. ONeil, Jr. |  | 51  |  | Director                                                                   
|Howard W. Sharp     |  | 57  |  | Director, President and Chief Executive Officer of the Company and the Bank
|Thomas L. Thorn     |  | 60  |  | Director                                                                   
|William M. Le Beau  |  | 55  |  | Executive Vice President  Risk Management                                 
|Arthur C. Smith     |  | 56  |  | Executive Vice President  Retail Banking Officer                          
|Randy J. Wiley      |  | 47  |  | Senior Vice President and Treasurer                                        
|Rexford C. Decker   |  | 51  |  | Senior Vice President and Chief Financial Officer                          
|Larry G. Denniston  |  | 58  |  | Senior Vice President and Corporate Secretary                              
|Douglas R. Johnson  |  | 61  |  | Senior Vice President and Senior Trust Officer                             
|Roy W. Brock        |  | 44  |  | Senior Vice President  Human Resources                                    



Robert W. Allen has been a
director since 1987. Mr. Allen has been the General Partner, Allen Family Limited Partnership since April 1999 and the Chief Executive Officer, Southern Belle Dairy Co., LLC since February 2002. From May 1997 to March 1999, Mr. Allen was the
President and Chief Executive Officer, Tuscan/Lehigh Dairies, L.P., Lansdale, Pennsylvania.



Diana J. Bendzhas been a director since 1998. Mrs. Bendz has been the IBM Endicott Senior Location Executive, Endicott, New York since July 1996.



William C. Craine has been a director since 1976 and has been the Chairman of the
Company and the Bank since February 2000. Mr. Craine has been the Chief Executive Officer of Granite Capital Holdings, Inc. since January 2003 and the Chairman since November 1998.



John P. Driscoll has been a director since 1999. Mr. Driscoll has been the Executive Vice President - CNYof the Bank since May 2001.
He was the Executive Vice President and Treasurer of the Company and the Bank from March 2000 to May 2001. From July 1999 to March 2000, Mr. Driscoll was the Executive Vice President - CNY Region of the Company and the Bank. From November 1999 to
March 2000, he was the Interim Treasury Administration Officer of the Bank. From September 1992 until July 1999, Mr. Driscoll was the Chairman, President and Chief Executive Officer of Skaneateles Bancorp, Inc. and Skaneateles Savings Bank. In July
1999, Skaneateles Bancorp, Inc. merged with and into the Company.



Ann G.
Higbeehas been a director since 1999. Mrs. Higbee is the Managing Partner of Public Relations Services at Eric Mower and Associates, Syracuse, New York, a position she has held since 1990.



84



---

##### Table of Contents

David A. Niermeyer has been a director since 1994. Mr. Niermeyer has been the President and Chief Executive
Officer, Stakmore Co., Inc., Owego, New York since April 1980.



Mark T.
ONeil, Jr. has been a director since 1994. Mr. ONeil has been the Executive Vice President and Chief Operating Officer, Catholic Health East, Newtown Square, Pennsylvania since July 2003. From July 2001 to July 2003, he was the
Executive Vice President, Mid-Atlantic Division, Catholic Health East, Newtown Square, Pennsylvania. From May 2000 to July 2001, he was the President and Chief Executive Officer of Mercy Health System, Conshohocken, Pennsylvania.



Howard W. Sharp has been a director since November 2000. Mr. Sharp has been the
President and Chief Executive Officer of the Company and the Bank since November 2000. Prior to that, he was the Regional President, Syracuse, NY Region of M&T Bank from April 1998 to November 2000. From November 1989 to April 1998, he held
various executive positions at OnBancorp, Inc. and OnBank & Trust Co., including Senior Executive Vice President and Chief Operating Officer.



Thomas L. Thornhas been a director since 1995. Mr. Thorn has been a private investor since 1997 prior to which he served as Executive Vice President and Treasurer
of Diamond Page International Corporation from September 1978 to October 1996. Mr. Thorn served as the Interim Executive Officer of the Company and the Bank from November 10, 2000 to December 31, 2000 and was the Acting President and Chief Executive
Officer of the Company from February 2000 to November 10, 2000.



William M.
Le Beau has been with the Bank and Company since December 2000. He has been the Executive Vice President, Risk Management since February 2002. From December 2000 until February 2002, he was Senior Vice President, Risk Management for the Bank and
Company. From 1998 to December 2000, he was Vice President, Community Reinvestment, of M&T Bank.



Arthur C. Smith joined the Bank in 1967. He has been the Executive Vice President - Retail Banking Officer since October 1996. He was the Senior Vice President of the Company and the Bank from 1994 to October
1996. Prior to that time, he was Vice President of the Bank from 1987 and of the Company since its formation in 1988.



Randy J. Wiley has been the Senior Vice President and Treasurer since May 2001. From April 1998 to May 2001, he was Chief Financial Officer of Cazenovia College.



Rexford C. Decker joined the Bank in 1982. He became Senior Vice
President and Chief Financial Officer of the Bank and the Company in February 1999. Mr. Decker served as Treasurer of the Company and the Bank from November 1999 to March 2000. He was Administrative Vice President and Controller of the Bank from
December 1996 to February 1999, Vice President and Controller of the Bank from December 1991 to December 1996, and Controller of the Bank from December 1985 to December 1991.



Larry G. Denniston joined the Bank in 1983. He became Senior Vice President and Corporate Secretary of the Company and the Bank in
December 1996. He was Vice President and Secretary of the Company and the Bank from 1990 to December 1996. Prior to that time, he was Vice President  Financial Services of the Bank.



Douglas R. Johnson joined the Bank in 1990. He became Senior Vice President and Trust Officer of the Company in October 2003. He was
Senior Vice President of the Company from January 1997 to October 2003. He has been Senior Vice President and Senior Trust Officer of the Bank since December 1990.



Roy W. Brock joined the Bank in May 1982. He became Senior Vice President  Human Resources of the Company and the Bank in
October 2003. He was Vice President of the Company from September 2001 to October 2003. He was Administrative Vice President, Human Resources of the Bank from October 2000 to October 2003. Prior to that time he was Assistant Vice President 
Human Resources Officer since 1996.



85



---

##### Table of Contents

The Board of Directors has determined that, except as noted below, all of the members of the Board are independent
directors within the meaning of NASDAQ Rule 4200.



Mr. Sharp is not
considered independent because he is an executive officer of the Company and the Bank. Mr. Driscoll is not considered independent because he is an executive officer of the Bank.



Audit Committee Matters



The Company has a standing Audit Committee. The Audit Committee currently has five members: Mr. Thorn (Chairman), Mrs. Bendz, Mrs. Higbee, and Messrs. Niermeyer and
ONeil. As of the date of this report, each of the members of the Audit Committee is an independent director under NASDAQ Rule 4200. The Audit Committees functions and responsibilities are described in a written policy
statement and charter that was adopted by the Companys Board of Directors. The Board of Directors has determined that both Mr. Thorn and Mr. Niermeyer qualify as an audit committee financial expert under rules promulgated by the
Securities and Exchange Commission.



Code of Ethics



The Company has adopted a code of ethics that applies to all employees, as well as each
member of the Companys Board of Directors. The code of ethics is available at the Companys website at www.bsbbank.com.



SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE



Section 16(a) of the Exchange Act requires the Companys directors and certain officers, and persons who beneficially own more than 10% of a registered class of the
Companys equity securities to file reports of ownership and changes in ownership with the Commission. Based solely on its review of the reports submitted to the Company, or written representations from certain reporting persons, the Company
believes that during fiscal 2003 all Section 16(a) filing requirements applicable to its directors, officers and greater than 10% beneficial owners were complied with on a timely basis, except Messrs. Brock, Decker, Denniston, Driscoll, Johnson, Le
Beau, Sharp, Smith and Wiley, who each had made a one day late filing, covering one transaction for each individual.



86



---

##### Table of Contents

|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



Summary Compensation Table



The following table sets forth the total compensation paid or accrued for the last three fiscal years for our chief executive officer, and each of the other four most highly compensated executive officers (collectively referred to as the
Named Executive Officers).



|                                                                                          |  |                     |  |            |                                      |     |                             |     |                     |                              |  |                    |     |  |     |                 
|----------------------------------------------------------------------------------------- |  | ------------------- |  | ---------- | ------------------------------------ | --- | --------------------------- | --- | ------------------- | ---------------------------- |  | ------------------ | --- |  | --- | ----------------
|                                                                                          |  |                     |  |            |                                      |     | Long TermCompensationAwards |     |                     | All OtherCompensation ($)(1)
|                                                                                          |  | Annual Compensation |  |            | SecuritiesUnderlyingOptions/SARs (#) |     |                            
|Name and Principal Position                                                               |  | Year                |  | Salary ($) |                                      |     | Bonus ($)                   |     |                     |                             
|Howard W. Sharp President, Chief Executive Officer and Director                           |  | 200320022001        |  | $$$        | 378,596356,000288,692                |     |                             | $$$ | 163,36482,34361,030 |                              |  | 46,50420,25050,000 |     |  | $$$ | 6,0006,00033,318
|                                                                                          |  |                     |  |            |                                     
|John P. Driscoll Executive Vice President  Central New York of                           |  | 200320022001        |  | $$$        | 168,775168,775168,775                |     |                             | $$$ | 64,38830,59927,240  | (2)(3)(4)                    |  | 27,90412,150      |     |  | $$$ | 5,0635,0635,063 
|BSB Bank & Trust Co; Director of BSB Bancorp, Inc. and BSB Bank & Trust Co.               |  |                     |  |            |                                      |     |                             |     |                     |                              |  |                    |     |  |     |                 
|                                                                                          |  |                     |  |            |                                     
|William M. Le Beau Executive Vice President of BSB Bancorp, Inc. and BSB Bank & Trust Co. |  | 200320022001        |  | $$$        | 164,519159,644119,469                |     |                             | $$$ | 62,76428,94319,282  |                              |  | 27,90412,150      |     |  | $$$ | 4,9354,7892,213 
|                                                                                          |  |                     |  |            |                                     
|Arthur C. Smith Executive Vice President of BSB Bank & Trust Co.                          |  | 200320022001        |  | $$$        | 154,519153,438145,125                |     |                             | $$$ | 43,71427,11023,423  |                              |  | 23,70412,150      |     |  | $$$ | 4,3654,4864,354 
|                                                                                          |  |                     |  |            |                                     
|Randy J. Wiley Senior Vice President of BSB Bancorp, Inc. and BSB Bank & Trust Co.        |  | 200320022001        |  | $$$        | 148,194133,35370,584                 | (5) |                             | $$$ | 56,53624,17713,892  | (6)                          |  | 27,9047,72425,000  | (7) |  | $$$ | 4,4464,0011,931 

---

|(1) | Includes matching contributions under the Banks defined contribution plan.
|--- | ---------------------------------------------------------------------------

|(2) | Mr. Driscolls 2003 bonus consists of $16,097 paid in cash and $48,291 deferred.
|--- | --------------------------------------------------------------------------------

|(3) | Mr. Driscolls 2002 bonus consists of $7,650 paid in cash and $22,949 deferred.
|--- | -------------------------------------------------------------------------------

|(4) | Mr. Driscolls 2001 bonus consists of $6,810 paid in cash and $20,430 deferred.
|--- | -------------------------------------------------------------------------------

|(5) | Mr. Wiley joined the Company in May 2001.
|--- | -----------------------------------------

|(6) | Mr. Wileys 2001 bonus includes $2,500 paid as a hiring inducement.
|--- | -------------------------------------------------------------------

|(7) | Granted as a hiring inducement.
|--- | -------------------------------



87



---

##### Table of Contents

Stock Option Grants in Last Fiscal Year



The following table contains information concerning the stock option grants made to each of
the Named Executive Officers for the fiscal year ended December 31, 2003.



|                   |  |                                                      |  |                                                         |    |  |                               |            |                                                                                             |                     |        |    |                |  |    |                 
|------------------ |  | ---------------------------------------------------- |  | ------------------------------------------------------- | -- |  | ----------------------------- | ---------- | ------------------------------------------------------------------------------------------- | ------------------- | ------ | -- | -------------- |  | -- | ----------------
|                   |  | Individual Grants                                    |  |                                                         |    |  |                               |            | Potential Realizable Value at AssumedAnnual Rates of StockPrice Appreciationfor Option Term
|Name               |  | Number ofSecuritiesUnderlyingOptions/SARsGranted (#) |  | % of TotalOptions/SARsGranted toEmployeesin Fiscal Year |    |  | Exercise or Base Price ($/Sh) |            | Expiration Date                                                                             |                     | 5% ($) |    | 10% ($)       
|Howard W. Sharp    |  | 20,75225,752                                         |  | 9.18.9                                                  | %% |  | $$                            | 20.8239.50 |                                                                                             | 2/13/201312/31/2013 |        | $$ | 271,718639,714 |  | $$ | 688,5871,621,161
|                   |  |                                                      |  |                                                         |    | 
|John P. Driscoll   |  | 12,45215,452                                         |  | 5.55.3                                                  | %% |  | $$                            | 20.8239.50 |                                                                                             | 2/13/201312/31/2013 |        | $$ | 163,041383,848 |  | $$ | 413,179972,747  
|                   |  |                                                      |  |                                                         |    | 
|William M. Le Beau |  | 12,45215,452                                         |  | 5.55.3                                                  | %% |  | $$                            | 20.8239.50 |                                                                                             | 2/13/201312/31/2013 |        | $$ | 163,041383,848 |  | $$ | 413,179972,747  
|                   |  |                                                      |  |                                                         |    | 
|Arthur C. Smith    |  | 12,45211,252                                         |  | 5.53.9                                                  | %% |  | $$                            | 20.8239.50 |                                                                                             | 2/13/201312/31/2013 |        | $$ | 163,041279,515 |  | $$ | 413,179708,345  
|                   |  |                                                      |  |                                                         |    | 
|Randy J. Wiley     |  | 12,45215,452                                         |  | 5.55.3                                                  | %% |  | $$                            | 20.8239.50 |                                                                                             | 2/13/201312/31/2013 |        | $$ | 163,041383,848 |  | $$ | 413,179972,747  



Aggregated Option
Exercises in Last Fiscal Year

and Year-End Option Values



The following table sets forth information concerning option exercises and option holdings by each of the Named Executive Officers for the
fiscal year ended December 31, 2003.



|                   |  |                                |             |                   |               |                                                                         |             |                                                                          |               |  |   |           |  |   |        
|------------------ |  | ------------------------------ | ----------- | ----------------- | ------------- | ----------------------------------------------------------------------- | ----------- | ------------------------------------------------------------------------ | ------------- |  | - | --------- |  | - | -------
|Name               |  | Shares Acquired OnExercise (#) |             | ValueRealized ($) |               | Number of SecuritiesUnderlyingUnexercised Options AtFiscal Year End (#) |             | Value of UnexercisedIn-the-Money Options/SARs At Fiscal Year End ($) (1)
|                   |  |                                |            
|                   |  |                                | Exercisable |                   | Unexercisable |                                                                         | Exercisable |                                                                          | Unexercisable
|Howard W. Sharp    |  |                               |             | $                 |              |                                                                         | 155,062     |                                                                          | 61,692        |  | $ | 3,255,584 |  | $ | 591,926
|John P. Driscoll   |  |                               |             | $                 |              |                                                                         | 7,887       |                                                                          | 37,017        |  | $ | 136,150   |  | $ | 355,173
|William M. Le Beau |  |                               |             | $                 |              |                                                                         | 9,287       |                                                                          | 43,267        |  | $ | 203,348   |  | $ | 517,673
|Arthur C. Smith    |  |                               |             | $                 |              |                                                                         | 47,161      |                                                                          | 32,817        |  | $ | 752,549   |  | $ | 355,173
|Randy J. Wiley     |  |                               |             | $                 |              |                                                                         | 14,431      |                                                                          | 46,197        |  | $ | 273,097   |  | $ | 557,644

---

|(1) | Represents the closing price per share of the underlying shares on the last day of the fiscal year less the option exercise price multiplied by the number of shares.
The closing price per share was $39.50 on the last trading day of the fiscal year as reported on The NASDAQ National Market System.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



88



---

##### Table of Contents

Employment Agreements with Executive Officers



The Company and the Bank, which we collectively refer to as the Employer, have entered into the following employment contracts
and agreements with the Named Executive Officers:



Sharp Employment
Agreement. On October 22, 2001, the Employer entered into an Employment Agreement with Howard W. Sharp to serve as the President and Chief Executive Officer of the Employer (the Sharp Agreement) at an annual salary of no less than
$356,000 from October 22, 2001 until October 22, 2004 and the Employer may extend the term for one additional year on each annual anniversary date of the Sharp Agreement. Under the terms of the agreement, Mr. Sharp is entitled to certain benefits
including monthly membership dues for clubs in the Binghamton, New York area, reimbursement for reasonable business entertainment and travel expenses and participation in all the incentive, bonus, management recognition and benefit plans of the
Employer and health, disability and life insurance.



The Bank may terminate Mr.
Sharps employment at any time. In the event of an involuntary termination other than for cause (as defined in the Sharp Agreement), or a voluntary termination with good reason (as defined in the Sharp Agreement), the
Bank will continue to pay Mr. Sharp the same level of compensation for the remaining term of the Sharp Agreement, as well as all medical, prescription drug, dental, and disability benefits, and employee life, group life, and other insurance that Mr.
Sharp received before the termination, except to the extent such medical, prescription drug and dental benefits are available to Mr. Sharp from a subsequent employer. If an involuntary termination without cause is effected at the request or
direction of an acquiring party before a change in control (as defined in the Sharp Agreement) or an involuntary termination without cause or a voluntary termination with good reason, occurs within 12 months following a change in
control, the Bank shall pay Mr. Sharp a lump sum cash payment equal to 2.99 times the average annual cash compensation paid by the Employer to Mr. Sharp for the five calendar years (or the term of his employment, if less than five years) before the
change in control. In such case, the options referred to above would be fully vested and exercisable. If any payments to Mr. Sharp constitute excess parachute payments under Section 280G of the Code, the Employer is required to pay the
executive an additional payment, referred to as a gross-up payment, sufficient to enable the executive to pay the excise tax described in Section 4999 of the Code imposed on the excess parachute payment, plus taxes on the additional payment. In the
event of a voluntary termination without good reason or an involuntary termination of Mr. Sharps employment for cause by the Employer, Mr. Sharp has no right to compensation under the Sharp Agreement. Following termination of Mr. Sharps
employment, the Employer will have the right to enjoin his employment with any significant competitor (as defined in the Sharp Agreement) for the lesser of one year or the remaining employment term plus six months.



On December 24, 2003, the Company announced that it entered into a definitive merger
agreement pursuant to which it will be acquired by Partners Trust Financial Group, Inc. (the Acquisition). Prior to the effective date of the Acquisition, and in accordance with the terms of the merger agreement, the Company may enter
into agreements or amend current employment, change of control and SERP agreements with any or all of its named executive officers and certain other officers, to provide for payments and benefits that are in addition to those to which such employees
are currently entitled and may pay any payments and benefits under any such arrangements; provided, however, that in no event shall the cost of the severance and benefit commitments under the current arrangements and any such enhancements exceed
$17.5 million, subject to certain limitations. In this regard, it is currently expected that Mr. Sharps existing employment agreement with the Company would be amended to provide for severance equal to three times his annual base salary and
2003 annual bonus, and that this amount would be paid to him immediately prior to the completion of the Acquisition.



Sharp Target Benefit Supplemental Retirement Benefit Agreement. The Company and Mr. Sharp entered into a Target Benefit Supplemental Retirement Benefit Agreement,
dated October 30, 2003, providing for a target benefit supplemental retirement benefit and the deferral of compensation. In connection with the Acquisition, Mr. Sharp will become 100% vested in his benefits under this agreement and be entitled to an
enhanced supplemental retirement benefit.



Driscoll Employment
Agreement. On May 31, 2000, March 16, 2001, February 21, 2002, and November 25, 2002, the Employer entered into agreements to amend the Employment Agreement dated January 25, 1999, between the Employer and Mr. Driscoll, the former Chairman,
President and Chief Executive Officer of Skaneateles Bancorp, Inc. (the Amended Driscoll Agreement). Under the terms of the Amended Driscoll Agreement, Mr. Driscoll will serve as the Executive Vice President of the Employer until June
30, 2004 at an annual salary of no less than $147,660. In addition, Mr. Driscoll is entitled to certain benefits including monthly membership dues for clubs, the use of a company car, reimbursement for reasonable business entertainment and travel
expenses, participation in all the incentive, bonus, management recognition and benefit plans of the Employer, health, disability and life insurance, and a carry-over of any vested retirement benefits to which he was entitled under any former
Skaneateles Bancorp, Inc. benefit plans.





89



---

##### Table of Contents

The Company and the Bank may terminate Mr. Driscolls employment at any time. In the event of an involuntary
termination other than for cause (as defined in the Amended Driscoll Agreement), or a voluntary termination with good reason (as defined in the Amended Driscoll Agreement), the Employer is required to continue to pay Mr.
Driscoll the same level of compensation for the remaining term of the Amended Driscoll Agreement, as well as all medical, prescription drug, dental, and disability benefits, and employee life, group life, and other insurance that Mr. Driscoll and
his family received before the termination, except to the extent such medical, prescription drug and dental benefits are available to Mr. Driscoll from a subsequent employer. Mr. Driscoll is not entitled to any payments that would constitute a
parachute payment within the meaning of Section 280G(b)(2) of the Code. In the event of a voluntary termination without good reason or an involuntary termination of Mr. Driscolls employment for cause by the Employer, Mr. Driscoll
has no right to compensation under the Amended Driscoll Agreement. If Mr. Driscoll voluntarily terminates his employment before June 30, 2004 without good reason and without the approval of the Employers Boards of Directors, he is prohibited
from entering into any other employment with a significant competitor of the Bank (as defined in the Amended Driscoll Agreement) for one year or until after December 31, 2004, whichever is less.



Driscoll Supplemental Retirement Agreement.On March 16, 2001, the Bank and Mr.
Driscoll entered into Amendment Number 1 to the Supplemental Retirement Agreement, dated as of January 1, 1998 among Mr. Driscoll, Skaneateles Bancorp, Inc. and Skaneateles Savings Bank (the SRA). Under the SRA, Mr. Driscoll is entitled
to a supplemental retirement benefit equal to the pension benefit he would have received under the Banks qualified retirement plan if he were fully vested under such plan. If Mr. Driscolls employment with BSB terminates prior to July 1,
2004, Mr. Driscolls accrued annual supplemental defined benefit under the SRA as of December 31, 2003 would be $15,190 using the straight life annuity option.



Smith Employment Agreement. On December 28, 2000, the Employer entered into a two-year employment agreement with Arthur C. Smith (the
Smith Agreement) that replaced in its entirety the Amended and Restated Change of Control Severance Agreement between the Employer and Mr. Smith, dated June 28, 1999. The term of this Agreement will automatically renew for one year on
each anniversary of the date the agreement was entered into unless either the Employer or the executive gives contrary written notice to the other such party. Under the Smith Agreement, Mr. Smith will serve as the Executive Vice President 
Retail Banking Officer of the Employer at an annual salary of no less than $135,000. In addition, Mr. Smith is entitled to certain benefits including reimbursement for reasonable business entertainment and travel expenses and participation in all
the incentive, bonus, management recognition and benefit plans of the Employer, and all health, disability and life insurance benefits of the Employer.



The Employer may terminate Mr. Smiths employment at any time. In the event of an involuntary termination other than for cause (as defined in the Smith
Agreement), or a voluntary termination for good reason (as defined in the Smith Agreement), the Employer is required to continue to pay the terminated executive the same level of compensation for either 24 months after the date of
termination or until the executive attains the age of 65, whichever is earlier, as well as all medical, prescription drug, dental, and disability benefits, and employee life, group life, and other insurance that the terminated executive and his
family received before the termination, except to the extent such medical, prescription drug and dental benefits are available from a subsequent employer. If any payments to Mr. Smith constitute excess parachute payments under Section
280G of the Code, the Employer is required to pay the executive an additional payment, referred to as a gross-up payment, sufficient to enable the executive to pay the excise tax described in Section 4999 of the Code imposed on the excess parachute
payment, plus taxes on the additional payment. In the event of a voluntary termination without good reason or an involuntary termination of the executives employment for cause by the Employer, the executive shall have no right to compensation
under his employment agreement. If Mr. Smith terminates his employment before the end of the term without the approval of the Board of Directors of the Bank and without good reason, the Bank will be entitled to enjoin the employment of
the executive with any significant competitor (as defined in the Smith Agreement) of the Bank for the lesser of a period of one year or the remaining term plus six months.



90



---

##### Table of Contents

Le Beau and Wiley Change of Control Agreements. The Employer entered into a three-year Change of Control Severance
Agreement with William M. Le Beau, Executive Vice President - Risk Management, on December 6, 2000 (the Le Beau Severance Agreement). The Employer entered into a three-year Change of Control Severance Agreement with Randy J. Wiley,
Senior Vice President and Treasurer, on May 14, 2001 (the Wiley Severance Agreement). Each Severance Agreement provides that the term of the Severance Agreement will be extended automatically by one year on each anniversary date of the
Severance Agreement, unless the Employer or the respective executive provides contrary written notice to the other party 180 days prior to the anniversary date.



If the executives employment under the Severance Agreement is terminated (1) for any reason before a change in control (as defined in the Severance
Agreement); (2) after a change in control, by the Employer for good cause (as defined in the Severance Agreement); or (3) by the voluntary action of the executive without good reason (as defined in the Severance Agreement),
the Employer is required to pay the executive his base salary through the date of termination, and the Employer shall have no further obligation to the executive or his spouse under the Severance Agreement, except for the payment of certain accrued
benefits.



If the executives employment under the Severance Agreement is
terminated involuntarily without good cause or voluntarily with good reason (1) before a change in control at the request or direction of the acquiring party, or (2) within 12 months after a change in control, the Employer is required to pay the
executive for a period of up to three years a salary equal to the higher of the executives base salary on the date of the change in control or the date of termination of employment, and other benefits.



If any payments to Mr. Le Beau or Mr. Wiley under their respective Severance Agreement are
subject to the excise tax described in Section 4999 of the Code, the Employer is required to pay the executive an additional payment, referred to as a gross-up payment, to equal the excise tax imposed on the payments, plus taxes imposed on the
additional payment. The Severance Agreements do not contain any provision restricting the right to compete against the Bank upon termination of employment.



Mr. Wiley and the Employer entered into a letter agreement, executed December 23, 2003, (the Wiley Letter Agreement) amending the Wiley Severance Agreement to
provide that immediately prior to the Acquisition, Mr. Wiley is entitled to a lump sum cash payment (exclusive of any applicable gross-up payment) equal to $619,493 in full satisfaction of Employers severance obligations under the Wiley
Severance Agreement. Mr. Le Beau and the Employer entered into a letter agreement, executed December 23, 2003, (the Le Beau Letter Agreement) amending the Le Beau Severance Agreement to provide that immediately prior to the Acquisition,
Mr. Le Beau is entitled to a lump sum cash payment (exclusive of any applicable gross-up payment) equal to $683,100 in full satisfaction of the Employers severance obligations under the Le Beau Severance Agreement.



Le Beau and Wiley Target Benefit Supplemental Retirement Benefit Agreements. On
October 30, 2003, the Employer entered into a Target Benefit Supplemental Retirement Benefit Agreement with each of Mr. Le Beau (the Le Beau Target Benefit Agreement) and Mr. Wiley (the Wiley Target Benefit Agreement). The
Wiley Letter Agreement referred to above also amended the Wiley Target Benefit Agreement to provide that immediately prior to the Acquisition, Mr. Wiley is entitled to a lump sum cash payment (exclusive of any applicable gross-up payment) equal to
$604,933 in full satisfaction of the Employers obligations under the Wiley Target Benefit Agreement. The Le Beau Letter Agreement referred to above also amended the Le Beau Target Benefit Agreement to provide that immediately prior to the
Acquisition, Mr. Le Beau is entitled to a lump sum cash payment (exclusive of any applicable gross-up payment) equal to $601,841 in full satisfaction of the Employers obligations under the Le Beau Target Benefit Agreement.



Deferred Compensation and Post Retirement Benefits



Executive employees may elect to defer the receipt of compensation income pursuant to a
non-qualified deferred compensation agreement with the Bank. Interest is credited on the deferred amounts at a rate equal to the Banks earning asset yield. The Company also provides certain life and health insurance benefits to substantially
all employees and eligible retirees through an unfunded plan. The Company makes contributions to the plan, as premiums are due. Retiree contributions may be required based upon years of service with the employer and the retirees election for
dependent coverage provided under the plan.



91



---

##### Table of Contents

Employee Defined Benefit Plans



The following table illustrates current annual pension benefits under the Companys defined benefit retirement plan for retirement in
2003 at age 65 under the most advantageous provisions available for various levels of compensation, years of service, and full Social Security benefits. Pension benefits are currently subject to an annual statutory maximum of $160,000, subject to
cost-of-living adjustments. Additionally, annual compensation in excess of $200,000 (subject to cost of living increases) may not be used in calculation of retirement benefits.



|                     |   |                          |    |        |    |        |    |        |    |         |    |         |    |        
|-------------------- | - | ------------------------ | -- | ------ | -- | ------ | -- | ------ | -- | ------- | -- | ------- | -- | -------
|Final Average Salary |   | Years of Benefit Service
|                     | 5 |                          | 10 |        | 15 |        | 20 |        | 25 |         | 30 |         | 35
|75,000               |   | 7,500                    |    | 15,000 |    | 22,500 |    | 30,000 |    | 37,500  |    | 45,000  |    | 45,000 
|100,000              |   | 10,000                   |    | 20,000 |    | 30,000 |    | 40,000 |    | 50,000  |    | 60,000  |    | 60,000 
|125,000              |   | 12,500                   |    | 25,000 |    | 37,500 |    | 50,000 |    | 62,500  |    | 75,000  |    | 75,000 
|150,000              |   | 15,000                   |    | 30,000 |    | 45,000 |    | 60,000 |    | 75,000  |    | 90,000  |    | 90,000 
|160,000              |   | 16,000                   |    | 32,000 |    | 48,000 |    | 64,000 |    | 80,000  |    | 96,000  |    | 96,000 
|170,000              |   | 17,000                   |    | 34,000 |    | 51,000 |    | 68,000 |    | 85,000  |    | 102,000 |    | 102,000
|200,000              |   | 20,000                   |    | 40,000 |    | 60,000 |    | 80,000 |    | 100,000 |    | 120,000 |    | 120,000



A participants normal retirement
benefit is equal to 2% of the average annual earnings, multiplied by the number of years and fraction thereof of creditable service. Average annual earnings represent payment made during the 36 consecutive calendar months of highest earnings during
the final 120 calendar months of the employees creditable service. In no event, however, may the normal retirement benefit exceed 60% of average annual earnings. Pension allowances are based on 2% of the employees average basis annual
earnings excluding overtime, bonus, or other special payments. Pension benefits are computed on a straight life annuity benefit.



The periods of creditable service as of December 31, 2003 for Messrs. Sharp, Driscoll, Le Beau, Smith and Wiley were 37 months, 54 months, 3 years, 36 years and 30
months, respectively.



Certain officers of the Company may also receive
incremental retirement benefits from the Company pursuant to certain Target Benefit Supplemental Retirement Benefit Plans (Target Benefit Plans), which became effective October 30, 2003. The Target Benefit Plans are non-qualified plans
covering Messrs. Sharp, Brock, Decker, Denniston, Le Beau and Wiley and are intended to make up for certain limitations in compensation under the qualified pension plan. The target benefit is calculated based on service and compensation projected to
age 65 including bonus amounts and compensation in excess of the IRC Section 401(a)(17) limitations. In addition, the plan recognizes service worked with prior employers for select individuals. The Company contributes a flat percentage of pay each
year for each participant based on the present value of the target benefit at normal retirement age (65). The benefit payable to the individual at age 65 is the account balance of the employer contribution, credited with earnings. For the year ended
December 31, 2003, the Company made $258,211 in contributions to the Target Benefit Plans.



Compensation of Directors



Directors Fees. Directors of the Company did not receive any fees in their roles as directors of the Company during 2003. In 2003, for the period through April 28, 2003, with the exception of Mr. Craine, the directors received
an annual retainer of $12,000 with $1,000 paid monthly, plus $500 for each Bank Board meeting attended. Also, during that same time period, each committee member received a fee of $500 per meeting attended and the Chairman of each of the Audit
Committee, the Salary and Personnel Administration Committee, Nominating and Corporate Governance Committee and the Trust Committee received fees of $600 per meeting attended. In 2003, through April 28, 2003, each non-rotating member of the
Banks Executive Committee scheduled to serve for the entire year received an annual retainer of $2,400 paid monthly and rotating members of the Executive Committee received fees of $500 per meeting attended.



92



---

##### Table of Contents

Effective April 28, 2003, the annual retainer fee was increased to $15,000, with $1,250 paid monthly, plus $600 for each
Bank Board meeting attended and each committee member received a fee of $600 per meeting attended, except for members of the Audit Committee, who received $1,200 per meeting attended. Non-rotating members of the Executive Committee who served from
April 28, 2003 through the remainder of the year received $400 per month. Beginning April 28, 2003, the Chairman of each of the Salary and Personnel Committee, Nominating and Corporate Governance Committee and the Trust Committee each were entitled
to receive a fee of $1,200 per meeting attended, the Chairman of the Audit Committee was entitled to receive $1,500 per meeting attended. In 2003, there was one Salary and Personnel Committee meeting, two Nominating and Corporate Governance
Committee meetings, three Trust Committee meetings and five Audit Committee meetings. Also beginning April 28, 2003, the Chairman of the Executive Committee was entitled to receive a monthly fee of $800. During 2003, Mr. Craine served as Chairman of
each of the Executive Committee and the Trust Committee and waived the fees discussed above in consideration of his receipt of fees as Chairman of the Board of Directors of the Bank, as discussed below. No fees were paid to officers of the Company
who are also directors of the Company and the Bank. Directors may elect to defer the receipt of all or a portion of their fees pursuant to a non-qualified deferred compensation agreement. Interest is credited on the deferred amounts at a rate equal
to the Banks earning asset yield.



As Chairman of the Board of Directors
of the Company and the Bank, Mr. Craine received a monthly director fee of $8,500. This monthly fee was in lieu of all fees Mr. Craine otherwise would be entitled to receive as a director, including retainers and fees for attending board or
committee meetings. Mr. Craine is not an executive officer of either the Company or the Bank and does not participate in any cash bonus or stock option compensation plans established for the benefit of executive officers of the Company or the Bank.
Mr. Craine will continue to participate in the Companys Directors Stock Option Plan.



Directors Stock Option Plan. The purpose of the Directors Stock Option Plan is to enhance the Companys ability to attract and retain highly qualified individuals to serve as members of the
Companys Board of Directors and to provide additional incentives to non-employee directors to promote the success of the Company. Pursuant to the Directors Stock Option Plan, Messrs. Akel, Allen, Craine, Niermeyer, ONeil and Thorn,
Mrs. Bendz and Mrs. Higbee each received a grant of a non-qualifying option for 2,250 shares of Common Stock at an exercise price of $21.18 per share on January 24, 2003, the fair market value of the date of the grant. To the extent shares remain
available for grant under the Directors Stock Option Plan, each non-employee director will receive in January of each year an option to purchase 2,250 shares at the fair market value on the date of grant. For 2004, the non-employee directors
each received an option for 2,250 shares at an exercise price of $38.10 per share, the fair market value on the date of grant, January 23, 2004. Mr. Akel retired from the Board of Directors in April 2003. Upon his resignation, and in accordance with
the Directors Stock Option Plan, Mr. Akel has the ability to exercise his options for a period of ten years from the grant date.



Company Compensation Committee and Bank Salary and Personnel Administration Committee Report on Executive Compensation



The Compensation Committee of the Company and the Salary and Personnel Administration
Committee of the Bank consist of the same four non-employee directors. Decisions on the compensation of the Companys executives, except with respect to stock options, are made by the Salary and Personnel Administration Committee of the Bank,
as the Companys executives do not receive separate compensation for their services as officers of the Company. The Compensation Committee of the Company has the authority to grant stock options to the Companys executives under the 1996
Long-Term Incentive and Capital Accumulation Plan (the 1996 Incentive Plan). For purposes of this report, the Salary and Personnel Administration Committee and the Compensation Committee are referred to together as the
Committee. All decisions by the Committee relating to the compensation of the Companys executive officers are reviewed by the full Board of Directors.



Set forth below is a report submitted by the Committee, addressing the Companys compensation policies for 2003 as they affected the
Companys executive officers.



93



---

##### Table of Contents

Compensation Policies for Executive Officers. The Committees executive compensation policies are designed to
provide competitive levels of compensation and assist the Company in attracting and retaining qualified executives. Target levels of executive officers overall compensation are intended to be consistent with peer banks in the northeastern
United States with assets between $1.0 billion and $5.0 billion. The Committee endorses the position that stock ownership by management and stock-based plans are beneficial in aligning managements and shareholders interests in the
enhancement of shareholder value. The Committee also endorses the position that cash bonuses tied to annual target levels for key financial performance objectives strengthen managements incentive to increase consolidated net income of the
Company.



Relationship of Performance to Executive Compensation.The
Companys named executive officers in 2003 were eligible for compensation consisting of the following components: base salary; cash profit sharing awards under the September 24, 2001 Performance Profit Sharing Plan, as amended January 1, 2003
(the Profit Sharing Plan); stock options under the 1996 Incentive Plan and the September 24, 2001 Performance Stock Option Plan, as amended January 1, 2003 (the Stock Option Plan); benefits under the Banks defined
retirement plan and defined contribution plan; and certain other benefits. The purpose of the Profit Sharing Plan and the Stock Option Plan is to provide awards to employees, who, through high levels of performance, contribute to the success and
profitability of the Company and the Bank, and to further align the economic interests of the award recipients with the interests of the Companys stockholders. The plans are designed to support organization objectives and financial goals, as
defined by the Companys strategic and financial plans by making available additional, variable and contingent compensation.



Base Salary.The Committee reviews executive base salaries annually. The 2003 base salaries for the Chief Executive Officer and for the other executive officers
were set within established salary ranges, which are based upon responsibility, experience and company performance. Base salaries are also designed to be competitive with peer banks in the northeastern United States with assets between $1.0 billion
and $5.0 billion.



Cash Profit Sharing Awards.The Performance
Profit Sharing Plan, adopted on September 24, 2001 and amended effective January 1, 2003 (the Profit Sharing Plan) by the Board of Directors establishes performance targets, including goals for the Companys return on equity and
return on assets, as well as the Banks net interest margin and non-performing assets to loan ratio. In addition, the Profit Sharing Plan establishes certain individual performance requirements. The executive officers of the Bank participated
in the Profit Sharing Plan in 2003. The maximum cash bonus that could be paid to the Chief Executive Officer under the Profit Sharing Plan was 50% of base salary; the maximum cash bonus to the other executive officers was 45% of base salary. The
Profit Sharing Plan also provided that no bonus could be paid out under the Profit Sharing Plan unless the Company declared and paid four quarterly dividends during 2003. A participant in the Profit Sharing Plan was not eligible for a bonus under
the Profit Sharing Plan if the participant terminated employment during 2003 (other than because of disability, retirement or death), received an unsatisfactory performance review rating or failed to meet the requirements of the individual
performance criteria, unless the Board or the Salary and Personnel Administration Committee of the Bank determined otherwise. Bonuses pursuant to the Profit Sharing Plan were paid in a lump sum on December 31, 2003.



Stock Options. The Companys 1996 Incentive Plan provides long-term incentives to
key employees, including executive officers, through the grant of stock options. The grant of stock options is intended to foster management team cohesion and align management and shareholder interests. Stock option grants provide additional
incentives for executive officers. The Company believes that the grant of stock options can be used to encourage performance that can result in enhanced shareholder value. The Board of Directors of the Company adopted a Performance Stock Option Plan
on September 24, 2001, as amended on January 1, 2003, to establish specific criteria that must be met to qualify for stock option awards under the 1996 Incentive Plan. For 2002 and 2003, the performance criteria set to qualify for stock option
awards were the same as under the Profit Sharing Plan. Options based on satisfaction of such criteria in 2002 were granted by the Compensation Committee on February 13, 2003, and options based on satisfaction of such criteria in 2003 were granted by
the Compensation Committee on December 31, 2003. All options were granted at the current market price on the date of grant.



94



---

##### Table of Contents

Other. In addition to the compensation paid to executive officers as described above, executive officers receive,
along with and on the same terms as other employees, benefits pursuant to the Banks defined benefit retirement plan and matching contributions under the Banks defined contribution plan. The executive officers also receive group term life
insurance on the same terms as other employees, and certain other prerequisites.



Chief Executive Officer Compensation.From January 1, 2003 to February 3, 2003, Mr. Sharps base salary was $356,000. From February 3, 2003 through December 31, 2003, Mr. Sharps base salary was $381,000. Mr. Sharp
received options for 46,504 shares of Common Stock during 2003 pursuant to the Companys 1996 Incentive Plan. Among the considerations for establishing the salary of the CEO for 2003 was a review of the performance of the Company in certain key
areas of performance for the year 2002, including progress in: improving commercial credit underwriting and administration; restructuring of the Companys asset mix, including reducing the size of the commercial and industrial loan portfolio by
$259.4 million in 2002; increasing the real estate loan portfolio by $121.5 million; increasing indirect auto loan originations by 72.5%; increasing the allowance to non-performing loans ratio to 125.0% as of December 31, 2002 versus 97.0% as of
December 31, 2001; and maintaining a strong capital ratio which significantly exceeded the Federal Reserve Board requirements for a well-capitalized financial institution. The Committee also considers appropriate comparative salaries for
other chief executive officers of peer banks in setting Mr. Sharps base salary.



Internal Revenue Code Section 162(m). In 1993, the IRC was amended to disallow publicly traded companies from receiving a tax deduction on compensation paid to executive officers in excess of $1 million (Section 162(m) of the IRC),
unless, among other things, the compensation meets the requirements for performance-based compensation. In structuring the Companys compensation programs and in determining executive compensation, the Committee takes into consideration the
deductibility limit for compensation.



Compensation
Committee



Robert W. Allen (Chairman)

Diana J. Bendz

David A. Niermeyer

Mark T. ONeil, Jr.



Compensation Committee and Salary and Personnel Administration Committee Interlocks and Insider Participation: Transactions with Management and Others



In fiscal 2003, the Bank had outstanding commercial real estate loans and commercial
loans secured by real estate to Apalachin Development LLC and Newman Development Group of CP, LLC, outstanding, unsecured commercial loans to TSM LLC and Lane Associates, LLC, as well as unsecured standby letters of credit to Town Square Mall
Associates, L.L.C., Campus Plaza, L.L.C. and Parkway Plaza L.L.C. and Newman Development Group of Dickinson, LLC, each of which was guaranteed by Mr. Akel. Mr. Akel is a former director of the Bank and member of the Compensation Committee until his
retirement in April 2003.Mr. Akel is a member of each of the LLCs and holds a 162/3% interest in each of
the LLCs listed above, except for an 11.1% interest in each of Apalachin Development LLC and Newman Development Group of Dickinson, LLC and no ownership interest in Lane Associates, LLC. The Bank has extended loans to one limited liability
corporation and to one group of individuals for the purpose of purchasing property owned, in part, by Mr. Akel. In fiscal 2003, the Bank also had outstanding commercial loans, secured by accounts receivable, inventory and equipment to Stakmore Co.,
Inc., each guaranteed by Mr. Niermeyer. Mr. Niermeyer is the President and Chief Executive Officer of Stakmore Co., Inc. The Bank believes that the foregoing loans, letters of credit and the guarantees, as applicable, by Mr. Akel and Mr. Niermeyer
were made in the ordinary course of business of the Bank on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. The Bank also believes the loans and
the guarantees did not involve more than the normal risk of collectability nor present any other unfavorable features.



95



---

##### Table of Contents

For the year ended December 31, 2003, the Bank paid an aggregate of $188,358 to Binghamton Giant Markets, Inc. of which
Mr. Akel is President and a principal stockholder. The payment reflects fees paid in connection with transactions on the Banks StoreTeller electronic facilities maintained at food markets owned by Binghamton Giant Markets, Inc. at market terms
in the ordinary course of business.



Comparative Company Performance



The following line graph sets forth comparative information regarding the
Companys cumulative shareholder return on its Common Stock over the last five fiscal years. Total shareholder return is measured by dividing total dividends (assuming dividend reinvestment) plus share price change for a period by the share
price at the beginning of the measurement period. The Companys cumulative shareholder return based on an investment of $100 at the beginning of the five year period beginning December 31, 1998 is compared to the cumulative total return of The
NASDAQ Stock Market (U.S. Companies) and SNL Securities L.C. $1 billion to $5 billion Bank Index.



[GRAPHIC APPEARS HERE]



96



---

##### Table of Contents

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- | --------------------------------------------------------------



Stock Owned by Management



The following table sets forth information as of January 20, 2004, with respect to the Companys Common Stock beneficially owned by each director of the Company,
each of the named executive officers and by all directors and executive officers of the Company as a group.



|                                                                                     |  |                                                  |  |                 
|------------------------------------------------------------------------------------ |  | ------------------------------------------------ |  | ----------------
|Name of Beneficial Owner                                                             |  | Amount and Nature of Beneficial Ownership (b)(c) |  | Percent of Class
|Robert W. AllenDirector                                                              |  | 50,935                                           |  | *               
|                                                                                     |  |                                                 
|Diana J. BendzDirector                                                               |  | 19,000                                           |  | *               
|                                                                                     |  |                                                 
|William C. CraineDirector, Chairman of the Board                                     |  | 93,421                                           |  | 1.00%           
|                                                                                     |  |                                                 
|John P. DriscollDirector and Executive Vice President  Central New York of the Bank |  | 58,875                                           |  | *               
|                                                                                     |  |                                                 
|Ann G. HigbeeDirector                                                                |  | 28,271                                           |  | *               
|                                                                                     |  |                                                 
|William M. Le BeauExecutive Vice President  Risk Management                         |  | 60,020                                           |  | *               
|                                                                                     |  |                                                 
|David A. NiermeyerDirector                                                           |  | 29,425                                           |  | *               
|                                                                                     |  |                                                 
|Mark T. ONeil, Jr.Director                                                          |  | 29,816                                           |  | *               
|                                                                                     |  |                                                 
|Howard W. SharpDirector, President and Chief Executive Officer                       |  | 173,389                                          |  | 1.83%           
|                                                                                     |  |                                                 
|Arthur C. SmithExecutive Vice President  Retail Banking Officer                     |  | 81,057                                           |  | *               
|                                                                                     |  |                                                 
|Thomas L. ThornDirector                                                              |  | 244,837                                          |  | 2.63%           
|                                                                                     |  |                                                 
|Randy J. WileySenior Vice President and Treasurer                                    |  | 22,352                                           |  | *               
|                                                                                     |  |                                                 
|All Directors and Executive Officers as a group (16 persons)                         |  | 1,058,602                                        |  | 10.82%          

---

|* | less than one percent
|- | ---------------------



97



---

##### Table of Contents

|(a) | In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (Exchange Act), a person is deemed to be the beneficial owner, for purposes of this
table, of any shares of Common Stock if such person has or shares voting power and/or investment power with respect to the security, or has the right to acquire beneficial ownership at any time within 60 days from January 20, 2004. As used herein,
voting power includes the power to vote or direct the voting of shares and investment power includes the power to dispose or direct the disposition of shares. This table represents all shares as to which named individual
possessed sole or shared voting or investment power as of January 20, 2004, including shares held by, in the name of, or in trust for, spouse, and dependent children of named individual and other relatives living in the same household, even if
beneficial ownership has been disclaimed as to any of these shares by the individual.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | The table includes shares as to which certain directors and named executive officers are beneficial owners but not the sole beneficial owners and over which the persons named in the
table possess shared voting and/or shared investment powers as follows: Mr. Allen, 22,695 shares; Mr. Craine, 4,150 shares; Mr. Driscoll, 21,194 shares; Mrs. Higbee, 8,447 shares; Mr. ONeil, 9,566 shares; Mr. Smith, 27,745 shares; and Mr.
Thorn, 51,250 shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | The table includes shares with respect to which the directors and the named executive officers currently have the right to acquire or will have the right to acquire beneficial
ownership of Common Stock through the exercise of options within 60 days of January 20, 2004, as follows: Mr. Allen, 20,250 shares; Mrs. Bendz, 18,000 shares; Mr. Craine, 6,750 shares; Mr. Driscoll, 14,038 shares; Mrs. Higbee, 15,750 shares; Mr. Le
Beau, 15,437 shares; Mr. Niermeyer, 13,500 shares; Mr. ONeil, 20,250 shares; Mr. Sharp, 165,313 shares; Mr. Smith, 53,312 shares; Mr. Thorn, 13,500 shares; and Mr. Wiley, 19,473 shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Principal Shareholders



The following table presents information known to the Company regarding the beneficial ownership of Common Stock as of February 13, 2004 by
each person believed by management to be the beneficial owner of more than 5% of the outstanding Common Stock of the Company.



|                                                                          |  |                                                      |  |                                    |  
|------------------------------------------------------------------------- |  | ---------------------------------------------------- |  | ---------------------------------- | -
|Name and Address ofBeneficial Owner                                       |  | Number of Shares andNature of BeneficialOwnership(a) |  | Percent ofCommon Stock Outstanding |  
|Wellington Management Company, LLP (WMC)75 State StreetBoston, MA 02109 |  | 492,500                                              |  | 5.28                               | %

---

|(a) | In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of Common Stock if that persons has or
shares voting power or investment power over the security, or has the right to acquire beneficial ownership at any time within 60 days from February 10, 2004. For this table, voting power includes the power to vote or direct the voting of shares and
investment power includes the power to dispose or direct the disposition.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Based on the Schedule 13G/A dated February 13, 2004, WMC reports shared voting power over 261,500 shares and shared dispositive power over 492,500 shares. WMC also reports that the
shares are owned of record by clients of WMC and that WMC may be deemed to beneficially own these shares in its capacity as investment advisor. WMCs clients have the right to receive, or the power to direct the receipt of, dividends from, or
the proceeds from the sale of, such securities. No such client is known to have such right or power with respect to more than five percent of the Common Stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



98



---

##### Table of Contents

Equity Compensation Plan Information



The following table sets forth information regarding outstanding options and shares reserved for future issuance under the equity
compensation plans as of December 31, 2003.



|                                                           |  |                                                                                             |  |                                                                             |       |                                                                                                                                            |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------ | -------
|Plan Category                                              |  | Number of Securities to be issued upon exercise of outstanding options, warrants and rights |  | Weighted-average exercise price of outstanding options, warrants and rights |       | Number of securities remaining available for future issuance under equity compensation
plans (excluding securities reflected in column(a))
|                                                           |  | (a)                                                                                         |  | (b)                                                                         |       | (c)                                                                                                                                       
|Equity compensation plans approved by security holders     |  | 1,367,991                                                                                   |  | $                                                                           | 25.78 |                                                                                                                                            | 707,506
|Equity compensation plans not approved by security holders |  | -0-                                                                                         |  |                                                                             | -0-   |                                                                                                                                            | -0-    
|Total                                                      |  | 1,367,991                                                                                   |  | $                                                                           | 25.78 |                                                                                                                                            | 707,506



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



Directors and employees of the Company or the Bank are permitted to borrow from the Bank to the extent permitted by New York law and the regulations of the Board of
Governors of the Federal Reserve System. Under applicable New York law, the Bank may make first or second mortgage loans to directors and employees provided that each such loan is secured by the individuals primary residence. In addition, the
Bank makes consumer loans and commercial real estate and commercial business loans to directors and employees and related persons consistent with applicable law. Except as described below, all loans made by the Bank to directors and employees and
related entities have been 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. It is the belief of
management that, at the time of origination, these loans neither involved more than the normal risk of collectability nor presented any other unfavorable features.



Effective as of August 1997, the Bank adopted a policy permitting all directors and employees to obtain loans at preferential interest rates
and to obtain discounted processing fees. This policy was discontinued in May 2002 for directors and executive officers of the Bank. The Bank has extended home equity lines of credit, with preferential terms, at an interest rate of prime plus 1/2% for indebtedness of up to $30,000 and prime for indebtedness of more than $30,000 to several individuals. In
December 1998, the Bank extended a home equity line of credit to Mr. Rexford C. Decker, the Senior Vice President and Chief Financial Officer of the Company and the Bank; the largest aggregate amount of indebtedness outstanding at any time under Mr.
Deckers line of credit during fiscal 2003 and as of January 20, 2004 was $30,204 and $27,547, respectively. In January 1995, the Bank extended a home equity line of credit to Mr. Arthur C. Smith, Executive Vice President  Retail Banking
Officer of the Bank; there was no indebtedness on this line of credit either at any time in fiscal 2003, nor as of January 20, 2004. In April 2001, the Bank extended a home equity line of credit to Mr. Roy Brock, Senior Vice President  Human
Resources of the Company and the Bank; the largest aggregate amount of indebtedness outstanding at any time under Mr. Brocks line of credit during fiscal 2003 and as of January 20, 2004 was $59,905 and $59,830, respectively.



99



---

##### Table of Contents

The Bank has outstanding mortgage loans made in the ordinary course of business, on substantially the same terms,
including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and at the time of origination, did not involve more than the usual risk of collectability nor present any other unfavorable
features. Under the Banks policy of permitting discounted processing fees to employees and directors, Mr. Larry Denniston, Senior Vice President and Corporate Secretary, received a one point waiver on a mortgage loan in September 1998. The
interest rate on the 15-year maturity loan is 4.75% and the largest aggregate amount of indebtedness outstanding during fiscal 2003 and as of January 20, 2004 was $165,200 and $160,081 respectively. Mr. John Driscoll, Executive Vice President, also
received a one point waiver on a mortgage loan. Mr. Driscolls 15-year mortgage loan entered into in December 2001 has an interest rate of 5.75% and the largest aggregate amount of indebtedness outstanding during fiscal 2003 and as of January
20, 2004 was $143,508 and $136,633.



For a description of certain transactions
regarding Mr. Akel, Mr. Niermeyer and the Bank, see Compensation Committee and Salary and Personnel Administration Committee Interlocks and Insider Participation.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



Audit and Non-Audit Fees



The following table presents fees for professional audit services rendered by KPMG LLP for the audit of the Companys annual consolidated financial statements for
the years ended December 31, 2003 and December 31, 2002 and fees billed for other services rendered by KPMG LLP during those periods.



|                      |  |             |         |             |   |        
|--------------------- |  | ----------- | ------- | ----------- | - | -------
|                      |  | Fiscal 2003 |         | Fiscal 2002
|Audit Fees(1)         |  | $           | 364,000 |             | $ | 377,100
|Audit-Related Fees(2) |  |             | 18,500  |             |   | 11,475 
|Tax Fees(3)           |  |             | 44,235  |             |   | 56,909 
|All Other Fees(4)     |  |             | 4,400   |             |   | 71,100 
|Total                 |  | $           | 431,135 |             | $ | 516,584

---

|(1) | Audit Fees consist of fees billed for professional services rendered for the audit of the
Companys consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports, and services that are normally provided by KPMG LLP in connection with statutory and regulatory
filings or engagements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-Related Fees consist of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of the Companys consolidated financial statements and are not reported under Audit Fees. This category includes fees related to employee benefit plan audits.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax Fees consist of fees billed for professional services rendered for federal and state tax
compliance, tax advice and tax planning.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(4) | All Other Fees consist of fees for services other than the services reported above. In fiscal
2003, this category included fees related to advisory services related to the Sarbanes-Oxley Act of 2002. In fiscal 2002, this category mainly included fees related to advisory services in connection with item processing practices.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



100



---

##### Table of Contents

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor



Consistent with Securities and Exchange Commission requirements regarding auditor
independence, on February 12, 2004, the Audit Committee adopted a policy to pre-approve all audit and permissible non-audit services provided by the independent auditor. All engagements of the independent auditor to perform any audit services and
permissible non-audit services since February 12, 2004 have been pre-approved by the Audit Committee in accordance with the adopted policy. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular
service or category of services and is generally subject to a specific budget. The Audit Committee has delegated authority to the Chair of the Audit Committee to pre-approve up to $25,000 in audit and non-audit services. Any decisions by the Chair
of the Audit Committee under this delegated authority will be reported at the next meeting of the Audit Committee. The Supervisor of Internal Audit is required to report, on a quarterly basis, to the Audit Committee regarding the extent of services
provided by the independent auditor in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.



All engagements of the independent auditor to perform any audit services and permissible
non-audit services prior to the implementation date for the pre-approval policy were pre-approved by the Audit Committee in accordance with its normal functions.



101



---

##### Table of Contents

PART IV



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



|       |  |                                                                                                                                                                                    
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)(1) |  | Financial Statements.                                                                                                                                                              
|       | 
|       |  | The information required by this item is included in Item 8 of Part II of this report.                                                                                             
|       | 
|(a)(2) |  | Financial Statement Schedules.                                                                                                                                                     
|       | 
|       |  | The information required by this item is included in Item 8 of Part II of this report.                                                                                             
|       | 
|(a)(3) |  | Exhibits.                                                                                                                                                                          
|       | 
|       |  | See Item 15(c).                                                                                                                                                                    
|       | 
|(b)    |  | Reports on Form 8-K.                                                                                                                                                               
|       | 
|       |  | The Company filed the following Current Reports on Form 8-K during the fourth quarter of 2003 or through the file date:                                                            
|       | 
|       |  | Current Report on Form 8-K filed with the Securities and Exchange Commission (the SEC) on October 22, 2003 announcing earnings for the quarter ended September 30,
2003.         
|       | 
|       |  | Current Report on Form 8-K filed with the SEC on November 7, 2003 announcing the sale of certain loans in its commercial loan portfolio.                                           
|       | 
|       |  | Current Report on Form 8-KA filed with the SEC on December 23, 2003 amending the Current Report on Form 8-K filed on May 26, 1999.                                                 
|       | 
|       |  | Current Report on Form 8-K filed with the SEC on December 24, 2003 announcing that the Company entered into a definitive merger agreement with Partners Trust Financial Group,
Inc.
|       | 
|       |  | Current Report on Form 8-K filed with the SEC on January 30, 2004 announcing earnings for the quarter and year ended December 31, 2003.                                            
|       | 
|(c)    |  | Exhibits.                                                                                                                                                                          
|       | 
|       |  | The following exhibits are either filed as part of this Annual Report on Form 10-K, or are incorporated herein by reference:                                                       



|              |  |                                                                                                                                                                                                                                                                                                                                       
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Index
|              | 
|No.           |  | Exhibit                                                                                                                                                                                                                                                                                                                               
|2.1           |  | Agreement and Plan of Merger, dated as of December 23, 2003, by and among Partners Trust Financial Group, Inc., SBU Bank, Partners Trust, MHC, Wicked Acquisition Corporation and BSB Bancorp,
Inc. (incorporated by reference from Exhibit 2.1 to the Companys Current Report on Form 8-K, filed with the SEC on December 29, 2003).
|              | 
|3.1           |  | Certificate of Incorporation, as amended by the Certificate of Amendment dated May 24, 1993 and the Certificate of Amendment dated April 22, 1996 (incorporated by reference from Exhibit 3.1
to the Quarterly Report on Form 10-Q of BSB Bancorp, Inc. (the Company) for the quarter ended March 31, 1996).                        



102



---

##### Table of Contents

|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|3.2  |  | Form of Amended Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and form of Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock (incorporated by reference from Exhibit 99.2 to the Companys Current Report on Form 8-K, filed with the SEC on May 26, 1999).
|     | 
|3.3  |  | Bylaws, as amended (incorporated by reference from Exhibit 3 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).                                                                                                                                                                                                                 
|     | 
|4.1  |  | Specimen common stock certificate (incorporated herein by reference from Exhibit 4 to the Companys Registration Statement on Form S-4, filed with the SEC on March 2,
1988).                                                                                                                                                                                     
|     | 
|4.2  |  | Rights Agreement, dated as of May 24, 1999, between the Company and American Stock Transfer & Trust Company (incorporated herein by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K, filed with the SEC on May 26, 1999).                                                                                                                   
|     | 
|4.3  |  | Amendment, dated as of December 23, 2003, to the Rights Agreement, dated as of May 24, 1999, between BSB Bancorp, Inc. and American Stock Transfer & Trust Company, Rights
Agent.                                                                                                                                                                                 
|     | 
|10.0 |  | Long-Term Incentive and Capital Accumulation Plan, as amended (incorporated herein by reference to Exhibit A to the Companys Definitive Proxy Statement for the 1990 Annual Meeting of
Shareholders).                                                                                                                                                            
|     | 
|10.1 |  | 1996 Long-Term Incentive and Capital Accumulation Plan (incorporated by reference to Exhibit A to the Companys Definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders).                                                                                                                                                                          
|     | 
|10.2 |  | Amendment Number 1 to 1996 Long-Term Incentive and Capital Accumulation Plan (incorporated herein by reference to Exhibit 10 to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).                                                                                                                                                 
|     | 
|10.3 |  | Amendment Number 2 to 1996 Long-Term Incentive and Capital Accumulation Plan (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the period
ended March 31, 1999).                                                                                                                                                      
|     | 
|10.4 |  | Amendment Number 3 to 1996 Long-Term Incentive and Capital Accumulation Plan (incorporated herein by reference to Exhibit 10.5 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2002).                                                                                                                                                 
|     | 
|10.5 |  | Amendment Number 4 to 1996 Long-Term Incentive and Capital Accumulation Plan dated January 27, 2003 (incorporated by reference to Exhibit 4.5 to Companys Form S-8 Registration Statement
filed June 10, 2003).                                                                                                                                                  
|     | 
|10.6 |  | Amendment Number 5 to the 1996 Long-Term Incentive and Capital Accumulation Plan effective February 24, 2003 (incorporated by reference to Exhibit 4.6 to Companys Form S-8 Registration
Statement filed June 10, 2003).                                                                                                                                         
|     | 
|10.7 |  | Amendment Number 6 to the 1996 Long-Term Incentive and Capital Accumulation Plan effective April 28, 2003 (incorporated by reference to Exhibit 4.7 to Companys Form S-8 Registration
Statement filed June 10, 2003).                                                                                                                                            
|     | 
|10.8 |  | Amendment Number 7 to the 1996 Long-Term Incentive and Capital Accumulation Plan effective April 28, 2003 (incorporated by reference to Exhibit 4.8 to Companys Form S-8 Registration
Statement filed June 10, 2003).                                                                                                                                            



103



---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.9  |  | Directors Stock Option Plan (incorporated herein by reference to Exhibit A to the Companys Definitive Proxy Statement for the 1994 Annual Meeting of
Shareholders).                                                                                                                                                                                                                                                  
|      | 
|10.10 |  | Employment Agreement, entered into as of October 22, 2001, by and among the Company, the Bank and Howard W. Sharp (incorporated herein by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).                                                                                                                                                          
|      | 
|10.11 |  | Employment Agreement, entered into as of January 25, 1999, by and among the Company, the Bank and John P. Driscoll (incorporated herein by reference to Exhibit 10.13 to the Companys
Annual Report on Form 10-K for the year ended December 31, 1999).                                                                                                                                                               
|      | 
|10.12 |  | Amendment to Employment Agreement, entered into as of May 31, 2000, by and among the Company, the Bank and John P. Driscoll (incorporated herein by reference to Exhibit 10.14 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2000).                                                                                                                                                      
|      | 
|10.13 |  | Amendment Number #1 to Supplemental Retirement Agreement among Skaneateles Bancorp, Inc., Skaneateles Savings Bank and John P. Driscoll dated January 1, 1998, entered into as of March 16,
2001, by and among BSB Bancorp, Inc., BSB Bank & Trust Company and John P. Driscoll (incorporated herein by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2001).
|      | 
|10.14 |  | Amendment Number #2 to Employment Agreement by and among John P. Driscoll, BSB Bancorp, Inc. and BSB Bank & Trust Company dated January 25, 1999, entered into as of March 16, 2001, by and
among BSB Bancorp, Inc., BSB Bank & Trust Company and John P. Driscoll (incorporated herein by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2001).             
|      | 
|10.15 |  | Amendment Number #3 to Employment Agreement by and among John P. Driscoll, BSB Bancorp, Inc. and BSB Bank & Trust Company dated January 25, 1999, entered into as of February 21, 2002, by
and among BSB Bancorp, Inc., BSB Bank & Trust Company and John P. Driscoll (incorporated herein by reference to Exhibit 10.11 to the Companys Annual Report on Form 10-K for the year ended December 31, 2001).            
|      | 
|10.16 |  | Amendment Number #4 to Employment Agreement by and among John P. Driscoll, BSB Bancorp, Inc. and BSB Bank & Trust Company dated January 25, 1999, entered into as of November 25, 2002, by
and among BSB Bancorp, Inc., BSB Bank & Trust Company and John P. Driscoll (incorporated herein by reference to Exhibit 10.13 to the Companys Annual Report on Form 10-K for the year ended December 31, 2002).            
|      | 
|10.17 |  | Change of Control Severance Agreement, entered into as of December 6, 2000, by and among the Company, the Bank and William L. Le Beau (incorporated herein by reference to Exhibit 10.22 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2000).                                                                                                                                            
|      | 
|10.18 |  | Letter Agreement, executed December 23, 2003, to amend Change of Control Severance agreement, dated December 6, 2000, by and among the Company, the Bank and William L. Le Beau; and to the
Target Benefit Supplemental Retirement Benefit Agreement between the Bank and William M. Le Beau, entered into as of October 30, 2003.                                                                                     
|      | 
|10.19 |  | Employment Agreement, entered into as of December 28, 2000, by and among the Company, the Bank and Arthur C. Smith (incorporated herein by reference to Exhibit 10.7 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2000).                                                                                                                                                                



104



---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                       
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.20 |  | Change of Control Severance Agreement, entered into as of February 22, 1999, by and among the Company, the Bank and Rexford C. Decker (incorporated herein by reference to Exhibit 10.20 to the
Companys Annual Report on Form 10-K for the year ended December 31, 1999).                                           
|      | 
|10.21 |  | Amendment to Change of Control Severance Agreement, entered into as of June 28, 1999, by and among the Company, the Bank and Rexford C. Decker (incorporated herein by reference to Exhibit
10.21 to the Companys Annual Report on Form 10-K for the year ended December 31, 1999).                                  
|      | 
|10.22 |  | Employment Agreement, entered into as of December 28, 2000, by and among the Company, the Bank and Larry G. Denniston (incorporated herein by reference to Exhibit 10.23 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2000).                                                           
|      | 
|10.23 |  | Change of Control Severance Agreement, entered into as of November 2, 1990, by and among the Company, the Bank and Douglas R. Johnson (incorporated herein by reference to Exhibit 10.3 to the
Companys Annual Report on Form 10-K for the year ended December 31, 1990).                                            
|      | 
|10.24 |  | Amendment to Change of Control Severance Agreement, entered into as of December 29, 1995, by and among the Company, the Bank and Douglas R. Johnson (incorporated herein by reference to
Exhibit 10.8 to the Companys Annual Report on Form 10-K for the year ended December 31, 1995).                              
|      | 
|10.25 |  | Amendment to Change of Control Severance Agreement, entered into as of June 28, 1999, by and among the Company, the Bank and Douglas R. Johnson (incorporated herein by reference to Exhibit
10.19 to the Companys Annual Report on Form 10-K for the year ended December 31, 1999).                                 
|      | 
|10.26 |  | Change of Control Severance Agreement, entered into as of May 14, 2001, by and among the Company, the Bank and Randy J. Wiley (incorporated herein by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).                                                  
|      | 
|10.27 |  | Letter Agreement, executed December 23, 2003, to amend Change of Control Severance agreement, dated May 14, 2001, by and among the Company, the Bank and Randy J. Wiley; and to the Target
Benefit Supplemental Retirement Benefit Agreement between the Bank and Randy J. Wiley, entered into as of October 30, 2003.
|      | 
|10.28 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and Howard W. Sharp, dated as of October 30, 2003.                                                                                                                                                                          
|      | 
|10.29 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and William M. Le Beau, dated as of October 30, 2003.                                                                                                                                                                       
|      | 
|10.30 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and Rexford C. Decker, dated as of October 30, 2003.                                                                                                                                                                        
|      | 
|10.31 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and Larry G. Denniston, dated as of October 30, 2003.                                                                                                                                                                       
|      | 
|10.32 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and Randy J. Wiley, dated as of October 30, 2003.                                                                                                                                                                           
|      | 
|10.33 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and Roy W. Brock, dated as of October 30, 2003.                                                                                                                                                                             
|      | 
|10.34 |  | Amendment Number 8 to 1996 Long-Term Incentive and Capital Accumulation Plan effective February 23, 2004.                                                                                                                                                                                                             
|      | 
|13    |  | Report of Independent Accountants from PricewaterhouseCoopers, LLP                                                                                                                                                                                                                                                    



105



---

##### Table of Contents

|     |  |                                                                  
|---- |  | -----------------------------------------------------------------
|     | 
|21   |  | List of the Companys Subsidiaries                               
|     | 
|23.1 |  | Consent of KPMG LLP as Independent Auditors                      
|     | 
|23.2 |  | Consent of PricewaterhouseCoopers, LLP as Independent Accountants
|     | 
|31.1 |  | Section 302 Certification of Chief Executive Officer             
|     | 
|31.2 |  | Section 302 Certification of Chief Financial Officer             
|     | 
|32.1 |  | Section 906 Certification of Chief Executive Officer             
|     | 
|32.2 |  | Section 906 Certification of Chief Financial Officer             



| | (d) | There are no other financial statements and financial statement schedules which are required to be included herein.
| | --- | -------------------------------------------------------------------------------------------------------------------



106



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, BSB Bancorp, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.



|                  |  |                                       |  |                
|----------------- |  | ------------------------------------- |  | ---------------
|BSB BANCORP, INC.
|(Registrant)     
|                  |  |                                      
|By:               |  | /s/ Howard W. Sharp                   |  | Date:  02/24/04
|                  |  | Howard W. Sharp                       |  |                
|                  |  | Chief Executive Officer and President |  |                



Pursuant to the
requirements of 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.



|    |  |                                                                                 
|--- |  | --------------------------------------------------------------------------------
|By: |  | /s/ Rexford C. Decker                                                           
|    |  | Rexford C. Decker                                                               
|    |  | Senior Vice President and Chief Financial Officer (Principal Accounting Officer)
|    | 
|By: |  | /s/ Robert W. Allen                                                             
|    |  | Robert W. Allen, Director                                                       
|    | 
|By: |  | /s/ Diana J. Bendz                                                              
|    |  | Diana J. Bendz, Director                                                        
|    | 
|By: |  | /s/ William C. Craine                                                           
|    |  | William C. Craine, Director                                                     
|    | 
|By: |  | /s/ John P. Driscoll                                                            
|    |  | John P. Driscoll, Director                                                      
|    | 
|By: |  | /s/ Ann G. Higbee                                                               
|    |  | Ann G. Higbee, Director                                                         
|    | 
|By: |  | /s/ David A. Niermeyer                                                          
|    |  | David A. Niermeyer, Director                                                    
|    | 
|By: |  | /s/ Mark T. ONeil, Jr.                                                         
|    |  | Mark T. ONeil, Jr., Director                                                   
|    | 
|By: |  | /s/ Thomas L. Thorn                                                             
|    |  | Thomas L. Thorn, Director                                                       



107



---

##### Table of Contents

Exhibits



|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.  |  | Exhibit                                                                                                                                                                                                                                                                                                                                                           
|2.1  |  | Agreement and Plan of Merger, dated as of December 23, 2003, by and among Partners Trust Financial Group, Inc., SBU Bank, Partners Trust, MHC, Wicked Acquisition Corporation and BSB Bancorp,
Inc. (incorporated by reference from Exhibit 2.1 to the Companys Current Report on Form 8-K, filed with the SEC on December 29, 2003).                            
|     | 
|3.1  |  | Certificate of Incorporation, as amended by the Certificate of Amendment dated May 24, 1993 and the Certificate of Amendment dated April 22, 1996 (incorporated by reference from Exhibit 3.1
to the Quarterly Report on Form 10-Q of BSB Bancorp, Inc. (the Company) for the quarter ended March 31, 1996).                                                    
|     | 
|3.2  |  | Form of Amended Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and form of Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock (incorporated by reference from Exhibit 99.2 to the Companys Current Report on Form 8-K, filed with the SEC on May 26, 1999).
|     | 
|3.3  |  | Bylaws, as amended (incorporated by reference from Exhibit 3 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).                                                                                                                                                                                                                 
|     | 
|4.1  |  | Specimen common stock certificate (incorporated herein by reference from Exhibit 4 to the Companys Registration Statement on Form S-4, filed with the SEC on March 2,
1988).                                                                                                                                                                                     
|     | 
|4.2  |  | Rights Agreement, dated as of May 24, 1999, between the Company and American Stock Transfer & Trust Company (incorporated herein by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K, filed with the SEC on May 26, 1999).                                                                                                                   
|     | 
|4.3  |  | Amendment, dated as of December 23, 2003, to the Rights Agreement, dated as of May 24, 1999, between BSB Bancorp, Inc. and American Stock Transfer & Trust Company, Rights
Agent.                                                                                                                                                                                 
|     | 
|10.0 |  | Long-Term Incentive and Capital Accumulation Plan, as amended (incorporated herein by reference to Exhibit A to the Companys Definitive Proxy Statement for the 1990 Annual Meeting of
Shareholders).                                                                                                                                                            
|     | 
|10.1 |  | 1996 Long-Term Incentive and Capital Accumulation Plan (incorporated by reference to Exhibit A to the Companys Definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders).                                                                                                                                                                          
|     | 
|10.2 |  | Amendment Number 1 to 1996 Long-Term Incentive and Capital Accumulation Plan (incorporated herein by reference to Exhibit 10 to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).                                                                                                                                                 
|     | 
|10.3 |  | Amendment Number 2 to 1996 Long-Term Incentive and Capital Accumulation Plan (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the period
ended March 31, 1999).                                                                                                                                                      
|     | 
|10.4 |  | Amendment Number 3 to 1996 Long-Term Incentive and Capital Accumulation Plan (incorporated herein by reference to Exhibit 10.5 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2002).                                                                                                                                                 



108



---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.5  |  | Amendment Number 4 to 1996 Long-Term Incentive and Capital Accumulation Plan dated January 27, 2003 (incorporated by reference to Exhibit 4.5 to Companys Form S-8 Registration Statement
filed June 10, 2003).                                                                                                                                                                                                       
|      | 
|10.6  |  | Amendment Number 5 to the 1996 Long-Term Incentive and Capital Accumulation Plan effective February 24, 2003 (incorporated by reference to Exhibit 4.6 to Companys Form S-8 Registration
Statement filed June 10, 2003).                                                                                                                                                                                              
|      | 
|10.7  |  | Amendment Number 6 to the 1996 Long-Term Incentive and Capital Accumulation Plan effective April 28, 2003 (incorporated by reference to Exhibit 4.7 to Companys Form S-8 Registration
Statement filed June 10, 2003).                                                                                                                                                                                                 
|      | 
|10.8  |  | Amendment Number 7 to the 1996 Long-Term Incentive and Capital Accumulation Plan effective April 28, 2003 (incorporated by reference to Exhibit 4.8 to Companys Form S-8 Registration
Statement filed June 10, 2003).                                                                                                                                                                                                 
|      | 
|10.9  |  | Directors Stock Option Plan (incorporated herein by reference to Exhibit A to the Companys Definitive Proxy Statement for the 1994 Annual Meeting of
Shareholders).                                                                                                                                                                                                                                                  
|      | 
|10.10 |  | Employment Agreement, entered into as of October 22, 2001, by and among the Company, the Bank and Howard W. Sharp (incorporated herein by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).                                                                                                                                                          
|      | 
|10.11 |  | Employment Agreement, entered into as of January 25, 1999, by and among the Company, the Bank and John P. Driscoll (incorporated herein by reference to Exhibit 10.13 to the Companys
Annual Report on Form 10-K for the year ended December 31, 1999).                                                                                                                                                               
|      | 
|10.12 |  | Amendment to Employment Agreement, entered into as of May 31, 2000, by and among the Company, the Bank and John P. Driscoll (incorporated herein by reference to Exhibit 10.14 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2000).                                                                                                                                                      
|      | 
|10.13 |  | Amendment Number #1 to Supplemental Retirement Agreement among Skaneateles Bancorp, Inc., Skaneateles Savings Bank and John P. Driscoll dated January 1, 1998, entered into as of March 16,
2001, by and among BSB Bancorp, Inc., BSB Bank & Trust Company and John P. Driscoll (incorporated herein by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2001).
|      | 
|10.14 |  | Amendment Number #2 to Employment Agreement by and among John P. Driscoll, BSB Bancorp, Inc. and BSB Bank & Trust Company dated January 25, 1999, entered into as of March 16, 2001, by and
among BSB Bancorp, Inc., BSB Bank & Trust Company and John P. Driscoll (incorporated herein by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2001).             
|      | 
|10.15 |  | Amendment Number #3 to Employment Agreement by and among John P. Driscoll, BSB Bancorp, Inc. and BSB Bank & Trust Company dated January 25, 1999, entered into as of February 21, 2002, by
and among BSB Bancorp, Inc., BSB Bank & Trust Company and John P. Driscoll (incorporated herein by reference to Exhibit 10.11 to the Companys Annual Report on Form 10-K for the year ended December 31, 2001).            
|      | 
|10.16 |  | Amendment Number #4 to Employment Agreement by and among John P. Driscoll, BSB Bancorp, Inc. and BSB Bank & Trust Company dated January 25, 1999, entered into as of November 25, 2002, by
and among BSB Bancorp, Inc., BSB Bank & Trust Company and John P. Driscoll (incorporated herein by reference to Exhibit 10.13 to the Companys Annual Report on Form 10-K for the year ended December 31, 2002).            

|
|





109



---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                   
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.17 |  | Change of Control Severance Agreement, entered into as of December 6, 2000, by and among the Company, the Bank and William L. Le Beau (incorporated herein by reference to Exhibit 10.22 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2000).                                                       
|      | 
|10.18 |  | Letter Agreement, executed December 23, 2003, to amend Change of Control Severance agreement, dated December 6, 2000, by and among the Company, the Bank and William L. Le Beau; and to the
Target Benefit Supplemental Retirement Benefit Agreement between the Bank and William M. Le Beau, entered into as of October 30, 2003.
|      | 
|10.19 |  | Employment Agreement, entered into as of December 28, 2000, by and among the Company, the Bank and Arthur C. Smith (incorporated herein by reference to Exhibit 10.7 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2000).                                                                           
|      | 
|10.20 |  | Change of Control Severance Agreement, entered into as of February 22, 1999, by and among the Company, the Bank and Rexford C. Decker (incorporated herein by reference to Exhibit 10.20 to the
Companys Annual Report on Form 10-K for the year ended December 31, 1999).                                                       
|      | 
|10.21 |  | Amendment to Change of Control Severance Agreement, entered into as of June 28, 1999, by and among the Company, the Bank and Rexford C. Decker (incorporated herein by reference to Exhibit
10.21 to the Companys Annual Report on Form 10-K for the year ended December 31, 1999).                                              
|      | 
|10.22 |  | Employment Agreement, entered into as of December 28, 2000, by and among the Company, the Bank and Larry G. Denniston (incorporated herein by reference to Exhibit 10.23 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2000).                                                                       
|      | 
|10.23 |  | Change of Control Severance Agreement, entered into as of November 2, 1990, by and among the Company, the Bank and Douglas R. Johnson (incorporated herein by reference to Exhibit 10.3 to the
Companys Annual Report on Form 10-K for the year ended December 31, 1990).                                                        
|      | 
|10.24 |  | Amendment to Change of Control Severance Agreement, entered into as of December 29, 1995, by and among the Company, the Bank and Douglas R. Johnson (incorporated herein by reference to
Exhibit 10.8 to the Companys Annual Report on Form 10-K for the year ended December 31, 1995).                                          
|      | 
|10.25 |  | Amendment to Change of Control Severance Agreement, entered into as of June 28, 1999, by and among the Company, the Bank and Douglas R. Johnson (incorporated herein by reference to Exhibit
10.19 to the Companys Annual Report on Form 10-K for the year ended December 31, 1999).                                             
|      | 
|10.26 |  | Change of Control Severance Agreement, entered into as of May 14, 2001, by and among the Company, the Bank and Randy J. Wiley (incorporated herein by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).                                                              
|      | 
|10.27 |  | Letter Agreement, executed December 23, 2003, to amend Change of Control Severance agreement, dated May 14, 2001, by and among the Company, the Bank and Randy J. Wiley; and to the Target
Benefit Supplemental Retirement Benefit Agreement between the Bank and Randy J. Wiley, entered into as of October 30, 2003.            
|      | 
|10.28 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and Howard W. Sharp, dated as of October 30, 2003.                                                                                                                                                                                      
|      | 
|10.29 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and William M. Le Beau, dated as of October 30, 2003.                                                                                                                                                                                   



110



---

##### Table of Contents

|      |  |                                                                                                                                                
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.30 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and Rexford C. Decker, dated as of October 30, 2003. 
|      | 
|10.31 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and Larry G. Denniston, dated as of October 30, 2003.
|      | 
|10.32 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and Randy J. Wiley, dated as of October 30, 2003.    
|      | 
|10.33 |  | Target Benefit Supplemental Retirement Benefit Agreement between BSB Bank & Trust Company and Roy W. Brock, dated as of October 30, 2003.      
|      | 
|10.34 |  | Amendment Number 8 to 1996 Long-Term Incentive and Capital Accumulation Plan effective February 23, 2004.                                      
|      | 
|13    |  | Report of Independent Accountants from PricewaterhouseCoopers, LLP                                                                             
|      | 
|21    |  | List of the Companys Subsidiaries                                                                                                             
|      | 
|23.1  |  | Consent of KPMG LLP as Independent Auditors                                                                                                    
|      | 
|23.2  |  | Consent of PricewaterhouseCoopers, LLP as Independent Accountants                                                                              
|      | 
|31.1  |  | Section 302 Certification of Chief Executive Officer                                                                                           
|      | 
|31.2  |  | Section 302 Certification of Chief Financial Officer                                                                                           
|      | 
|32.1  |  | Section 906 Certification of Chief Executive Officer                                                                                           
|      | 
|32.2  |  | Section 906 Certification of Chief Financial Officer                                                                                           
|      | 
|(d)   |  | There are no other financial statements and financial statement schedules which are required to be included herein.                            



111