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 transaction period from ___________________ to ______________________



Commission File Number: 001-31277



|                                                               |  | PARTNERS TRUST FINANCIAL GROUP, INC.                        |  |     
|-------------------------------------------------------------- |  | ----------------------------------------------------------- |  | ----
|                                                               |  | (Exact Name of Registrant as Specified in its Charter)      |  |     
|                                                               |  |                                                             |  |     
|Federal                                                        |  | 75-2993918                                                 
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)                    
|                                                               |  |                                                             |  |     
|233 Genesee Street, Utica, NY                                  |  | 13501                                                       |  |     
|(Address of Principal Executive Offices)                       |  | (Zip Code)                                                  |  |     
|                                                               |  |                                                             |  |     
|                                                               |  | (315) 768-3000                                              |  |     
|                                                               |  | (Registrant's Telephone Number including area code)         |  |     
|                                                               |  |                                                             |  |     
|                                                               |  | Securities Registered Pursuant to Section 12(b) of the Act: |  |     
|                                                               |  |                                                             |  |     
|                                                               |  |                                                             |  | None
|                                                               |  |                                                             |  |     
|                                                               |  | Securities Registered Pursuant to Section 12(g) of the Act: |  |     
|                                                               |  |                                                             |  |     
|                                                               |  | Common Stock, par value $0.10 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 twelve months (or for such shorter period that the Registrant was required to file reports) 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 in Part III of this Form 10-K or any amendments 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 Registrant's Common Stock held by non-affiliates as of January 27, 2004 was $228.6 million.  As of June 30, 2003, there were issued and outstanding 14,204,079 shares of the Registrant's Common Stock.





PART I



ITEM 1.	BUSINESS



General

Forward Looking Statements

This Form 10-K contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions.  These statements are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and may include:

















The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.  In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements.  Some of the risks and uncertainties that may affect the operations, performance, development and results of the Company's business, the interest rate sensitivity of its assets and liabilities, and the adequacy of its allowance for loan losses, include but are not limited to the following:



















The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including those described above, could affect the Company's financial performance and could cause the Company's actual results or circumstances for future periods to differ materially from those anticipated or projected.



Except as required by law, the Company does not undertake, and specifically disclaims any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.



Partners Trust Financial Group, Inc.



Partners Trust Financial Group, Inc. (the "Company") is a Federal corporation that began operations on April 3, 2002 in connection with the conversion of SBU Bank (the "Bank") from a mutual savings bank to a stock savings bank and the completion of the Company's initial public offering ("IPO").   The Bank is a wholly-owned subsidiary of the Company and the Company is a majority-owned subsidiary of Partners Trust, MHC (the "MHC"), a mutual holding company.

SBU Bank was founded in 1839 and offers a wide variety of business and retail banking products as well as a full range of trust, investment, and municipal banking services through its sixteen Central New York locations in Oneida, Onondaga and Herkimer counties.  Customers' banking needs are serviced 24 hours a day through a network of ATMs, automated telephone banking, and through the convenience of internet banking at its website www.sbu.com.  Municipal banking services are provided by SBU Bank's subsidiary, SBU Municipal Bank.



On December 27, 2002, the Company completed its acquisition of Herkimer Trust Corporation, Inc. ("Herkimer") and its wholly owned subsidiary, The Herkimer County Trust Company ("Herkimer Bank").  Herkimer Bank operated twelve branches in the Mohawk Valley region of New York State.  The Company paid $64.0 million in cash in exchange for the Herkimer shares outstanding at the time of acquisition (as well as $1.1 million in direct acquisition costs), acquired $366.2 million in assets and assumed $301.2 million in liabilities.  Goodwill associated with this transaction approximated $34.5 million.



On December 23, 2003, the Board of Directors of the MHC, the Company and the Bank adopted a Plan of Conversion and Reorganization of Partners Trust, MHC (the "Plan") for the conversion and restructuring of the Company and the MHC into a full capital stock corporation.  The Plan is subject to regulatory, depositor and stockholder approvals.  Pursuant to the Plan, the reorganization will be effected in a manner that is consistent with applicable federal law and regulations.  The reorganization will be accounted for as a change in corporate form with no resulting change in the historical basis of assets, liabilities and equity.  Direct offering costs are being deferred and will be deducted from the proceeds of the shares sold in the offering.  If the reorganization and conversion is not completed, all costs will be charged to expense.  As of December 31, 2003 no costs had been deferred.



On December 23, 2003, the Company also signed a definitive merger agreement to acquire BSB Bancorp, Inc. ("BSB"), the holding company for BSB Bank & Trust Company.  Under the agreement, following the conversion discussed in the preceding paragraph BSB will be merged into the reorganized Partners Trust.  The acquisition will only occur if the conversion is completed.  The consideration to be paid in the merger will be 40% cash and 60% stock.  Shareholders of BSB will be able to elect either $36.00 in cash or 3.6 shares of common stock of the reorganized Partners Trust, subject to customary proration and allocation procedures.  The conversion, offering and acquisition are expected to be completed in mid-2004, subject to regulatory and stockholder approvals.  The acquisition is to occur immediately upon completion of the conversion.  As of December 31, 2003, BSB has total assets of $2.21 billion, total deposits of $1.59 billion and total shareholders' equity of $146.3 million.



The Company does not employ any persons other than certain officers who are currently officers of the Bank, but utilizes the support staff of the Bank from time to time.



The Company's offices are located at the executive offices of the Bank at 233 Genesee Street, Utica, New York, 13501.  Its telephone number is (315) 768-3000.



This annual report, including the exhibits and schedules filed as part of the annual report, may be inspected at the public reference facility maintained by the Securities and Exchange Commission ("SEC") at its public reference room at 450 Fifth Street, NW, Washington, DC 20549 and copies of all or any part thereof may be obtained from that office upon payment of the prescribed fees.  You may call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room and you can request copies of the documents upon payment of a duplicating fee, by writing to the SEC.  In addition, the SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically with the SEC which can be accessed at www.sec.gov.



The Company also makes its periodic and current reports available, free of charge, on its website, www.partnerstrust.com, as soon as reasonably practicable after such material is electronically filed with the SEC.  Information available on our website is not a part of, and should not be incorporated into, this annual report on Form 10-K.



Business



Lending Activities



General.





Loan Portfolio Composition.



|                        |                               |                             |  | At December 31,       
|----------------------- | ----------------------------- | --------------------------- |  | ----------------------
|                        |                               |                             |  | 2003                  
|                        |                               |                             |  | Amount                
|                        |                               |                             |  | (Dollars in thousands)
|                        |                               |                             |  |                       
|Residential real estate |                               | $481,929                    |  | 59.85%                
|Commercial real estate  |                               | 139,555                     |  | 17.33                 
|Commercial              |                               | 58,936                      |  | 7.32                  
|Consumer (1)            |                               | 124,830                     |  | 15.50                 
|                        |                               |                             |  |                       
|                        |                               | Total loans receivable (2)  |  | 805,250               
|                        |                               |                             |  |                       
|                        | Less:                         |                             |  |                       
|                        |                               | Net deferred fees and costs |  | 446                   
|                        |                               | Allowance for loan losses   |  | 8,608                 
|Net loans receivable    |                               | $796,196                    |  |                       
|                        |                               |                             |  |                       
|(1)                     | Includes home equity loans.   |                             |  |                       
|(2)                     | Excludes loans held for sale. |                             |  |                       

Loan Maturity and Repricing Schedule.  The following table sets forth certain information as of December 31, 2003, regarding the amount of loans maturing or repricing in our portfolio.  Demand loans having no stated schedule of repayment and no stated maturity, and overdrafts are reported as due in one year or less.  Adjustable- and floating-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans are included in the period in which the final contractual repayment is due.

|                        |                                                                                                                    |                  |                 |               |               |                |                |               | Ten           |                |                |               |              
|----------------------- | ------------------------------------------------------------------------------------------------------------------ | ---------------- | --------------- | ------------- | ------------- | -------------- | -------------- | ------------- | ------------- | -------------- | -------------- | ------------- | -------------
|                        |                                                                                                                    |                  |                 |               | One           |                | Five           |               | Through       |                | Beyond         |               |              
|                        |                                                                                                                    |                  | Within One      |               | Through       |                | Through        |               | Twenty        |                | Twenty         |               |              
|                        |                                                                                                                    |                  | Year (2)        |               | Five Years    |                | Ten Years      |               | Years         |                | Years          |               | Total        
|                        |                                                                                                                    |                  | (In thousands) 
|Residential real estate |                                                                                                                    | $         95,787 |                 | $     207,416 |               | $      116,067 |                | $      58,029 |               | $        4,630 |                | $     481,929
|Commercial real estate  |                                                                                                                    | 47,290           |                 | 85,870        |               | 6,382          |                | 13            |               | -              |                | 139,555      
|Commercial              |                                                                                                                    | 45,931           |                 | 12,171        |               | 826            |                | 8             |               | -              |                | 58,936       
|Consumer (1)            |                                                                                                                    | 70,528           |                 | 50,950        |               | 2,757          |                | 593           |               | 2              |                | 124,830      
|                        |                                                                                                                    |                  |                 |               |               |                |                |               |               |                |                |               |              
|                        | Total loans receivable (3)                                                                                         |                  | $       259,536 |               | $     356,407 |                | $      126,032 |               | $      58,643 |                | $        4,632 |               | $     805,250
|                        |                                                                                                                    |                  |                 |               |               |                |                |               |               |                |                |               |              
|                        | (1)Includes home equity loans.                                                                                     |                  |                 |               |               |                |                |               |               |                |               
|                        | (2) Includes $240.2 million of loans that reprice within one year but that are scheduled to mature after one year.
|                        | (3)Excludes loans held for sale.                                                                                   |                  |                 |               |               |                |                |               |               |                |               



Fixed- and Adjustable-Rate Loan Schedule.

|                        |                               |               | Due After December 31, 2004
|----------------------- | ----------------------------- | ------------- | ---------------------------
|                        |                               |               | Fixed                      
|                        |                               |               | (In thousands)             
|                        |                               |               |                            
|Residential real estate |                               | $     392,699 |                            
|Commercial real estate  |                               | 36,911        |                            
|Commercial              |                               | 20,473        |                            
|Consumer (1)            |                               | 94,981        |                            
|                        |                               |               |                            
|                        | Total loans receivable (2)    |               | $     545,064              
|                        |                               |               |                            
|(1)                     | Includes home equity loans.   |               |                            
|(2)                     | Excludes loans held for sale. |               |                            

Residential Mortgage Lending.



Our mortgage loans generally have terms from 15 to 30 years, amortized on a monthly basis with principal and interest due each month.  We offer a variety of terms and conditions to our mortgage customers which meet virtually any financing need.  As of December 31, 2003, we offered the following residential mortgage loan products:





















Residential real estate loans may remain outstanding for significantly shorter periods than their contractual terms as borrowers may refinance or prepay loans at their option without penalty.  Our conventional residential mortgage loans customarily contain "due on sale" clauses which permit us to accelerate the indebtedness of the loan upon transfer of ownership in the mortgaged property.



The decision to originate loans for portfolio or for sale in the secondary market is made by our Asset/Liability Management Committee, and is based on our interest rate risk profile.  Our current practice is to sell almost all newly originated conforming fixed-rate 30 year monthly payment loans in the secondary market and to hold biweekly fixed-rate loans, loans with terms of 15 years or less and adjustable-rate loans in our portfolio.  We did, however, originate $40.4 million of conforming fixed-rate 30-year monthly payment loans for portfolio during 2003.  FHA and VA loans are sold servicing-released while we retain servicing on all other loans sold.  We lend up to a maximum loan-to-value ratio of 95% on mortgage loans secured by owner-occupied properties, with the condition that private mortgage insurance is required on loans with a loan-to-value ratio in excess of 80%.  Certain loans with a loan-to-value ratio between 80% and 85% do not require private mortgage insurance but carry a higher interest rate and are underwritten to stricter standards.  To a lesser extent, we originate non-conforming loans that may not satisfy the various requirements of the secondary market.



Our adjustable-rate mortgage loans are made with a maximum term of 30 years.  Adjustable-rate loans include loans that provide for an interest rate that is based on the interest paid on U.S. Treasury securities of corresponding terms, plus a margin.  Our adjustable-rate conventional mortgages include limits on the increase or decrease in the interest rate.  The interest rate may increase or decrease by a maximum of 2.0% per adjustment with a maximum adjustment over the life of the loan, which generally is 5.0%.  For one year adjustable-rate loans, borrowers are qualified at the initial rate and at 2.0% over the initial rate.  For all other adjustable-rate loans, borrowers are qualified at the initial rate.



The retention of adjustable-rate loans in our portfolio helps reduce exposure to changes in interest rates.  However, there are credit risks resulting from potential increased costs to the borrower as a result of rising interest rates.  During periods of rising interest rates, the risk of default on adjustable-rate mortgages may increase due to the upward adjustment of interest cost to the borrower.



Commercial Real Estate Loans.  We originate commercial real estate loans to finance real property, which generally consists of developed real estate.  We have a diversified portfolio comprised of loans on apartment buildings, professional offices, retail establishments, and other properties.  We have no exposure greater than 25% of the commercial real estate portfolio in any of these individual property types.  At December 31, 2003, our commercial real estate loan portfolio totaled $139.6 million, or 17.3% of total loans.  Most of the commercial real estate portfolio consists of loans secured by properties in an area of New York State bounded by Syracuse in the west and Albany in the east.  To a lesser extent, commercial real estate loans are secured by properties located outside of that area but primarily in New York State.  In underwriting commercial real estate loans, consideration is given to the property's historic and projected cash flow, current and projected occupancy, location and physical condition.  We lend up to a maximum loan to value ratio of 75% (with certain exceptions made on a loan-by-loan basis) and require minimum debt coverage ratios depending on the property type involved.



Commercial real estate lending involves additional risks compared to one-to-four family residential lending because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan.  Repayment of such loans may be subject, to a greater extent than residential loans, to adverse conditions in the real estate market or the economy.  Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers.  Our policies limit the amount of loans to a single borrower or group of related borrowers to reduce this risk.



Because of increased risks associated with commercial real estate loans, commercial real estate loans generally have a higher interest rate and shorter term than residential mortgage loans.  Commercial real estate loans are generally offered at one to five year adjustable-rates tied to the Federal Home Loan Bank of New York advance rates.  The term of such loans generally does not exceed ten years with amortization schedules of fifteen to twenty years.



Commercial Loans.  In addition to commercial real estate loans, we also engage in commercial lending, including business installment loans, lines of credit and other commercial loans.  We focus on making commercial loans to small and medium sized businesses in a wide variety of industries located primarily in Onondaga, Oneida and Herkimer Counties.  At December 31, 2003, our commercial loan portfolio totaled $58.9 million, or 7.3% of total loans.



Unless secured by a mortgage on commercial real estate, our commercial loans generally are limited to terms of seven years or less and have fixed interest rates or variable interest rates tied to the FHLB and prime rate, respectively.  Whenever possible, we collateralize these loans with a lien on business assets and equipment and obtain the personal guarantees from principals of the borrower.



Commercial loans generally are considered to involve a higher degree of risk than residential mortgage loans.  Such loans typically involve relatively large loan balances to single borrowers or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation and income stream of the borrower.  In addition, commercial loans are in some cases unsecured, and if secured, the collateral may be subject to market obsolescence.  Such risks can be significantly affected by economic conditions.  In addition, commercial business lending generally requires substantially greater oversight efforts compared to residential real estate lending.  We utilize the services of an outside loan review consultant to conduct reviews of the commercial loan and commercial real estate portfolios to assess adherence to underwriting standards and policy requirements.



Consumer Loans.  Weoffer a variety of consumer loans to meet customer demand and to increase the yield on our loan portfolio.  Consumer loans are generally offered at a higher rate and shorter term than residential mortgages.  Examples of our consumer loans include:



















At December 31, 2003, the consumer loan portfolio totaled $124.8 million, or 15.5% of total loans.  Consumer loans generally are offered for terms of one to fifteen years depending on the collateral, and at fixed or variable rates of interest depending on the product.



Auto loans currently comprise the largest portion of the consumer loan portfolio at 44.4%.  For loans secured by new and used automobiles, the financial terms are determined by the age and condition of the vehicle, and the financial ability of the borrower to repay.  We obtain a title lien on the vehicle and collision insurance policies are required on these loans.  While we lend directly to borrowers, the majority of our automobile loans are originated through local auto dealerships in Oneida, Herkimer and Onondaga Counties.  We independently underwrite the loans from the dealerships.  Approximately 82.0% of the auto loan portfolio consists of indirect loans.



Home equity loans totaled $54.9 million at December 31, 2003, and comprised 44.0% of consumer loans.  These loans are typically secured by a second lien on the mortgaged property.  We generally make home equity loans up to 90% loan to value.  We offer both fixed and adjustable rates, as well as a variety of repayment terms.



We make loans secured by deposit accounts up to 100% for SBU Bank accounts, 90% for all other bank accounts, of the amount of the depositor's collected savings account balance.  We also make other consumer loans that may or may not be secured.  The terms of the loans vary depending on the collateral.



Consumer loans are generally originated at higher interest rates than residential mortgage loans and also tend to have a higher credit risk than residential loans due to the loan being unsecured or secured by rapidly depreciable assets.



Loan Activity.



The following table sets forth changes in our Company's loan portfolio for the periods indicated, inclusive of loans held for sale.



|                                          |                         |                                                                                                      |                            |               | Year Ended December 31,
|----------------------------------------- | ----------------------- | ---------------------------------------------------------------------------------------------------- | -------------------------- | ------------- | -----------------------
|                                          |                         |                                                                                                      |                            |               | 2003                   
|                                          |                         |                                                                                                      |                            |               | (In thousands)         
|Originations:                             |                         |                                                                                                     
|                                          | Residential real estate |                                                                                                      | $    223,233               |               | $   162,292            
|                                          | Commercial real estate  |                                                                                                      | 28,510                     |               | 29,083                 
|                                          | Commercial              |                                                                                                      | 36,582                     |               | 14,280                 
|                                          | Consumer (1)            |                                                                                                      | 54,392                     |               | 29,983                 
|                                          |                         | Total originations                                                                                   |                            | 342,717       |                        
|                                          |                         |                                                                                                      |                            |               |                        
|Loans sold                                |                         | 18,091                                                                                               |                            | 27,908        |                        
|                                          |                         |                                                                                                      |                            |               |                        
|Repayments:                               |                         |                                                                                                      |                            |               |                        
|                                          | Residential real estate |                                                                                                      | 158,369                    |               | 112,105                
|                                          | Commercial real estate  |                                                                                                      | 63,103                     |               | 31,534                 
|                                          | Commercial              |                                                                                                      | 32,982                     |               | 22,951                 
|                                          | Consumer (1)            |                                                                                                      | 72,034                     |               | 32,476                 
|                                          |                         | Total repayments                                                                                     |                            | 326,488       |                        
|                                          |                         |                                                                                                      |                            |               |                        
|                                          |                         |                                                                                                      | Total sales and repayments |               | 344,579                
|                                          |                         |                                                                                                      |                            |               |                        
|Loans acquired from Herkimer County Trust |                         | -                                                                                                    |                            | 196,746       |                        
|Decrease in other items, net (2)          |                         | (1,554)                                                                                              |                            | (5)           |                        
|                                          |                         |                                                                                                      |                            |               |                        
|                                          |                         | Net (decrease) increase                                                                              |                            | $     (3,416) |                        
|                                          |                         |                                                                                                      |                            |               |                        
|                                          | (1)                     | Includes home equity loans.                                                                          |                            |               |                        
|                                          | (2)                     | Other items include net deferred fees and costs and amortization of purchase accounting adjustments.

Loan Approval Procedures and Authority.



Consumer loans are underwritten by our consumer underwriting group.  For unsecured loans in excess of $25,000, non-real estate secured loans in excess of $60,000, and loans secured by real estate in excess of $125,000, the approval of our chief credit officer is needed, or in his absence, the chief executive officer or the senior vice president of sales.



Commercial real estate and commercial loans are underwritten by commercial credit analysts and relationship managers.  The manager of the small business department may approve loans up to $500,000, and the manager of the commercial loan department may approve loans up to $750,000. Our chief credit officer may approve loans up to $1.5 million. The chief credit officer in conjunction with the chief executive officer may approve loans up to $4.0 million.  The Bank's Credit Committee must approve loans between $4.0 million and $5.0 million.  Loans above $5.0 million require the approval of our Executive Committee or the full Board.



Loans to One Borrower.



At December 31, 2003, the largest aggregate amount loaned by SBU Bank to one borrower consisted of four commercial mortgage loans secured by apartment buildings and retail property in a committed amount of $13.1 million.  At December 31, 2003, the outstanding amount under these loans was $13.0 million.  The next largest relationship consisted of commercial loans to a local manufacturer in a committed amount of $10.0 million.  These loans are secured by all operating assets of the company, including real estate.  There was $7.1 million outstanding on these loans at December 31, 2003.  The next eight largest credit relationships totaled $29.1 million at December 31, 2003 (including committed amounts).  All of these large loan relationships are performing in accordance with their terms.



Asset Quality



General.



Collection Procedures.



We hold foreclosed property as other real estate owned.  We carry foreclosed real estate at the lower of the unpaid principal balance at the time of foreclosure or its fair market value less estimated selling costs.  If a foreclosure action is commenced and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, we either sell the real property securing the loan at the foreclosure sale or sell the property as soon thereafter as practical.  Our collection procedures for Federal Housing Association (FHA) and Veteran's Administration (VA) one- to four-family mortgage loans follow the collection guidelines outlined by those agencies.

The collection procedures for commercial real estate and commercial loans include our sending periodic late notices and letters to a borrower once a loan is past due.  We attempt to make direct contact with a borrower once a loan is 15 days past due.  We follow our residential mortgage and consumer loans collection procedures in our attempts to reach individuals by phone.  Our credit quality committee reviews all delinquencies on a monthly basis. Delinquent commercial real estate and commercial loans may be transferred to our loan workout department for further action. Our chief credit officer has the authority to transfer current commercial real estate or commercial loans to the workout department if, in his opinion, a credit problem exists or is likely to occur.



Loans deemed uncollectable are proposed for charge-off on a monthly basis at the credit quality committee meeting.  The chief credit officer can approve charge-offs up to $500,000.  Amounts in excess of this require the approval of the chief executive officer or, in his absence, the chief financial officer.



Delinquent Loans and Non-performing Loans and Assets.



With the exception of first mortgage loans insured or guaranteed by the FHA or VA or for which the borrower has obtained private mortgage insurance, we generally stop accruing income on loans when interest or principal payments are 90 days in arrears or earlier if management deems appropriate.  We designate loans on which we stop accruing income as non-accrual loans and we reverse outstanding interest that we previously credited.  We may recognize income in the period that we collect it, when the ultimate collectibility of principal is no longer in doubt.  We return a non-accrual loan to accrual status when factors indicating doubtful collection no longer exist and the loan has been brought current.



Loans that are delinquent three payments are included in the past due 60-89 days category.  Loans that are delinquent four or more payments are included in the past due 90 days or more category.  The following table sets forth certain information regarding delinquencies in our loan portfolio as of the dates indicated.



|                                |                             |       | At December 31, 2003   |             | At December 31, 2002
|------------------------------- | --------------------------- | ----- | ---------------------- | ----------- | --------------------
|                                |                             |       | Past Due               |             | Past Due            
|                                |                             |       | 60-89 Days             |             | 90 Days or More     
|                                |                             |       |                        |             | Principal           
|                                |                             |       | Number                 | Balance of  | Number              
|                                |                             |       | of Loans               |             | Loans               
|                                |                             |       | (Dollars in thousands)
|                                |                             |       |                        |             |                     
|Residential real estate         |                             | 6     |                        | $       314 |                     
|Commercial real estate          |                             | 3     |                        | 128         |                     
|Commercial                      |                             | 5     |                        | 711         |                     
|Consumer (1)                    |                             | 52    |                        | 356         |                     
|                                | Total                       |       | 66                     |             | $    1,509          
|                                |                             |       |                        |             |                     
|Delinquent loans to total loans |                             | 0.19% |                        |             |                     
|                                |                             |       |                        |             |                     
|(1)                             | Includes home equity loans. |       |                        |             |                     



|                                |                             |    | At December 31, 2001  
|------------------------------- | --------------------------- | -- | ----------------------
|                                |                             |    | Past Due              
|                                |                             |    | 60-89 Days            
|                                |                             |    |                       
|                                |                             |    | Number                
|                                |                             |    | of Loans              
|                                |                             |    | (Dollars in thousands)
|                                |                             |    |                       
|Residential real estate         |                             | 12 |                       
|Commercial real estate          |                             | 2  |                       
|Commercial                      |                             | 6  |                       
|Consumer (1)                    |                             | 25 |                       
|                                | Total                       |    | 45                    
|                                |                             |    |                       
|Delinquent loans to total loans |                             |    | 0.55%                 
|                                |                             |    |                       
|(1)                             | Includes home equity loans. |    |                       

The consumer portfolio acquired from Herkimer contained $36.1 million of indirect loans primarily secured by used autos.  These loans have experienced higher delinquency rates than the indirect loans originated by SBU Bank, and as such, the overall delinquency rate of the consumer portfolio has been higher than that experienced prior to the Herkimer acquisition.



Non-performing loans totaled $4.2 million, or 0.53% of loans at December 31, 2003 compared with $11.0 million, or 1.36% of loans at December 31, 2002.



The following table sets forth information regarding non-performing loans and assets.



|                                                  |                                           |                            |              | At December 31,       
|------------------------------------------------- | ----------------------------------------- | -------------------------- | ------------ | ----------------------
|                                                  |                                           |                            |              | 2003                  
|                                                  |                                           |                            |              | (Dollars in thousands)
|Non-accruing loans:                               |                                           |                            |              |                       
|                                                  | Residential real estate                   |                            | $      1,007 |                       
|                                                  | Commercial real estate                    |                            | 1,279        |                       
|                                                  | Commercial                                |                            | 931          |                       
|                                                  | Consumer (1)                              |                            | 545          |                       
|                                                  |                                           | Total non-accruing loans   |              | 3,762                 
|Accruing loans delinquent 90 days or more         |                                           | 480                        |              | 461                   
|                                                  |                                           | Total non-performing loans |              | 4,242                 
|Other real estate owned                           |                                           | 121                        |              | 3,092                 
|Total non-performing assets                       |                                           | $      4,363               |              | $    14,075           
|                                                  |                                           |                            |              |                       
|Total non-performing loans to total loans         |                                           | 0.53%                      |              | 1.36%                 
|Total non-performing assets to total assets       |                                           | 0.34%                      |              | 1.06%                 
|Allowance for loan losses to non-performing loans |                                           | 202.92%                    |              | 100.05%               
|Allowance for loan losses to total loans (2)      | 1.07%                                     |                            | 1.37%        |                       
|_________________________                         |                                           |                            |              |                       
|(1)                                               | Includes home equity loans.               |                            |              |                       
|(2)                                               | Total loans excludes loans held for sale. |                            |              |                       



Non-performing loans at December 31, 2003 consist of a number of individual relationships, the largest being $522,000.  We have worked diligently to satisfactorily resolve the larger non-performing loans that existed at December 31, 2002.  The $6.7 million reduction in non-performing loans from December 31, 2002, to the end of 2003, was primarily a result of payment in full on a $2.4 million non-performing commercial real estate loan, and the charge-off of $1.5 million on a non-performing commercial loan.



Other real estate owned decreased $3.0 million from December 31, 2002 to December 31, 2003 primarily due to the sale of one commercial property in December 2003.  This property, which is a strip shopping center, was recorded as other real estate owned at its estimated net realizable value of $2.8 million.  A net loss of $356,000 was recorded on this sale.



We review all non-accrual commercial real estate and commercial loans greater than $250,000 for impairment.  These loans are individually assessed to determine whether a loan's carrying value is in excess of the fair value of the collateral or the present value of the loan's cash flows.  Smaller balance homogenous loans that are collectively evaluated for impairment, such as residential mortgage loans and consumer loans, are specifically excluded from the impairment review.  We had $1.9 million, $2.0 million and $4.9 million of loans classified as impaired at December 31, 2003, 2002 and 2001, respectively.



In addition to the non-performing loans, we have identified through normal internal credit review procedures, $4.6 million in loans that warrant increased attention at December 31, 2003.  These loans are classified as substandard as they exhibit certain risk factors, which have the potential to cause them to become non-performing.  Accordingly, these credits are reviewed on at least a quarterly basis and were considered in our evaluation of the allowance for loan losses at December 31, 2003.  None of these loans were considered impaired and as such, no specific impairment allowances were established for these loans.



Allowance for Loan Losses.  The allowance for loan losses reflects our evaluation of the probable losses in our loan portfolio. The allowance for loan losses is maintained at a level that represents management's best estimate of losses in the loan portfolio at the balance sheet date that were both probable and reasonably estimable.  We maintain the allowance through provisions for loan losses that we charge to income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely.  Recoveries on loans charged-off are restored to the allowance for loan losses.



Our evaluation of the adequacy of the allowance for loan losses includes the review of all loans for which the collectibility of principal may not be reasonably assured. For residential mortgage and consumer loans, this review primarily considers delinquencies and collateral values. For commercial real estate and commercial loans, an extensive review of financial performance, payment history and collateral values is conducted on a quarterly basis by the credit quality committee.



The criteria that we consider in connection with determining the overall allowance for loan losses include the following:



- results of the quarterly credit quality review;
- historical loss experience in each segment of the loan portfolio;
- general economic and business conditions affecting our key lending areas;
- credit quality trends (including trends in non-performing loans expected to result from existing conditions);
- collateral values;
- loan volumes and concentrations;
- age of the loan portfolio;
- specific industry conditions within portfolio segments;
- duration of the current business cycle;
- bank regulatory examination results; and
- external loan review results.



Certain of these criteria impact our loss estimates on specific problem loans reviewed by the credit quality committee. In addition, these criteria also impact management's estimates of losses on other loan portfolios, including smaller balance consumer, commercial and residential loans.



The allowance for loan losses is an estimate of probable losses in the loan portfolio. The amount of actual losses can vary significantly from the estimated amounts. Our methodology includes several features that are intended to reduce the differences between estimated and actual losses. A historical loss experience model is used to establish the loan loss factors for the various types of loans. Pooled loss factors are adjusted quarterly, if necessary, based upon the level of net charge-offs incurred and expected by management. Furthermore, our methodology permits adjustments to loss factors used in the computation of the allowance in the event that, in management's judgment, significant conditions that affect the collectibility of the portfolio as of the evaluation date are not reflected in the loss factors. By estimating the probable losses in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based on recent information that becomes available.



Additions to the allowance for loan losses may be made when management has identified significant conditions or circumstances related to a specific loan that management believes indicate the probability that a loss has been incurred in excess of the amount determined by the pooled loss factors.



Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses that may in fact be realized in the future or that additional provisions for loan losses will not be required.



Various regulatory agencies, as well as our outsourced loan review function, as an integral part of their review process, periodically review our loan portfolios and the related allowance for loan losses. Regulatory agencies may require us to increase the allowance for loan losses based on their judgments of information available to them at the time of their examination, thereby adversely affecting our results of operations.



At December 31, 2003 and 2002, our allowance for loan losses was $8.6 million and $11.0 million, respectively.  The allowance coverage to total loans declined to 1.07% at December 31, 2003, from 1.37% at the end of 2002.  This reduction was considered reasonable given the changes in portfolio mix, substantial improvement in non-performing and classified loans and improved asset quality ratios during the year.



The following table sets forth the analysis of the activity in the allowance for loan losses for the periods indicated.



|                                            |                             |                   |  | Years Ended December 31,
|------------------------------------------- | --------------------------- | ----------------- |  | ------------------------
|                                            |                             |                   |  | 2003                    
|                                            |                             |                   |  | (Dollars in thousands)  
|Balance at beginning of year                |                             | $     10,989      |  | $       7,934           
|                                            |                             |                   |  |                         
|Charge-offs:                                |                             |                   |  |                         
|Residential real estate                     |                             | 87                |  | 36                      
|Commercial real estate                      |                             | 136               |  | 2,104                   
|Commercial                                  |                             | 2,362             |  | 651                     
|Consumer (1)                                |                             | 1,466             |  | 306                     
|                                            |                             | Total charge-offs |  | 4,051                   
|                                            |                             |                   |  |                         
|Recoveries:                                 |                             |                   |  |                         
|Residential real estate                     |                             | 31                |  | 9                       
|Commercial real estate                      |                             | 104               |  | 43                      
|Commercial                                  |                             | 175               |  | 628                     
|Consumer (1)                                |                             | 260               |  | 150                     
|                                            |                             | Total recoveries  |  | 570                     
|                                            |                             |                   |  |                         
|Net charge-offs                             |                             | 3,481             |  | 2,267                   
|Provision for loan losses                   |                             | 1,100             |  | 1,150                   
|Allowance acquired from Herkimer            |                             | -                 |  | 4,172                   
|Balance at end of year                      |                             | $       8,608     |  | $     10,989            
|                                            |                             |                   |  |                         
|Ratio of net charge-offs during the year to |                             |                   |  |                         
|average loans outstanding during the year   |                             | 0.43%             |  | 0.37%                   
|                                            |                             |                   |  |                         
|(1)                                         | Includes home equity loans. |                   |  |                         



The level of charge-offs increased from 2002 to 2003 primarily as a result of the $1.5 million commercial loan charge-off previously discussed, and an increase in consumer loan charge-offs.  The majority of consumer loans charged off in 2003 were direct and indirect auto loans acquired from Herkimer.



The following table sets forth the allocation of the allowance for loan losses by loan category for the periods 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 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,       
|----------------------- | --------------------------- | ----------- | ----------------------
|                        |                             |             | 2003                  
|                        |                             |             |                       
|                        |                             |             |                       
|                        |                             |             | Amount of Allowance   
|                        |                             |             | for Loan Losses       
|                        |                             |             | (Dollars in thousands)
|                        |                             |             |                       
|Residential real estate |                             | $     1,319 |                       
|Commercial real estate  |                             | 1,164       |                       
|Commercial              |                             | 3,454       |                       
|Consumer (1)            |                             | 2,671       |                       
|Unallocated             |                             | -           |                       
|                        | Total                       |             | $     8,608           
|                        |                             |             |                       
|(1)                     | Includes home equity loans. |             |                       

The reduction in the allowance allocated to commercial real estate was attributed to the significant reduction in non-performing commercial real estate loans during 2003.  The increase in the allowance allocated to consumer loans in 2003 was attributed to the increased charge-offs of consumer loans previously discussed.



Securities Activities



General. Our investment policy is established by the Bank's Board of Directors. This policy dictates that investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our interest rate risk management. The asset/liability management committee oversees our investment program and evaluates on an ongoing basis our investment policy and objectives. The chief financial officer, or the controller acting with the chief financial officer, is responsible for making securities portfolio decisions in accordance with established policies. Our chief financial officer and controller have the authority to purchase and sell securities within specific guidelines established by the investment policy. All transactions are reviewed by the Board on a monthly basis.



Our current policies generally limit securities investments to U.S. Government, agency and sponsored entity securities, municipal bonds, and corporate debt obligations, as well as investments in preferred and common stock of government sponsored entities, such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank ("FHLB") ("federal agency securities"). The policy also permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as collateralized mortgage obligations ("CMOs") issued or backed by securities issued by these government agencies and/or investment grade privately issued CMOs. Privately issued CMOs typically offer rates above those paid on government agency CMOs, but lack the guaranty of those agencies and typically there is less market liquidity than agency bonds.  We owned $8.2 million and $14.8 million of privately issued CMOs at December 31, 2003 and 2002, respectively.  Also permitted are investments in securities issued or backed by the Small Business Administration and asset-backed securities collateralized by auto loans, credit card receivables, and home equity and home improvement loans. Securities are generally classified as available-for-sale for financial reporting purposes at December 31, 2003. Our current investment strategy uses a risk management approach of diversified investing in fixed-rate securities with short- to intermediate-term maturities. The emphasis of this approach is to increase overall securities yields while managing interest rate risk. To accomplish these objectives, we focus on investments in mortgage-backed securities and CMOs.  In addition, U.S. Government and other non-amortizing securities are used for call protection and liquidity.



Amortized Cost and Estimated Fair Value of Securities. The following table sets forth certain information regarding the amortized cost and estimated fair values of our securities as of the dates indicated.



|                    |                                                  |                          |                  |         | At December 31,
|------------------- | ------------------------------------------------ | ------------------------ | ---------------- | ------- | ---------------
|                    |                                                  |                          |                  |         | 2003           
|                    |                                                  |                          |                  |         | Amortized      
|                    |                                                  |                          |                  |         | Cost           
|                    |                                                  |                          |                  |         | (In thousands) 
|Available-for-sale: |                                                  |                          |                  |         |                
|                    | U.S. Treasury and obligations of U.S. Government |                          |                  |         |                
|                    | corporations and agencies                        |                          | $  101,905       |         | $  103,055     
|                    | Municipal obligations                            |                          | 31,729           |         | 32,279         
|                    | Corporate debt securities                        |                          | 15,481           |         | 15,915         
|                    | Fannie Mae preferred stock                       |                          | 10,000           |         | 8,193          
|                    | Other securities                                 |                          | -                |         | -              
|                    | Collateralized mortgage obligations              |                          | 42,209           |         | 42,545         
|                    | Other mortgage-backed securities                 |                          | 138,393          |         | 141,727        
|                    |                                                  | Total available-for-sale |                  | 339,717 |                
|                    |                                                  |                          |                  |         |                
|Held-to-maturity:   |                                                  |                          |                  |         |                
|                    | Other securities                                 |                          | 1,240            |         | 1,241          
|                    |                                                  | Total held-to-maturity   |                  | 1,240   |                
|                    |                                                  |                          |                  |         |                
|                    |                                                  |                          | Total securities |         | $  340,957     



Prepayments on mortgage-backed securities and collateralized mortgage obligations were at a high level in 2003 as interest rates decreased and borrowers refinanced at lower rates.  As our investments in CMOs were paid down, we reinvested the proceeds in additional mortgage-backed securities as well as obligations of U.S. Government agencies and local municipalities in 2003.



The following table sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of our debt securities portfolio as of December 31, 2003.  Adjustable-rate mortgage related securities are included in the period in which interest rates are next scheduled to adjust.  No tax equivalent adjustments were made to the weighted average yields.  Amounts are shown at fair value, as all securities shown are available-for-sale securities.



|                                            |                       |       |             | At December 31, 2003  
|------------------------------------------- | --------------------- | ----- | ----------- | ----------------------
|                                            |                       |       |             |                       
|                                            |                       |       |             | One Year or Less      
|                                            |                       |       |             |                       
|                                            |                       |       |             | Carrying              
|                                            |                       |       |             | Value                 
|                                            |                       |       |             | (Dollars in thousands)
|                                            |                       |       |             |                       
|U.S. Treasury and federal agency securities | $    31,519           |       | 3.23%       |                       
|Municipal obligations                       |                       | 4,789 |             | 1.88                  
|Corporate securities                        |                       | 3,788 |             | 3.53                  
|Collateralized mortgage obligations         |                       | 105   |             | 2.38                  
|Other mortgage-backed securities            |                       | 33    |             | 3.51                  
|                                            | Total debt securities |       | $    40,234 |                       





Sources of Funds



General. Deposits, repurchase agreements, FHLB advances, scheduled amortization and prepayments of loan principal, maturities and calls of securities and funds provided by operations are our primary sources of funds for use in lending, investing and for other general purposes. Brokered time deposits are used on occasion when market conditions warrant.



Deposits. We offer a variety of deposit accounts having a range of interest rates and terms. We currently offer passbook and statement savings accounts, interest-bearing demand accounts, non-interest-bearing demand accounts, money market accounts and time deposits.



Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing decisions and competition. Our deposits are primarily obtained from areas surrounding our branch offices. In order to attract and retain deposits we rely on providing quality service and introducing new products and services that meet our customers' needs such as on-line banking and bill payment.



Deposit rates are generally determined weekly by the pricing committee which is chaired by the chief financial officer. Members of the committee include the heads of retail banking, commercial lending, mortgage and indirect lending. Staff members from marketing and branch management are non-voting members. When we determine our deposit rates we consider local competition, FHLB advance rates and rates charged on other sources of funds. Core deposits, defined as savings accounts, money market accounts and demand deposit accounts, represented 62.7% of total deposits at December 31, 2003 and 61.6% at December 31, 2002.  At December 31, 2003 and 2002, time deposits with remaining terms to maturity of less than one year amounted to $193.4 million and $190.1 million, respectively.



Total deposits decreased $59.1 million, or 6.9%, to $796.1 million at December 31, 2003 compared to $855.2 million at December 31, 2002.  This decrease occurred in all deposit types as we priced our deposits below most of the competition in order to offset declining yields on loans and securities.



The following table indicates the amount of our time accounts by time remaining until maturity as of December 31, 2003.

|                                  |        | Maturity       |        |               
|--------------------------------- | ------ | -------------- | ------ | --------------
|                                  |        | 3 Months or    |        | Over 3 to 6   
|                                  |        | Less           |        | Months        
|                                  |        | (In thousands)
|                                  |        |                |        |               
|Time accounts less than $100,000  |        | $       48,323 |        | $       39,219
|Time accounts of $100,000 or more | 12,655 |                | 10,669 |               
|                                  |        |                |        |               
|Total of time accounts            |        | $       60,978 |        | $       49,888



Maturities of Time Accounts.  The following table sets forth the amount and maturities of time accounts at the dates indicated.



|                |          | Period to Maturity from December 31, 2003 |               | At December 31,
|--------------- | -------- | ----------------------------------------- | ------------- | ---------------
|                |          | One Year                                  |               | Over One to    
|                |          | or Less                                   |               | Two Years      
|                |          | (Dollars in thousands)                   
|Rate:           |          |                                           |               |                
|Less than 2.00% | $109,166 |                                           | $       7,990 |                
|2.00 to 4.00%   | 67,555   |                                           | 23,203        |                
|4.01 to 5.00%   | 4,238    |                                           | 4,151         |                
|5.01 to 6.00%   | 7,346    |                                           | 1,778         |                
|6.01 to 7.00%   | 4,445    |                                           | 14,134        |                
|7.01% and above | 658      |                                           | 2,957         |                
|                | Total    | $193,408                                  |               | $     54,213   



Borrowed Funds. At December 31, 2003, we had $290.6 million of borrowed funds, which consisted of FHLB advances, FHLB overnight lines of credit and repurchase agreements compared with $292.0 million outstanding at December 21, 2002.  Repurchase agreements are contracts for the sale of securities owned or borrowed by us, with an agreement to repurchase those securities at an agreed upon price and date.  Our policies limit the use of repurchase agreements to collateral consisting of U.S. Treasury obligations, U.S. agency obligations or mortgage-related securities.  There were $26.1 million of repurchase agreements outstanding as of December 31, 2003, and we averaged approximately $34.7 million outstanding pursuant to such agreements during the year ended December 31, 2003.



As a member of the FHLB of New York, the Bank is eligible to obtain advances upon the security of the FHLB common stock owned and certain residential mortgage loans, provided certain standards related to credit worthiness have been met. FHLB advances are available pursuant to several credit programs, each of which has its own interest rate and range of maturities.



We had available $351.5 million and $277.0 million in borrowing capacity with the FHLB (subject to limitations) at December 31, 2003 and 2002, respectively, of which $263.5 million and $247.0 million, respectively was outstanding.



The following table sets forth certain information regarding FHLB advances and repurchase agreements at the dates or for the periods indicated.



|                                              |  | December 31,          
|--------------------------------------------- |  | ----------------------
|                                              |  | 2003                  
|                                              |  | (Dollars in thousands)
|FHLB Overnight Line of Credit:                |  |                       
|Maximum month-end balance                     |  | $     13,000          
|Balance at end of year                        |  | 1,000                 
|Average balance                               |  | 1,058                 
|                                              |  |                       
|Weighted average interest rate at end of year |  | 1.04%                 
|Weighted average interest rate during year    |  | 1.16%                 
|                                              |  |                       
|Repurchase Agreements:                        |  |                       
|Maximum month-end balance                     |  | $      44,294         
|Balance at end of year                        |  | 26,069                
|Average balance                               |  | 34,668                
|                                              |  |                       
|Weighted average interest rate at end of year |  | 1.04%                 
|Weighted average interest rate during year    |  | 1.21%                 
|                                              |  |                       
|FHLB Advances:                                |  |                       
|Maximum month-end balance                     |  | $    263,500          
|Balance at end of year                        |  | 263,500               
|Average balance                               |  | 237,263               
|                                              |  |                       
|Weighted average interest rate at end of year |  | 3.58%                 
|Weighted average interest rate during year    |  | 4.19%                 



Trust Services



The Trust Department offers a full range of services, including living trusts, executor services, testamentary trusts, employee benefit plan management, custody services and investment management, primarily to individuals, corporations and other institutions.  The Trust Department has retained the services of an independent investment services firm to provide investment research.  A Trust Committee that consists of the Manager of the Trust Department and the President, as well as two members of our Board of Directors, oversees operations of the Trust Department.  The Trust Department markets its services through its trust officers, who call on our existing customers, referrals from attorneys and accountants and our branch managers who cross-sell the Trust Department's services.  As of December 31, 2003, the Trust Department held $69.8 million of assets, which includes $57.3 million over which the Trust Department has discretionary investment authority.



Municipal Activities



SBU Municipal Bank is a limited purpose commercial bank which accepts deposits of municipalities in our market area.  The subsidiary was created in conjunction with the Herkimer transaction and is regulated by the FDIC and New York State Banking Department.



Investment Services



We offer annuity and mutual fund products through designated employees who are registered representatives. The annuities and mutual funds, which are products of unrelated insurance and mutual fund companies, are offered to customers and to members of the general public who are interested in non-deposit investments. We earn fees from the annuity and mutual fund providers for attracting and retaining these customers.



The Bank's subsidiary, 233 Genesee Street Corporation, is a New York State Article 9A company that is involved in holding investments in U.S. Treasury, and federal agency and corporate obligations.



Title Insurance



We have an equity ownership in a title insurance company that sells title insurance for residential property.  Management believes that this ownership is beneficial to our relationship with our residential mortgage customers.  We record income based on our percentage ownership in the title insurance company.



Competition



We face intense competition within our market both in making loans and attracting deposits. The Central New York area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as private banking. However, our branch network, deployment of branch and offsite ATMs and development of our web-based banking services allow us to compete effectively for most consumer and small business relationships.



Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our in-house investment services department offers a full range of mutual funds, annuities and other investment products based on careful analysis of customer needs. This department has a close working relationship with other sales functions within SBU Bank. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our leadership role as a community bank.



Personnel



As of December 31, 2003, SBU Bank had 290 full-time employees and 59 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.



REGULATION



The Company and Partners Trust, MHC, as savings and loan holding companies, and the Bank, as a federal savings bank, are subject to extensive supervision, regulation and examination by the Office of Thrift Supervision ("OTS") as their primary federal banking regulator.  The Company, Partners Trust, MHC, and the Bank also are subject to regulation as to certain matters by the Board of Governors of the Federal Reserve System ("Federal Reserve"), and the Bank is subject to regulation as to certain matters by the Federal Deposit Insurance Corporation ("FDIC").  The Bank also is a member of the Federal Home Loan Bank of New York, which is a regional branch of the Federal Home Loan Bank System.  The trust department of the Bank is registered as an investment adviser and, as such, is subject to extensive supervision and regulation by the Securities and Exchange Commission.  SBU Municipal Bank, a subsidiary of the Bank, is a New York-chartered limited-purpose commercial bank, and is subject to extensive supervision, regulation and examination by the FDIC and the New York State Banking Department ("NYSBD"), and is subject to regulation as to certain matters by the Federal Reserve.



As a federal savings bank, the Bank derives its lending and investment powers from the Home Owners' Loan Act, as amended, and regulations of the OTS thereunder.  These laws and regulations limit the ability of the Bank to invest in certain types of assets and limit the amount of loans that the Bank may make to a single borrower.  The Bank also is subject to a "qualified thrift lender" or "QTL" test, which requires the Bank to maintain at least 65% of its "portfolio assets" in "qualified thrift investments," which generally include loans and investments made for residential purposes, personal loans, and small business loans.  As of December 31, 2003, the Bank was in compliance with all applicable lending and investment restrictions and also satisfied the QTL test.



As a member of the Federal Home Loan Bank of New York, the Bank is required to hold a minimum amount of the capital stock thereof.  As of December 31, 2003, the Bank satisfied this requirement.



Deposits of the Bank and of SBU Municipal Bank are insured by the FDIC up to statutory and regulatory limits, and are subject to deposit insurance assessments to maintain the insurance funds administered by the FDIC.  The FDIC has adopted a risk-based system for determining deposit insurance assessments.  Under this system, all insured depository institutions are placed in one of nine categories based on their level of capital and supervisory evaluation, and are assessed from 0% to 0.27% of insured deposits based on their placement.  The FDIC is authorized to raise the assessment rates as necessary to maintain the ratio of reserves to insured deposits at not less than 1.25%.  As of December 31, 2003, the Bank and SBU Municipal Bank were not subject to assessments.  In addition, all FDIC-insured depository institutions are required to pay assessments to the FDIC at an annual rate of 0.212% of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government, to recapitalize the predecessor of the Savings Association Insurance Fund.  These assessments will continue until the bonds mature in 2017.



The Bank is subject to OTS capital adequacy guidelines.  These guidelines require savings institutions to maintain a minimum ratio of tangible capital to tangible assets of 1.5%, of Tier 1 capital to total assets (or "leverage ratio") of 4% (3% for savings institutions receiving the highest composite CAMELS rating for safety and soundness), of Tier I capital to risk-weighted assets of 4%, and a minimum ratio of qualifying total capital to risk-weighted assets of 8%.  Savings institutions that fail to meet these minimum capital guidelines are subject to prompt corrective action.  The appointment of a receiver or conservator is required for savings institutions with a tangible capital ratio of less than 2%, thereby establishing 2% as the effective minimal tangible capital ratio.  As of December 31, 2003, the Bank was "well capitalized" under OTS standards.  The OTS may set higher minimum capital requirements for individual savings institutions whose circumstances warrant it.  The Bank is not subject to any special capital requirements.



SBU Municipal Bank is subject to similar capital adequacy guidelines of the FDIC and the NYSBD.  Under these guidelines, a commercial bank must maintain a minimum leverage ratio of 4% (3% for commercial banks receiving the highest composite CAMELS rating for safety and soundness), 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, SBU Municipal Bank was "well capitalized" under FDIC and NYSBD standards and was not subject to any special capital requirements.



The Bank and SBU Municipal Bank are subject to substantial regulatory restrictions on their ability to pay dividends to their shareholders.  Under OTS restrictions with respect to the Bank and FDIC and NYSBD restrictions with respect to SBU Municipal Bank, prior regulatory approval is required in order to pay a dividend if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the institution's retained net income during the calendar year and its retained net income during the preceding two years.  The ability to pay dividends also is subject to the depository institution being in compliance with regulatory capital requirements.  The Bank and SBU Municipal Bank are currently in compliance with these requirements.  As of December 31, 2003, approximately $23.2 million was available at the Bank after the payment of all declared dividends to pay future dividends to the Company without prior OTS approval.



Transactions between the Bank and its affiliates are governed by sections 23A and 23B of the Federal Reserve Act.  An "affiliate" of a bank or savings institution is any company or entity that controls, is controlled by, or is under common control with the bank or savings institution.  Generally, a subsidiary of a depository institution that is not also a depository institution is not treated as an affiliate of the bank for purposes of sections 23A and 23B.  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.



On October 31, 2002, the Federal Reserve adopted a new regulation, Regulation W, effective April 1, 2003, that comprehensively amends 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.



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, the Bank and SBU Municipal Bank, are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions.  Additional information-sharing among financial institutions, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the GLB Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing.  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 and to SBU Municipal Bank.



The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among other issues, corporate governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection, and enhanced and timely disclosure of corporate information.  The SEC and the NASD have adopted several implementing rules.  The changes are intended to allow stockholders to monitor more effectively the performance of companies and management.



Effective August 29, 2002, as directed by section 302(a) of the Sarbanes-Oxley Act, our chief executive officer and chief financial officer are each required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact.  This requirement has several parts, including certification that these officers are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal controls; that they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal controls; and that they have included information in our quarterly and annual reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.



ITEM 2.	PROPERTIES



We conduct our business through our main banking office located in Utica, New York, and other full-service branch offices located in Oneida, Herkimer, and Onondaga Counties, New York. The aggregate net book value of our premises and equipment was $16.8 million at December 31, 2003 (including land and buildings held for sale). The following table sets forth certain information with respect to our offices at December 31, 2003.



|OWNED                                 |      | Original |     | Net Book            
|------------------------------------- | ---- | -------- | --- | --------------------
|                                      |      | Year     |     | Value               
|Location                              |      | Acquired |     | (in thousands)      
|Main Office                           |      | 1839     |     | $              4,300
|233 Genesee Street                    |      |          |     |                     
|Utica, NY 13501                       |      |          |     |                     
|                                      |      |          |     |                     
|Commercial Drive Branch               |      | 2002     |     | 636                 
|4630 Commercial Drive                 |      |          |     |                     
|New Hartford, NY 13413                |      |          |     |                     
|                                      |      |          |     |                     
|Dolgeville Branch                     |      | 2002     |     | 321                 
|71 N. Main Street                     |      |          |     |                     
|Dolgeville, NY                        |      |          |     |                     
|                                      |      |          |     |                     
|Ellinwood Office Building             |      | 1993     |     | 3,091               
|2 Ellinwood Drive                     |      |          |     |                     
|New Hartford, NY 13413                |      |          |     |                     
|                                      |      |          |     |                     
|Frankfort Branch                      |      | 2002     |     | 57                  
|134 E. Main Street                    |      |          |     |                     
|Frankfort, NY                         |      |          |     |                     
|                                      |      |          |     |                     
|Ilion Branch                          |      | 2002     |     | 524                 
|150 Central Ave.                      |      |          |     |                     
|Ilion, NY                             |      |          |     |                     
|                                      |      |          |     |                     
|Little Falls Branch                   |      | 2002     |     | 1,262               
|501 E. Main Street                    |      |          |     |                     
|Little Falls, NY                      |      |          |     |                     
|                                      |      |          |     |                     
|Newport Branch                        |      | 2002     |     | 143                 
|15 Bridge Street                      |      |          |     |                     
|Newport, NY                           |      |          |     |                     
|                                      |      |          |     |                     
|North Utica Branch                    |      | 2001     |     | 1,573               
|1-3 Herkimer Road                     |      |          |     |                     
|Utica, NY 13502                       |      |          |     |                     
|                                      |      |          |     |                     
|Oriskany Branch                       |      | 2002     |     | 92                  
|110 River Street                      |      |          |     |                     
|Oriskany, NY 13424                    |      |          |     |                     
|                                      |      |          |     |                     
|Slawson St. Storage Facility          |      | 2002     |     | 36                  
|3 Slawson Street                      |      |          |     |                     
|Dolgeville, NY                        |      |          |     |                     
|                                      |      |          |     |                     
|100 South Main Street Office Building | 2002 |          | 670
|Herkimer, NY                          |      |          |     |                     
|                                      |      |          |     |                     
|Whitesboro Branch                     |      | 1997     |     | 1,618               
|80 Oriskany Boulevard                 |      |          |     |                     
|Whitesboro, NY 13492                  |      |          |     |                     
|Total Owned                           |      |          |     | $          14,323   





|LEASED                                |  | Original |  | Date of    |  | Net Book             
|------------------------------------- |  | -------- |  | ---------- |  | ---------------------
|                                      |  | Year     |  | Lease      |  | Value                
|Location                              |  | Leased   |  | Expiration |  | (In thousands)       
|Clinton ATM Facility                  |  | 1997     |  | 10/13/2007 |  | $                 115
|Corner of College St. & Chenango Ave. |  |          |  |            |  |                      
|Clinton, NY 13323                     |  |          |  |            |  |                      
|                                      |  |          |  |            |  |                      
|Fayetteville Branch                   |  | 2000     |  | 4/30/2010  |  | 169                  
|6872 E. Genesee Street                |  |          |  |            |  |                      
|Fayetteville, NY 13066                |  |          |  |            |  |                      
|                                      |  |          |  |            |  |                      
|Hannaford Branch                      |  | 2002     |  | 6/30/2008  |  | 4                    
|401 East Albany Street                |  |          |  |            |  |                      
|Herkimer, NY                          |  |          |  |            |  |                      
|                                      |  |          |  |            |  |                      
|Marcy Branch                          |  | 2002     |  | 7/31/2007  |  | -                    
|Rt 49 Plaza                           |  |          |  |            |  |                      
|Marcy, NY                             |  |          |  |            |  |                      
|                                      |  |          |  |            |  |                      
|New Hartford Shopping Center Branch   |  | 1961     |  | 6/30/2006  |  | 154                  
|120 Genesee Street                    |  |          |  |            |  |                      
|New Hartford, NY 13413                |  |          |  |            |  |                      
|                                      |  |          |  |            |  |                      
|North Herkimer Branch                 |  | 2002     |  | 12/31/2008 |  | 2                    
|319 North Main Street                 |  |          |  |            |  |                      
|Herkimer, NY                          |  |          |  |            |  |                      
|                                      |  |          |  |            |  |                      
|Oriskany Airport ATM Facility         |  | 2002     |  | 7/5/2004   |  | -                    
|110 River Street                      |  |          |  |            |  |                      
|Oriskany, NY                          |  |          |  |            |  |                      
|                                      |  |          |  |            |  |                      
|Rome Branch                           |  | 1997     |  | 6/30/2007  |  | 3                    
|1919 Black River Boulevard            |  |          |  |            |  |                      
|Rome, NY 13440                        |  |          |  |            |  |                      
|                                      |  |          |  |            |  |                      
|Washington Mills Branch               |  | 1999     |  | 3/31/2006  |  | 61                   
|40 Kellogg Road                       |  |          |  |            |  |                      
|New Hartford, NY 13413                |  |          |  |            |  |                      
|Total Leased                          |  |          |  |            |  | $               508  
|Total Leased and Owned                |  |          |  |            |  | $          14,831    





ITEM 3.	LEGAL PROCEEDINGS



There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or its subsidiary 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 REGISTRANT'S COMMON EQUITY AND RELATED

STOCKHOLDER MATTERS



The Company completed its offering of common stock on April 4, 2002.  Since that date, the common stock has traded on the Nasdaq National Market under the symbol "PRTR".  Prior to April 4, 2002, no established public trading market for the common stock existed.  The following table sets forth for the periods indicated the high and low sales price per share of the common stock and dividends paid per share as reported by The Nasdaq National Market.



|            |  | 2003           |  | 2002          
|----------- |  | -------------- |  | --------------
|            |  |                |  |               
|            |  | High           |  | Low           
|            |  |                |  |               
|1st quarter |  | $        17.56 |  | $        15.81
|2nd quarter |  | 22.00          |  | 16.87         
|3rd quarter |  | 24.52          |  | 19.00         
|4th quarter |  | 34.76          |  | 21.95         



(1) No dividends were paid on shares held by the MHC, which has waived receipt of its dividends on its common stock.  The closing price of the common stock on December 23, 2003, the date immediately prior to the public announcement of the acquisition of BSB Bancorp, Inc., was $25.47 per share.  The closing price of the common stock on January 27, 2004 was $38.74 per share.  The approximate number of holders of record of our common stock on January 27, 2004 was 1,385.



In 2003, we purchased 13,273 shares, at the then-current market price, from certain directors and executive officers.  The individuals used the proceeds to pay their tax liability incident to the vesting of restricted stock.



ITEM 6.	SELECTED FINANCIAL DATA



|                                   |                           |  |                  | December 31,  
|---------------------------------- | ------------------------- |  | ---------------- | --------------
|                                   |                           |  |                  | 2003          
|                                   |                           |  |                  | (In thousands)
|Selected Financial Condition Data: |                           |  |                  |               
|                                   | Total assets              |  | $      1,285,115 |               
|                                   | Gross loans (1)           |  | 805,250          |               
|                                   | Allowance for loan losses |  | 8,608            |               
|                                   | Securities                |  | 344,954          |               
|                                   | Goodwill                  |  | 34,523           |               
|                                   | Other intangible assets   |  | 3,288            |               
|                                   | Deposits                  |  | 796,078          |               
|                                   | Borrowings (2)            |  | 296,625          |               
|                                   | Shareholders' equity      |  | 175,335          |               
|                                   | Non-performing loans      |  | 4,242            |               
|                                   | Other real estate owned   |  | 121              |               



|                         |                                                                                                                        |                                                     |                  | Year Ended December 31,          
|------------------------ | ---------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ---------------- | ---------------------------------
|                         |                                                                                                                        |                                                     |                  | 2003                             
|                         |                                                                                                                        |                                                     |                  | (In thousands, except share data)
|Selected Operating Data: |                                                                                                                        |                                                     |                  |                                  
|                         | Interest income                                                                                                        |                                                     | $       69,189   |                                  
|                         | Interest expense                                                                                                       |                                                     | 22,582           |                                  
|                         | Net interest income                                                                                                    |                                                     | 46,607           |                                  
|                         | Provision for loan losses                                                                                              |                                                     | 1,100            |                                  
|                         |                                                                                                                        | Net interest income after provision for loan losses | 45,507           |                                  
|                         | Net (loss) gain on sale of securities available-for-sale                                                               | -                                                   |                  | (19)                             
|                         | Other non-interest income                                                                                              |                                                     | 11,138           |                                  
|                         | Merger expenses                                                                                                        |                                                     | -                |                                  
|                         | Other non-interest expense (3)                                                                                         |                                                     | 35,331           |                                  
|                         | Income before income tax expense                                                                                       |                                                     | 21,314           |                                  
|                         | Income tax expense                                                                                                     |                                                     | 7,268            |                                  
|                         | Net income                                                                                                             |                                                     | $       14,046   |                                  
|                         | Basic earnings per share (4)                                                                                           |                                                     | $           1.04 |                                  
|                         | Diluted earnings per share (4)                                                                                         |                                                     | $           1.02 |                                  
|                         | Basic weighted average shares outstanding (4)                                                                          |                                                     | 13,531,672       |                                  
|                         | Diluted weighted average shares outstanding (4)                                                                        |                                                     | 13,749,174       |                                  
|                         | Dividends paid per share                                                                                               |                                                     | $           0.34 |                                  
|                         |                                                                                                                        |                                                     |                  |                                  
|(1)                      | Excludes loans held for sale.                                                                                         
|(2)                      | Includes mortgagors' escrow funds.                                                                                     |                                                     |                  |                                  
|(3)                      | Includes one-time $2.1 million charitable contribution to the SBU Bank Charitable Foundation in 2002.                 
|(4)                      | Earnings per share and weighted average shares outstanding are not applicable prior to the conversion of SBU Bank to a
|                         |                                                                                                                        | stock bank on April 3, 2002.                       



|                                       |                                  |                          |        | Year Ended December 31,
|-------------------------------------- | -------------------------------- | ------------------------ | ------ | -----------------------
|                                       |                                  |                          |        | 2003                   
|                                       |                                  |                          |        |                        
|Selected Financial and Other Data: (1) |                                  |                          |        |                        
|                                       | Performance Ratios:              |                          |        |                        
|                                       | Return on average assets         |                          | 1.08%  |                        
|                                       | Return on average equity         |                          | 8.18%  |                        
|                                       | Interest rate information:       |                          |        |                        
|                                       |                                  | Yield on assets          |        | 5.91%                  
|                                       |                                  | Cost of funds            |        | 2.24%                  
|                                       |                                  | Net interest rate spread |        | 3.67%                  
|                                       | Net interest margin (2)          |                          | 3.98%  |                        
|                                       | Net charge-offs to average loans |                          | 0.43%  |                        
|                                       | Efficiency ratio (3)             |                          | 61.90% |                        



|    |                                                                                        |                                                                                         |                 | December 31,
|--- | -------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | --------------- | ------------
|    |                                                                                        |                                                                                         |                 | 2003        
|    |                                                                                        |                                                                                         |                 |             
|    | Asset Quality Ratios:                                                                  |                                                                                         |                 |             
|    | Non-performing loans to total loans                                                    |                                                                                         | 0.53%           |             
|    | Non-performing assets to total assets                                                  |                                                                                         | 0.34%           |             
|    | Allowance for loan losses to non-performing loans                                      | 202.92%                                                                                 |                 | 100.05%     
|    | Allowance for loan losses to total loans                                               |                                                                                         | 1.07%           |             
|    |                                                                                        |                                                                                         |                 |             
|    | Equity ratios:                                                                         |                                                                                         |                 |             
|    | Book value per share                                                                   |                                                                                         | $         12.72 |             
|    | Book value per share,                                                                  |                                                                                         |                 |             
|    |                                                                                        | including unallocated ESOP shares                                                       |                 | 12.35       
|    | Tangible book value per share                                                          |                                                                                         | 9.98            |             
|    | Tangible book value per share, including                                               |                                                                                         |                 |             
|    | unallocated ESOP shares                                                                |                                                                                         | 9.69            |             
|(1) | Averages presented are daily averages.                                                 |                                                                                         |                 |             
|(2) | Net interest income divided by average earning assets.                                 |                                                                                         |                 |             
|(3) | Represents the ratio of non-interest expense divided by the sum of net interest income |                                                                                         |                 |             
|    |                                                                                        | and non-interest income, excluding gains or losses on the sale of securities and loans. |                 |             





|                                                         |                                                                                                                             |                                  |                 |        |                 |        |                 |        |                 |        |                 |       |                 |        |                |      
|-------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | --------------- | ------ | --------------- | ------ | --------------- | ------ | --------------- | ------ | --------------- | ----- | --------------- | ------ | -------------- | -----
|                                                         |                                                                                                                             | 2003                             |                 | 2002  
|                                                         |                                                                                                                             | Fourth                           |                 | Third  |                 | Second |                 | First  |                 | Fourth |                 | Third |                 | Second |                | First
|                                                         |                                                                                                                             | (In thousands except share data)
|Selected Quarterly Financial Data                        |                                                                                                                             |                                  |                 |        |                 |        |                 |        |                 |        |                 |       |                 |        |               
|                                                         |                                                                                                                             |                                  |                 |        |                 |        |                 |        |                 |        |                 |       |                 |        |                |      
|Interest income                                          | $      16,240                                                                                                               |                                  | $      16,994   |        | $      17,445   |        | $      18,510   |        | $      15,517   |        | $      15,843   |       | $      15,821   |        | $      15,709 
|Interest expense                                         | 5,017                                                                                                                       |                                  | 5,367           |        | 5,826           |        | 6,372           |        | 6,299           |        | 6,715           |       | 7,139           |        | 7,473         
|Net interest income                                      | 11,223                                                                                                                      |                                  | 11,627          |        | 11,619          |        | 12,138          |        | 9,218           |        | 9,128           |       | 8,682           |        | 8,236         
|Provision for loan losses                                | -                                                                                                                           |                                  | 391             |        | 283             |        | 425             |        | 300             |        | 200             |       | 350             |        | 300           
|                                                         | Net interest income after provision for loan losses                                                                         | 11,223                           |                 | 11,236 |                 | 11,336 |                 | 11,713 |                 | 8,918  |                 | 8,928 |                 | 8,332  |                | 7,936
|Net (loss) gain on sale of securities available-for-sale | -                                                                                                                           |                                  | -               |        | -               |        | -               |        | -               |        | -               |       | (19)            |        | -             
|Other non-interest income                                | 2,737                                                                                                                       |                                  | 3,241           |        | 2,748           |        | 2,411           |        | 1,732           |        | 1,998           |       | 1,582           |        | 1,554         
|Merger expenses                                          | -                                                                                                                           |                                  | -               |        | -               |        | -               |        | 1,712           |        | 4               |       | -               |        | -             
|Other non-interest expense (1)                           | 8,868                                                                                                                       |                                  | 9,000           |        | 8,692           |        | 8,770           |        | 6,272           |        | 6,332           |       | 8,287           |        | 6,124         
|Income before income tax expense                         | 5,092                                                                                                                       |                                  | 5,477           |        | 5,392           |        | 5,354           |        | 2,666           |        | 4,590           |       | 1,608           |        | 3,366         
|Income tax expense                                       | 1,845                                                                                                                       |                                  | 1,862           |        | 1,782           |        | 1,780           |        | 730             |        | 1,479           |       | 551             |        | 1,058         
|Net income                                               | $        3,247                                                                                                              |                                  | $        3,615  |        | $        3,610  |        | $        3,574  |        | $        1,936  |        | $        3,111  |       | $        1,057  |        | $        2,308
|Basic earnings per share (2)                             | $          0.24                                                                                                             |                                  | $          0.27 |        | $          0.27 |        | $          0.26 |        | $          0.14 |        | $          0.23 |       | $          0.08 |        | N/A           
|Diluted earnings per share (2)                           | $          0.23                                                                                                             |                                  | $          0.26 |        | $          0.26 |        | $          0.26 |        | $          0.14 |        | $          0.23 |       | $          0.08 |        | N/A           
|Basic weighted average shares outstanding (2)            | 13,567,189                                                                                                                  |                                  | 13,532,398      |        | 13,519,624      |        | 13,506,805      |        | 13,589,711      |        | 13,730,775      |       | 13,713,597      |        | N/A           
|Diluted weighted average shares outstanding (2)          | 13,853,994                                                                                                                  |                                  | 13,789,794      |        | 13,718,119      |        | 13,636,850      |        | 13,660,561      |        | 13,730,775      |       | 13,713,597      |        | N/A           
|Dividends paid per share                                 | $          0.10                                                                                                             |                                  | $          0.10 |        | $          0.07 |        | $          0.07 |        | $          0.05 |        | $          0.05 |       | N/A             |        | N/A           
|Net interest margin (3)                                  | 3.85%                                                                                                                       |                                  | 3.95%           |        | 3.93%           |        | 4.19%           |        | 3.82%           |        | 3.76%           |       | 3.59%           |        | 3.62%         
|Return on average assets                                 | 1.01%                                                                                                                       |                                  | 1.11%           |        | 1.11%           |        | 1.11%           |        | 0.75%           |        | 1.20%           |       | 0.41%           |        | 0.95%         
|Return on average equity                                 | 7.35%                                                                                                                       |                                  | 8.22%           |        | 8.48%           |        | 8.70%           |        | 4.57%           |        | 7.47%           |       | 2.68%           |        | 9.11%         
|Efficiency ratio (4)                                     | 63.90%                                                                                                                      |                                  | 61.95%          |        | 61.02%          |        | 60.80%          |        | 74.24%          |        | 57.70%          |       | 81.22%          |        | 62.98%        
|                                                         |                                                                                                                             |                                  |                 |        |                 |        |                 |        |                 |        |                 |       |                 |        |                |      
|(1)                                                      | Includes one-time $2.1 million charitable contribution to the SBU Bank Charitable Foundation in the second quarter of 2002. |                                  |                 |        |                
|(2)                                                      | Earnings per share and weighted average shares outstanding are not applicable prior to the conversion of SBU Bank to        |                                  |                 |        |                 |        |                
|                                                         | a stock bank on April 3, 2002.                                                                                              |                                  |                 |        |                 |        |                 |        |                 |        |                 |       |                 |        |               
|(3)                                                      | Net interest income divided by average earning assets.                                                                      |                                  |                 |        |                 |        |                 |        |                 |        |                 |       |                 |        |               
|(4)                                                      | Represents the ratio of non-interest expense divided by the sum of net interest income and                                  |                                  |                 |        |                 |        |                
|                                                         | non-interest income, excluding gains or losses on the sale of securities and loans.                                         |                                  |                 |        |                 |        |                 |        |                 |        |                 |       |                





ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS



General



The financial review that follows focuses on the factors affecting the consolidated financial condition and results of operations of Partners Trust Financial Group, Inc., and its subsidiary, SBU Bank (the "Bank") (combined, the "Company"), during the year ended December 31, 2003 and the preceding two years.  The consolidated financial statements and related notes as of December 31, 2003 and 2002, and for each of the years in the three year period ended December 31, 2003 should be read in conjunction with this review.



Income



Expenses



2003 Highlights



Total assets were $1.3 billion at December 31, 2003, which was $48.4 million lower than at December 31, 2002.  Cash and cash equivalents decreased $44.5 million.  The decrease in cash and cash equivalents was primarily caused by a $59.1 million outflow of deposits, due largely to our relatively low deposit account rates.  The average balances of loans and deposits were up significantly during 2003, however, primarily due to the acquisition of Herkimer Trust Corporation, Inc. ("Herkimer") on December 27, 2002.



Net income for the year ended December 31, 2003 was $14.0 million, or $1.02 per diluted share, which was $5.6 million, or 67.0%, higher than the same period in 2002.  The increase is primarily due to the Herkimer acquisition and emphasis on net interest margin and expense control.  Return on assets and return on equity were 1.08% and 8.18%, respectively, for the year ended December 31, 2003, compared to 0.82% and 5.67%, respectively, for the same period in 2002.



Adoption of Plan of Conversion and Reorganization and Acquisition



On December 23, 2003, the Board of Directors of the MHC, the Company and the Bank adopted the Plan of Conversion and Reorganization of Partners Trust, MHC (the "Plan") for the conversion and restructuring of the Company and the MHC into a full capital stock corporation.  The Plan is subject to regulatory, depositor and stockholder approvals.



In addition, the Company signed a definitive merger agreement to acquire BSB Bancorp, Inc. ("BSB"), the holding company for BSB Bank & Trust Company.  The acquisition will only occur if the conversion is completed.  The consideration to be paid in the merger will be 40% cash and 60% stock.  Shareholders of BSB will be able to elect either $36.00 in cash or 3.6 shares of common stock of the reorganized Partners Trust, subject to customary proration and allocation procedures.  The aggregate value of the transaction is approximately $347.0 million.  The conversion, offering and acquisition are expected to be completed in mid-2004, subject to regulatory and stockholder approvals.  As of December 31, 2003, BSB had total assets of $2.21 billion, total loans of $1.45 billion, total deposits of $1.59 billion and total shareholders' equity of $146.3 million.



Average Balance Sheet



The following tables set forth certain information for the years ended December 31, 2003, 2002 and 2001.  For the years indicated, the total dollar amount of interest income from average earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, is expressed both in dollars and rates.  No tax equivalent adjustments were made.  Average balances are daily averages.

|                                                                                                             |                                         |                                            |                | For the Years Ended December 31,
|------------------------------------------------------------------------------------------------------------ | --------------------------------------- | ------------------------------------------ | -------------- | --------------------------------
|                                                                                                             |                                         |                                            |                |                                 
|                                                                                                             |                                         |                                            |                | Average                         
|                                                                                                             |                                         |                                            |                | Outstanding                     
|                                                                                                             |                                         |                                            |                | Balance                         
|                                                                                                             |                                         |                                            |                | (Dollars in thousands)          
|Earning assets:                                                                                              |                                         |                                            |                |                                 
|                                                                                                             | Federal funds sold and interest bearing |                                            |                |                                 
|                                                                                                             |                                         | deposits                                   | $       30,817 |                                 
|                                                                                                             | Securities (1)                          | 347,877                                    |                | 14,855                          
|                                                                                                             | Loans (2)                               | 792,993                                    |                | 53,986                          
|                                                                                                             |                                         | Total earning assets                       | 1,171,687      |                                 
|                                                                                                             |                                         |                                            |                |                                 
|                                                                                                             | Non-earning assets                      | 123,974                                    |                |                                 
|                                                                                                             |                                         |                                            | Total assets   | $  1,295,661                    
|                                                                                                             |                                         |                                            |                |                                 
|Interest bearing liabilities:                                                                                |                                         |                                            |                |                                 
|                                                                                                             | Savings accounts                        | $     166,457                              |                | $         839                   
|                                                                                                             | Money market accounts                   | 160,358                                    |                | 1,335                           
|                                                                                                             | NOW accounts                            | 91,142                                     |                | 199                             
|                                                                                                             | Time accounts                           | 314,454                                    |                | 9,563                           
|                                                                                                             | Borrowings (3)                          | 277,548                                    |                | 10,646                          
|                                                                                                             |                                         | Total interest bearing liabilities         | 1,009,959      |                                 
|                                                                                                             |                                         |                                            |                |                                 
|                                                                                                             | Non-interest bearing deposits           | 99,617                                     |                |                                 
|                                                                                                             | Other non-interest bearing liabilities  | 14,316                                     |                |                                 
|                                                                                                             |                                         | Total liabilities                          | 1,123,892      |                                 
|                                                                                                             | Shareholders' equity                    | 171,769                                    |                |                                 
|                                                                                                             |                                         | Total liabilities and shareholders' equity | $  1,295,661   |                                 
|                                                                                                             |                                         |                                            |                |                                 
|                                                                                                             | Net interest income                     |                                            |                | $    46,607                     
|                                                                                                             |                                         |                                            |                |                                 
|                                                                                                             | Net interest rate spread                |                                            |                |                                 
|                                                                                                             |                                         |                                            |                |                                 
|                                                                                                             | Net earning assets                      | $     161,728                              |                |                                 
|                                                                                                             |                                         |                                            |                |                                 
|                                                                                                             | Net interest margin                     |                                            |                |                                 
|                                                                                                             |                                         |                                            |                |                                 
|                                                                                                             | Ratio of earning assets to              |                                            |                |                                 
|                                                                                                             |                                         | interest bearing liabilities               | 116.01%        |                                 
|                                                                                                             |                                         |                                            |                |                                 
|(1) The amounts shown are amortized cost and include FHLB stock.                                             |                                         |                                            |                |                                 
|(2)Net of the allowance for loan losses and net deferred loan fees and costs.  Includes loans held for sale. |                                         |                                            |                |                                 
|(3)Borrowings include mortgagors' escrow funds.                                                              |                                         |                                            |                |                                 



Rate/Volume Analysis



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



|                              |                                                  |                                    |         | Year Ended December 31,
|----------------------------- | ------------------------------------------------ | ---------------------------------- | ------- | -----------------------
|                              |                                                  |                                    |         | 2003 vs. 2002          
|                              |                                                  |                                    |         | Rate                   
|                              |                                                  |                                    |         | (In thousands)         
|Earning assets:               |                                                  |                                    |         |                        
|                              | Federal funds sold and interest-bearing deposits | $     (141)                        |         | $       (45)           
|                              | Securities                                       |                                    | (5,213) |                        
|                              | Loans                                            |                                    | (3,132) |                        
|                              |                                                  | Total earning assets               |         | (8,486)                
|                              |                                                  |                                    |         |                        
|Interest bearing liabilities: |                                                  |                                    |         |                        
|                              | Savings accounts                                 |                                    | (786)   |                        
|                              | Money market accounts                            |                                    | (1,030) |                        
|                              | NOW accounts                                     |                                    | (261)   |                        
|                              | Time accounts                                    |                                    | (3,954) |                        
|                              | Borrowings                                       |                                    | (2,377) |                        
|                              |                                                  | Total interest bearing liabilities |         | (8,408)                
|                              |                                                  |                                    |         |                        
|Net interest income           |                                                  | $       (78)                       |         | $  11,421              



See "Comparison of Operating Results for the Years Ended December 31, 2003 and 2002" and "Comparison of Operating Results for Years Ended December 31, 2002 and 2001" later in this section for a discussion of changes in net interest income.



Comparison of Financial Condition at December 31, 2003 and December 31, 2002



Total assets were $1.3 billion at December 31, 2003, which was $48.4 million lower than at December 31, 2002.  Cash and cash equivalents decreased $44.5 million.  The decrease in cash and cash equivalents was primarily caused by a $59.1 million outflow of deposits.



Securities available-for-sale were relatively flat from December 31, 2002 to December 31, 2003, although there was a change in the mix of securities.   U.S. Treasury and obligations of U.S. government corporations and agencies and other mortgage-backed securities increased $21.2 million and $7.9 million, respectively, while collateralized mortgage obligations decreased $31.8 million.  Prepayments on collateralized mortgage obligations and other mortgage-backed securities were at a high level in 2003 as interest rates decreased and borrowers refinanced at lower rates.  These securities were primarily replaced with obligations of U.S. Government agencies and additional mortgage-backed securities.



Loans receivable were flat year to year.  However, due primarily to the Herkimer transaction, our average outstanding loan balance increased significantly from $603.3 million in 2002 to $793.0 million in 2003, and our loan mix changed.  Residential mortgages increased $47.6 million or 11.0% and were 59.9% of total loans receivable, compared to 54.0% at the end of 2002.  As interest rates remained at historic lows in 2003, refinancing activity of residential mortgages was substantial.  This, in conjunction with borrowers' desire for shorter term loans such as 15-year biweekly mortgages, allowed us to retain more loans for portfolio.  Commercial real estate and consumer loans decreased $30.9 million, or 18.1% and $18.6 million, or 13.0% respectively.  The decline in commercial real estate loans is primarily attributed to customers refinancing their loans with competitors who offered rates and conditions that the Bank was not willing to match, and due to the planned exiting of riskier lending relationships.  The decline in consumer loans is primarily attributed to a high level of payoffs on automobile loans as consumers took advantage of extremely low rates of financing offered by automotive manufacturers.



During 2003, our security and loan portfolios repriced downward as market rates decreased.  Accordingly, we decreased the rates we paid on deposits in an effort to maintain net interest income.  Deposits were often priced below the competition which caused the decrease in deposits year to year.  Total deposits decreased $59.1 million, or 6.9%, to $796.1 million at December 31, 2003.  The decrease occurred in all deposit types, but the majority of the decrease was in time deposits which are not considered core deposits.  Time deposits decreased $31.5 million or 9.6% from December 31, 2002 to December 31, 2003.



Total shareholders' equity increased $9.9 million primarily due to net income of $14.0 million, partially offset by $2.1 million of dividends paid to minority shareholders and a $3.7 million decrease in accumulated other comprehensive income.



Comparison of Operating Results for the Years Ended December 31, 2003 and 2002



General. Net income for the year ended December 31, 2003 was $14.0 million, or $1.02 per diluted share, which was $5.6 million, or 67.0%, higher than the same period in 2002.  The increase is primarily due to the acquisition of Herkimer Trust Corporation, Inc. ("Herkimer") on December 27, 2002 and emphasis on net interest margin and expense control.



Net Interest Income. Net interest income for the year ended December 31, 2003 totaled $46.6 million, an increase of 32.2% over the $35.3 million for the same period in 2002.  The net interest spread for the year ended December 31, 2003 was 3.67% compared to 3.22% for the same period in 2002.  The net interest margin for the years ended December 31, 2003 and 2002 was 3.98% and 3.70%, respectively.  The improvement in spread occurred as a result of acquiring generally higher yielding net earning assets from Herkimer, which had more of a commercial banking nature, and because we aggressively managed our funding costs in a downward rate environment.  The cost of interest bearing liabilities was 2.24% for the year ended December 31, 2003, compared with 3.38% for the same period in 2002, a reduction of 114 basis points.  This reduction more than offset the 69 basis point reduction in the yield on earning assets period to period.  Our ability to further reduce rates on deposits has diminished.  We have priced our deposit account rates near the lowest in our marketplace, and at levels below most other local community banks.  This deposit pricing strategy may make it more difficult for us to attract and/or retain deposits and has resulted in the outflow of certificates of deposit as previously discussed.  Due to competitive pressure, we may be forced to increase rates on deposits which will most likely decrease our net interest margin.  Although we have the ability to meet our liquidity needs through borrowings, we will seek to retain core deposits and customer relationships.  Furthermore, if market rates continue to decline, or remain at their current low level, our assets will continue to reprice downward, which could also decrease our net interest margin.



We had an investment of $13.2 million in Federal Home Loan Bank of New York (FHLBNY) common stock at December 31, 2003.  The FHLBNY reported that it suspended the October dividend payment on this stock.  This announcement reduced 2003 interest income by approximately $150,000, or one quarter's dividend amount.  Future earnings will be impacted to the extent the FHLBNY continues the dividend suspension or reduces the dividend amount from that previously paid.



Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level management considers necessary to absorb probable credit losses in the current loan portfolio. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or later events occur. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses in order to increase the allowance.



We recorded a provision for loan losses of $1.1 million for the year ended December 31, 2003 compared to $1.2 million for the same period in 2002.  We used the same general methodology in determining the required loan loss provision and in assessing the adequacy of the allowance for both periods.  Our primary asset quality ratios have improved from December 31, 2002 to December 31, 2003.  In addition, our classified loans have decreased year to year.  Based upon our analysis of the commercial and commercial real estate portfolios, and the improved credit quality, we do not expect commercial charge-offs in 2004 to continue at 2003 levels.



Non-Interest Income.



The following table summarizes changes in the major components of non-interest income (dollars in thousands):



|                                                         |                           | 2003       |             | 2002        |             | $ Change    |       | % Change
|-------------------------------------------------------- | ------------------------- | ---------- | ----------- | ----------- | ----------- | ----------- | ----- | --------
|Service fees                                             | $     7,137               |            | $     4,066 |             | $     3,071 |             | 76 % 
|Trust and investment services                            | 1,768                     |            | 623         |             | 1,145       |             | 184 %
|Income from bank-owned life insurance                    | 1,273                     |            | 1,292       |             | (19)        |             | (1)% 
|Net (loss) gain on sale of securities available-for-sale | -                         |            | (19)        |             | 19          |             | 100 %
|Net gain on sale of loans                                | 666                       |            | 467         |             | 199         |             | 43 % 
|Other income                                             | 294                       |            | 418         |             | (124)       |             | (30)%
|                                                         | Total non-interest income | $   11,138 |             | $     6,847 |             | $     4,291 |       | 63 %    



The increase in non-interest income from 2002 to 2003 is primarily attributed to an increase in fee generating deposit accounts and new products offered as a result of the Herkimer acquisition, as well as efforts to expand fee generating product lines such as the sale of title insurance and non-deposit investment products.



With the acquisition of Herkimer at the end of 2002, we are now able to offer trust and asset management services which resulted in $503,000 in income for the year ended December 31, 2003.  Commissions on sales of non-deposit investment products increased $642,000 period to period, which is primarily attributable to increased emphasis on this product line.



The increase in net gain on sale of loans is primarily attributable to $254,000 in gains on the sale of agricultural loans as we sought to exit this business line.  These loans were classified as held for sale.



Other income decreased for the year ended December 31, 2003 primarily because the results for 2002 were positively impacted by a $300,000 legal settlement.  There was no such amount in 2003.  This was partially offset by a $113,000 increase in income from the sale of title insurance, which income totaled $218,000 in 2003.



Non-Interest Expense.



The following table summarizes changes in the major components of non-interest expense (dollars in thousands):



| |                                               |                            | 2003          |               | 2002          |                | $ Change       |        | % Change
| | --------------------------------------------- | -------------------------- | ------------- | ------------- | ------------- | -------------- | -------------- | ------ | --------
| | Salaries and employee benefits                | $     18,655               |               | $      13,231 |               | $        5,424 |                | 41 %  
| | Occupancy and equipment expense               | 3,720                      |               | 2,699         |               | 1,021          |                | 38 %  
| | Writedown of land and buildings held for sale | 32                         |               | 34            |               | (2)            |                | (6)%  
| | Marketing expense                             | 938                        |               | 1,064         |               | (126)          |                | (12)% 
| | Professional services                         | 1,483                      |               | 1,088         |               | 395            |                | 36 %  
| | Technology expense                            | 3,640                      |               | 2,648         |               | 992            |                | 37 %  
| | Contribution expense                          | 152                        |               | 2,268         |               | (2,116)        |                | (93)% 
| | Amortization of intangible assets             | 1,189                      |               | -             |               | 1,189          |                | N/A   
| | Merger expenses                               | -                          |               | 1,716         |               | (1,716)        |                | (100)%
| | Other expense                                 | 5,522                      |               | 3,983         |               | 1,539          |                | 39 %  
| |                                               | Total non-interest expense | $      35,331 |               | $      28,731 |                | $        6,600 |        | 23 %    



The increase in non-interest expense from 2002 to 2003 is primarily due to operating as a larger, more geographically diverse company as a result of the Herkimer acquisition.



In 2003, we recognized $644,000 of expense related to restricted stock granted under our long-term stock-based incentive plan that was adopted in the fourth quarter of 2002 during which time, $161,000 of expense was recognized.  Additionally, expense of our employee stock ownership plan (the "ESOP") increased $316,000 due to an increase in our stock price.  The remaining increase in salary and employee benefits is primarily due to the additional employees retained from Herkimer to staff the branches acquired.  We had 324 full time equivalent employees at December 31, 2003, compared to 187 at September 30, 2002, the most recent quarter prior to the Herkimer acquisition.



Occupancy and equipment expense increased primarily due to an increase in utilities, real estate taxes, rent and maintenance expenses related to the increase in the number of branches.  We had nine branches prior to the Herkimer acquisition, compared with 16 at December 31, 2003.



The increase in professional services is primarily attributed to an increase in item processing costs due to increased account volume and increased legal fees incurred on a variety of routine matters.



Technology expense increased primarily due to an increase in computer and ATM expenses, again related to the increased locations and volumes related primarily to the Herkimer acquisition.



In 2002, we recorded a one-time $2.1 million contribution expense in connection with establishing the SBU Bank Charitable Foundation.



Amortization of the core deposit and trust intangible assets related to Herkimer was $1.0 million for the year ended December 31, 2003.  Additionally, we recorded $177,000 of expense related to covenants not to compete with former Herkimer employees.



All merger expenses related to the Herkimer acquisition were recorded in 2002, and there were no such expenses in 2003.



Other expense increased $1.5 million, or 38.6%.  Expenses related to other real estate owned increased $283,000, primarily as a result of the $356,000 loss on the sale of a $2.8 million property.  Mortgage recording tax expense increased $235,000 during 2003, which is attributed to a $61.0 million increase in residential mortgage originations.  Losses on our automatic overdraft program implemented in 2003 were $269,000.  Offsetting this increase was an increase in service fee income as previously discussed.  The remainder of the increase in other expenses is primarily due to increases in a variety of expenses primarily attributed to the effect of the Herkimer acquisition.



Income Tax Expense.



Comparison of Operating Results for the Years Ended December 31, 2002 and 2001



General. Net income for the year ended December 31, 2002 was $8.4 million, or $0.45 per share (computed on earnings from the date of the reorganization), which was $1.8 million higher than 2001.  The 2002 results were substantially affected by the Bank's reorganization and merger expenses.  In connection with the reorganization, we contributed 191,928 shares of newly issued stock and $200,000 in cash to the SBU Bank Charitable Foundation, resulting in a one-time charitable contribution expense of $2.1 million, or approximately $1.3 million after income taxes.  We also incurred $1.7 million in merger expenses related to Herkimer, or approximately $1.0 million after income taxes.  The increase in net income from the prior year was primarily due to higher net interest income and a reduction in the provision for loan losses, partially offset by a decrease in non-interest income, an increase in non-interest expense and an increase in income tax expense.  Return on average assets for the years ended December 31, 2002 and 2001 was 0.82% and 0.67%, respectively.  Return on average equity for the years ended December 31, 2002 and 2001 was 5.67% and 6.85%, respectively.



Net Interest Income. Net interest income for the year ended December 31, 2002 totaled $35.3 million, an increase of 18.9% over the $29.7 million for 2001.  The net interest spread for the year ended December 31, 2002 was 3.22% compared to 2.80% for 2001.  The net interest margin for the years ended December 31, 2002 and 2001 was 3.70% and 3.20%, respectively.   The improvement in spread occurred as we aggressively managed its funding costs in a downward rate environment beginning in 2001.  The weighted average cost of interest bearing liabilities was 3.38% for the year ended December 31, 2002, compared with 4.59% for 2001, a reduction of 121 basis points.  This reduction more than offset the 79 basis point reduction in the weighted average yield on earning assets year to year. The improvement in the net interest margin resulted from the increase in spread and an increase in the ratio of average earning assets to average interest bearing liabilities.  This ratio was 116.38% for the year ended December 31, 2002 compared with 109.51% for 2001.  The increase occurred primarily as the growth in our equity, primarily from the IPO, was invested in earning assets.



Provision for Loan Losses.  We recorded a provision for loan losses of $1.2 million and $1.7 million in the years ended December 31, 2002 and 2001, respectively.  The decrease in the provision for loan losses is due to the improvement in our asset quality ratios.  Non-performing loans to total loans decreased to 1.36% from 1.51% at December 31, 2002 and 2001, respectively.  The allowance for loan losses to non-performing loans and to total loans increased to 100.05% and 1.37%, respectively, from 86.85% and 1.32%, respectively, at December 31, 2002 and 2001, respectively.  We used the same general methodology in determining the allowance at both dates and the provision for both periods.



Non-Interest Income.  Non-interest income is comprised primarily of fee income derived from bank services and increases in the cash surrender value of bank-owned life insurance.  Non-interest income decreased $286,000, or 4.0% to $6.8 million for the year ended December 31, 2002, compared to $7.1 million for 2001.  This decrease is primarily due to a $724,000 gain related to a life insurance policy on a deceased employee recognized in 2001. There was no such transaction in 2002.  The decrease was partially offset by a $205,000 increase in net gain on sale of loans, caused by an increase in the volume of loans sold.



Non-Interest Expense.  Non-interest expense increased $2.6 million, or 9.8% to $28.7 million for the year ended December 31, 2002, compared to $26.2 million for 2001.  This increase is primarily due to the contribution of stock and cash to the SBU Bank Charitable Foundation resulting in an expense of $2.1 million, merger expenses of $1.7 million (primarily consisting of systems conversion costs, customer communication, personnel charges, and writedowns on Company properties that are no longer being used), ESOP expense of $765,000 and $161,000 of expense related to our Management Recognition Plan.  These increases were partially offset by a $1.5 million decrease in impairment writedowns on land and buildings held for sale.



Income Tax Expense.  Income tax expense was $3.8 million on income before taxes of $12.2 million for the year ended December 31, 2002, resulting in an effective tax rate of 31.2% compared to income tax expense of $2.3 million on income before taxes of $9.0 million for 2001, resulting in an effective tax rate of 26.0%.    The gain on the life insurance policy discussed under non-interest income was non-taxable, resulting in a lower effective tax rate in the year ended December 31, 2001 compared to 2002.



Impact of Inflation and Changing Prices



Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial condition and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation.  The impact of inflation is reflected in the increasing cost of our operations.  Unlike those of most industrial companies, our assets and liabilities are nearly all monetary.  As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation.  In addition, interest rates do not necessarily move in the same direction, or to the same extent, as the price of goods and services.



Off-Balance Sheet Arrangements



In the normal course of operations, we engage 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 us 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, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition.



Liquidity and Capital Resources



Liquidity describes our ability to meet the financial obligations that arise during the ordinary course of business.  Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures.  Our primary sources of funds are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of securities and funds provided by our operations.  In addition, we may enter into repurchase agreements with approved broker-dealers and we may borrow from the Federal Home Loan Bank of New York.  At December 31, 2003 we had $290.6 million in outstanding borrowings.



Our primary investing activities are the origination of loans, and to a lesser extent, the purchase of securities.  For the years ended December 31, 2003 and 2002, loan originations totaled $342.7 million and $239.3 million, respectively.  Purchases of securities were $180.4 million and $88.2 million for the years ended December 31, 2003 and 2002, respectively.



At December 31, 2003, we had loan commitments to borrowers of approximately $84.2 million, and letters of credit of approximately $1.0 million.  Total deposits decreased $59.1 million during the year ended December 31, 2003 as discussed previously.  Total deposits increased $250.2 million during the year ended December 31, 2002, primarily due to the Herkimer acquisition.  Deposit flows are affected by the level of interest rates, the interest rates and products offered by competitors and other factors.  Time deposit accounts scheduled to mature within one year were $193.4 million at December 31, 2003.  Based on our deposit retention experience we anticipate that a majority of these time deposits will be retained, though our current deposit pricing strategy has resulted in increased outflows, which may continue.  We are committed to maintaining a strong liquidity position and monitor our liquidity position on a daily basis.  If deposit outflow increases beyond reasonable levels, we will readjust our deposit pricing strategy or take other measures, such as not reinvesting security payments or increasing borrowings, to ensure ample liquidity.  We anticipate that we will have sufficient funds to meet our current funding commitments.



We do not anticipate any material capital expenditures for the foreseeable future, nor do we have any balloon or other payments due on any long-term obligations, although a $20.0 million of FHLB advance at December 31, 2003 can be called by the FHLB at quarterly intervals.  If called, we have the option to reprice the advance at the then-current FHLB rates, or to repay the advance.  The advance has a rate of 6.31% and matures in August 2005.  Given the current interest rate levels, we do not anticipate that this advance will be called in the near term.



On an unconsolidated basis at the holding company level, our primary sources of funds are net proceeds from capital offerings, dividends from the Bank, and investment income.  The main use of liquidity is the payment of dividends to common stockholders.  At December 31, 2003, we had $24.0 million of cash and securities available-for-sale at the holding company level on an unconsolidated basis.  Because of the substantial level of cash at the Company, the Bank has not paid dividends to the Company.  Under OTS capital distribution regulations, the Bank may pay dividends to the Company without prior regulatory approval so long as the Bank meets its applicable regulatory capital requirements before and after payment of the dividends and its total dividends do not exceed its net income to date over the calendar year plus retained net income over the preceding two years.  The OTS has discretion to prohibit any otherwise permissible capital distributions on general safety and soundness grounds, and must be given 30 days advance notice of all capital distributions.  At December 31, 2003, the Bank had the ability to pay dividends of $23.2 million to the Company without the prior approval of the OTS.



At December 31, 2003, both the Bank and SBU Municipal Bank exceeded all the applicable regulatory capital requirements.  Although the Office of Thrift Supervision does not impose minimum capital requirements on thrift holding companies, our consolidated regulatory capital amounts and ratios are discussed below.  The Company's consolidated and the Bank's leverage (Tier 1) capital at December 31, 2003 was $135.4 million and $114.8 million, respectively, or 10.8% and 9.2% of assets, respectively.  In order to be classified as "well-capitalized" under federal banking regulations, the Bank was required to have leverage (Tier 1) capital of at least $62.3 million, or 5.0% of assets.  To be classified as a well-capitalized bank, the Bank must also have a ratio of total risk-based capital to risk-weighted assets of at least 10.0%.  At December 31, 2003, the Bank's total risk-based capital ratio was 16.9%.



Critical Accounting Policies



Management of the Company considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required for probable credit losses and the material effect that such judgments can have on the results of operations.  Management also considers the accounting policy relating to the test for impairment of goodwill and intangible assets to be a critical accounting policy due to the subjectivity and judgment involved and the material effect an impairment loss could have on the results of operations.  Our policies on the allowance for loan losses and goodwill and intangible assets are disclosed in note 1 to the consolidated financial statements.  A more detailed description of our methodology for determining the allowance for loan losses is included in the "Asset Quality" section in Part 1, Item 1 of this report.  All accounting policies are important, and as such, we encourage the reader to review each of the policies included in note 1 to the consolidated financial statements to obtain a better understanding of how our financial performance is reported.



Impact of New Accounting Standards



In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt", as amended by Statement No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements."  As a result, gains and losses from extinguishment of debt can only be classified as extraordinary items if they meet the definition of unusual and infrequent as prescribed in APB Opinion No. 30.  Additionally, Statement No. 145 amends Statement No. 13, "Accounting for Leases", to require that lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions.  The provisions of this statement are effective at various dates in 2002 and 2003 and did not have a material impact on our consolidated financial statements.



In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."  This statement nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)", and requires that a liability for costs associated with an exit or disposal activity  be recognized when the liability is incurred and represents an obligation to transfer assets or provide services as a result of past transactions.  The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002 and did not have a material impact on our consolidated financial statements.



In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 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, noncontrolling 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 No. 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders.  FIN No. 46 was effective for all VIE's created after January 31, 2003.  For VIE's created prior to February 1, 2003, FIN No. 46 was to be effective for public companies on    July 1, 2003.  However, the FASB postponed that effective date to December 31, 2003.  In December 2003, the FASB issued a revised FIN No. 46 (FIN No. 46R), which further delayed the effective date for public companies to March 31, 2004 for VIE's created prior to February 1, 2003, except for interests in special purpose entities, for which a company must adopt either FIN No. 46 or FIN No. 46R as of December 31, 2003.  Adoption of the requirements of FIN No. 46R is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.



In 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) 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 SFAS No. 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133, in connection with other Board 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 SFAS No. 149 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.  The first type is financial instruments issued in the form of shares that are mandatorily redeemable, which embody an unconditional obligation 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 and requires or may require the issuer to settle the obligation by transferring assets.  The third type is financial instruments that embody 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.  SFAS No. 150 also requires disclosures about the terms of the instruments and settlement alternatives.  SFAS No. 150 is 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.   For certain financial instruments, the classification and measurement provisions of SFAS No. 150 have been deferred indefinitely.  The provisions of this Statement did not have a material impact on our consolidated financial statements.



In December of 2003, the American Institute of Certified Public Accountants issued Statement of Position (SOP) No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer."  SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality.  This SOP prohibits "carry over" or creation of valuation allowances in the initial accounting of all loans acquired in transfers within the scope of SOP No. 03-3, which includes loans acquired in a purchase business combination.  SOP No. 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004.  We do not expect to adopt SOP No. 03-3 early.  The adoption of SOP No. 03-3 is not expected to have a material impact on our consolidated financial statements.



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.  We maintain a postretirement benefit plan that may be impacted by the Act.  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," we have elected to defer recognition of the effects of the Act in any measures of the benefit obligation or cost associated with its postretirement benefit plan. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require us to change previously reported information.  Currently we do not believe we will need to amend our plan to benefit from the Act.  The measurement date used to determine postretirement benefit measures for our postretirement benefit plan is September 30.



Contractual Obligations



We are contractually obliged to make payments as follows (dollars in thousands):



|                                  |              |              |               | Payments Due by Period:
|--------------------------------- | ------------ | ------------ | ------------- | -----------------------
|                                  |              |              |               | Less Than              
|                                  |              | Total        |               | 1 Year                 
|Federal Home Loan Bank Borrowings | $    263,500 |              | $      33,500 |                        
|Operating Leases                  |              | 1,882        |               | 447                    
|Total Obligations                 |              | $    265,382 |               | $      33,947          



ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Qualitative Analysis. Because the majority of our assets and liabilities are sensitive to changes in interest rates, our most significant form of market risk is interest rate risk. We are vulnerable to an increase in interest rates to the extent that interest-bearing liabilities mature or reprice more rapidly than interest-earning assets. The primary objective of our interest rate risk policy is to manage the exposure of net interest income to changes in interest rates. We actively monitor interest rate risk in connection with our lending, investing, deposit and borrowing activities.



Quantitative Analysis. Our interest rate sensitivity is monitored through the use of a net interest income simulation model, which generates estimates of the change in our net interest income over a range of interest rate scenarios. The model assumes loan prepayment rates, reinvestment rates and deposit decay rates based on historical experience and current conditions.



The following table sets forth the result of our net interest income simulation model as of December 31, 2003.



|Change in Interest Rates in |  |  | Annual Net Interest Income
|--------------------------- |  |  | --------------------------
|Basis Points (Rate Shock)   |  |  | $ Amount                  
|                            |  |  | (Dollars in thousands)    
|-100                        |  |  | 45,899                    
|Flat                        |  |  | 46,459                    
|+100                        |  |  | 46,215                    
|+200                        |  |  | 45,983                    
|+300                        |  |  | 45,790                    



The above table indicates that as of December 31, 2003 we had a relatively well-matched interest rate risk profile.  In the event of an immediate 200 basis point increase in interest rates across the yield curve, we estimate that we would experience a 1.02%, or $476,000, decrease in net interest income. In the event of an immediate 100 basis point decrease in interest rates across the yield curve, we estimate that we would experience a 1.21%, or $560,000, decrease in net interest income.  Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurement.  Modeling changes in net interest income requires the making of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the net interest income table presented assumes that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities.  Accordingly, although the net interest income table provides an indication of our interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.



ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA











Independent Auditors' Report





The Board of Directors and Shareholders
Partners Trust Financial Group, Inc.:





We have audited the accompanying consolidated balance sheets of Partners Trust Financial Group, Inc. and subsidiary (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders' equity, cash flows, and comprehensive income for each of the years in the three-year period ended December 31, 2003.  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.



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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Partners Trust Financial Group, Inc. and subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended   December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.





/s/ KPMG LLP



Albany, New York
February 2, 2004















|Partners Trust Financial Group, Inc. and Subsidiary                    |                                                                            |                                                                     |                                           
|---------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------------
|Consolidated Balance Sheets                                            |                                                                            |                                                                     |                                           
|December 31, 2003 and 2002                                             |                                                                            |                                                                     |                                           
|                                                                       |                                                                            |                                                                     |                                           
|Assets                                                                 | (In thousands except share data)                                          
|Cash and due from banks                                                | $          27,607                                                          |                                                                     | $          45,868                         
|Federal funds sold                                                     | 12,900                                                                     |                                                                     | 39,111                                    
|                                                                       |                                                                            |                                                                     | Cash and cash equivalents                 
|Securities available-for-sale, at fair value                           | 343,714                                                                    |                                                                     | 344,133                                   
|Securities held-to-maturity (fair value of $1,241 at December 31, 2003 |                                                                            |                                                                     |                                           
|                                                                       | and $1,567 at December 31, 2002)                                           | 1,240                                                               |                                           
|Federal Home Loan Bank of New York ("FHLB") stock                      | 13,225                                                                     |                                                                     | 12,350                                    
|Loans held for sale                                                    | 1,390                                                                      |                                                                     | 5,054                                     
|Loans receivable                                                       | 804,804                                                                    |                                                                     | 804,556                                   
|Less: Allowance for loan losses                                        | (8,608)                                                                    |                                                                     | (10,989)                                  
|                                                                       |                                                                            |                                                                     | Net loans receivable                      
|Premises and equipment, net                                            | 13,623                                                                     |                                                                     | 14,511                                    
|Land and buildings held for sale                                       | 3,182                                                                      |                                                                     | 3,397                                     
|Accrued interest receivable                                            | 5,236                                                                      |                                                                     | 5,973                                     
|Bank-owned life insurance                                              | 24,099                                                                     |                                                                     | 22,826                                    
|Other real estate owned                                                | 121                                                                        |                                                                     | 3,092                                     
|Goodwill                                                               | 34,523                                                                     |                                                                     | 34,523                                    
|Other intangible assets, net                                           | 3,288                                                                      |                                                                     | 4,461                                     
|Other assets                                                           | 4,771                                                                      |                                                                     | 3,070                                     
|                                                                       |                                                                            |                                                                     | Total Assets                              
|                                                                       |                                                                            |                                                                     |                                           
|Liabilities and Shareholders' Equity                                   |                                                                            |                                                                     |                                           
|Liabilities:                                                           |                                                                            |                                                                     |                                           
|                                                                       | Deposits:                                                                  |                                                                     |                                           
|                                                                       |                                                                            | Non-interest bearing                                                | $          98,942                         
|                                                                       |                                                                            | Interest bearing                                                    | 697,136                                   
|                                                                       |                                                                            |                                                                     | Total deposits                            
|                                                                       | Borrowings                                                                 | 290,569                                                             |                                           
|                                                                       | Mortgagors' escrow funds                                                   | 6,056                                                               |                                           
|                                                                       | Other liabilities                                                          | 17,077                                                              |                                           
|                                                                       |                                                                            |                                                                     | Total liabilities                         
|                                                                       |                                                                            |                                                                     |                                           
|Shareholders' Equity:                                                  |                                                                            |                                                                     |                                           
|                                                                       | Preferred stock, $0.10 par value, 5,000,000 shares authorized, none issued | -                                                                   |                                           
|                                                                       | Common stock, $0.10 par value, 35,000,000 shares authorized,               |                                                                     |                                           
|                                                                       |                                                                            | 14,216,875 shares issued at December 31, 2003 and December 31, 2002 | 1,422                                     
|                                                                       | Additional paid-in capital                                                 | 63,410                                                              |                                           
|                                                                       | Retained earnings                                                          | 115,561                                                             |                                           
|                                                                       | Accumulated other comprehensive income                                     | 1,902                                                               |                                           
|                                                                       | Treasury stock (23,069 shares at December 31, 2003 and 12,796              |                                                                     |                                           
|                                                                       |                                                                            | shares at December 31, 2002)                                        | (450)                                     
|                                                                       | Unallocated ESOP shares (409,446 shares at December 31, 2003 and 460,627   |                                                                     |                                           
|                                                                       |                                                                            | shares at December 31, 2002)                                        | (4,094)                                   
|                                                                       | Unearned restricted stock awards                                           | (2,416)                                                             |                                           
|                                                                       |                                                                            |                                                                     | Total shareholders' equity                
|                                                                       |                                                                            |                                                                     | Total Liabilities and Shareholders' Equity
|                                                                       |                                                                            |                                                                     |                                           
|                                                                       | See accompanying notes to consolidated financial statements.               |                                                                     |                                           

|Partners Trust Financial Group, Inc. and Subsidiary          |                                                          |                                                     |                                   |                     |                      
|------------------------------------------------------------ | -------------------------------------------------------- | --------------------------------------------------- | --------------------------------- | ------------------- | ---------------------
|Consolidated Statements of Income                            |                                                          |                                                     |                                   |                     |                      
|Years Ended December 31, 2003, 2002 and 2001                 |                                                          |                                                     |                                   |                     |                      
|                                                             |                                                          |                                                     | 2003                              |                     | 2002                 
|                                                             |                                                          |                                                     | (In thousands, except share data)
|Interest income:                                             |                                                         
|                                                             | Loans, including fees                                    | $            53,986                                 |                                   | $            44,037 |                      
|                                                             | Federal funds sold and interest bearing deposits         | 348                                                 |                                   | 534                 |                      
|                                                             | Securities                                               | 14,855                                              |                                   | 18,319              |                      
|                                                             |                                                          | Total interest income                               | 69,189                            |                     | 62,890               
|                                                             |                                                          |                                                     |                                   |                     |                      
|Interest expense:                                            |                                                          |                                                     |                                   |                     |                      
|                                                             | Deposits:                                                |                                                     |                                   |                     |                      
|                                                             |                                                          | Savings accounts                                    | 839                               |                     | 1,147                
|                                                             |                                                          | Money market accounts                               | 1,335                             |                     | 1,832                
|                                                             |                                                          | Time accounts                                       | 9,563                             |                     | 12,054               
|                                                             |                                                          | NOW accounts                                        | 199                               |                     | 326                  
|                                                             |                                                          |                                                     | 11,936                            |                     | 15,359               
|                                                             | Borrowings:                                              |                                                     |                                   |                     |                      
|                                                             |                                                          | Repurchase agreements                               | 443                               |                     | 639                  
|                                                             |                                                          | FHLB advances                                       | 10,109                            |                     | 11,471               
|                                                             |                                                          | Mortgagors' escrow funds                            | 94                                |                     | 157                  
|                                                             |                                                          |                                                     | 10,646                            |                     | 12,267               
|                                                             |                                                          | Total interest expense                              | 22,582                            |                     | 27,626               
|                                                             |                                                          | Net interest income                                 | 46,607                            |                     | 35,264               
|Provision for loan losses                                    | 1,100                                                    |                                                     | 1,150                             |                     | 1,672                
|                                                             |                                                          | Net interest income after provision for loan losses | 45,507                            |                     | 34,114               
|                                                             |                                                          |                                                     |                                   |                     |                      
|Non-interest income:                                         |                                                          |                                                     |                                   |                     |                      
|                                                             | Service fees                                             | 7,137                                               |                                   | 4,066               |                      
|                                                             | Trust and investment services                            | 1,768                                               |                                   | 623                 |                      
|                                                             | Income from bank-owned life insurance                    | 1,273                                               |                                   | 1,292               |                      
|                                                             | Net (loss) gain on sale of securities available-for-sale | -                                                   |                                   | (19)                |                      
|                                                             | Net gain on sale of loans                                | 666                                                 |                                   | 467                 |                      
|                                                             | Other income                                             | 294                                                 |                                   | 418                 |                      
|                                                             |                                                          | Total non-interest income                           | 11,138                            |                     | 6,847                
|                                                             |                                                          |                                                     |                                   |                     |                      
|Non-interest expense:                                        |                                                          |                                                     |                                   |                     |                      
|                                                             | Salaries and employee benefits                           | 18,655                                              |                                   | 13,231              |                      
|                                                             | Occupancy and equipment expense                          | 3,720                                               |                                   | 2,699               |                      
|                                                             | Writedown of land and buildings held for sale            | 32                                                  |                                   | 34                  |                      
|                                                             | Marketing expense                                        | 938                                                 |                                   | 1,064               |                      
|                                                             | Professional services                                    | 1,483                                               |                                   | 1,088               |                      
|                                                             | Technology expense                                       | 3,640                                               |                                   | 2,648               |                      
|                                                             | Contribution expense                                     | 152                                                 |                                   | 2,268               |                      
|                                                             | Amortization of intangible assets                        | 1,189                                               |                                   | -                   |                      
|                                                             | Merger expenses                                          | -                                                   |                                   | 1,716               |                      
|                                                             | Other expense                                            | 5,522                                               |                                   | 3,983               |                      
|                                                             |                                                          | Total non-interest expense                          | 35,331                            |                     | 28,731               
|                                                             |                                                          | Income before income tax expense                    | 21,314                            |                     | 12,230               
|Income tax expense                                           | 7,268                                                    |                                                     | 3,818                             |                     | 2,329                
|                                                             |                                                          | Net income                                          | $            14,046               |                     | $              8,412 
|                                                             |                                                          |                                                     |                                   |                     |                      
|                                                             |                                                          |                                                     |                                   |                     |                      
|                                                             |                                                          | Basic earnings per share                            | $                1.04             |                     | $                0.45
|                                                             |                                                          | Diluted earnings per share                          | $                1.02             |                     | $                0.45
|See accompanying notes to consolidated financial statements. |                                                          |                                                     |                                   |                    





|Partners Trust Financial Group, Inc. and Subsidiary                    |                |  |                                   |  |            |  |                |  |                |  |                  |  |                 |  |            
|---------------------------------------------------------------------- | -------------- |  | --------------------------------- |  | ---------- |  | -------------- |  | -------------- |  | ---------------- |  | --------------- |  | -----------
|Consolidated Statements of Changes in Shareholders' Equity             |                |  |                                   |  |            |  |                |  |                |  |                  |  |                 |  |            
|Years Ended December 31, 2003, 2002 and 2001                           |                |  |                                   |  |            |  |                |  |                |  |                  |  |                 |  |            
|                                                                       |                |  |                                   |  |            |  |                |  | Accumulated    |  |                  |  |                 |  | Unearned   
|                                                                       |                |  |                                   |  | Additional |  |                |  | Other          |  |                  |  | Unallocated     |  | Restricted 
|                                                                       |                |  | Common                            |  | Paid-in    |  | Retained       |  | Comprehensive  |  | Treasury         |  | ESOP            |  | Stock      
|                                                                       |                |  | Stock                             |  | Capital    |  | Earnings       |  | Income         |  | Stock            |  | Shares          |  | Awards     
|                                                                       |                |  | (In thousands, except share data)
|Balance at December 31, 2000                                           | $            - |  | $            -                    |  | $   89,732 |  | $          179 |  | $           -  |  | $              - |  | $             - |  | $    89,911
|Net income                                                             | -              |  | -                                 |  | 6,641      |  | -              |  | -              |  | -                |  | -               |  | 6,641      
|Other comprehensive income, net of tax                                 | -              |  | -                                 |  | -          |  | 3,596          |  | -              |  | -                |  | -               |  | 3,596      
|Balance at December 31, 2001                                           | -              |  | -                                 |  | 96,373     |  | 3,775          |  | -              |  | -                |  | -               |  | 100,148    
|Net income                                                             | -              |  | -                                 |  | 8,412      |  | -              |  | -              |  | -                |  | -               |  | 8,412      
|Other comprehensive income, net of tax                                 | -              |  | -                                 |  | -          |  | 1,800          |  | -              |  | -                |  | -               |  | 1,800      
|Cash dividends ($0.10 per minority share)                              | -              |  | -                                 |  | (608)      |  | -              |  | -              |  | -                |  | -               |  | (608)      
|Net proceeds from sale of common stock in initial public offering      |                |  |                                   |  |            |  |                |  |                |  |                  |  |                 |  |            
|(6,397,594 shares), net of offering costs of $2,043                    | 640            |  | 61,293                            |  | -          |  | -              |  | -              |  | -                |  | -               |  | 61,933     
|Initial capital contribution and issuance of shares to Partners Trust, |                |  |                                   |  |            |  |                |  |                |  |                  |  |                 |  |            
|MHC (7,627,353 shares)                                                 | 763            |  | (763)                             |  | (100)      |  | -              |  | -              |  | -                |  | -               |  | (100)      
|Charitable contribution of common stock to the SBU Bank Charitable     |                |  |                                   |  |            |  |                |  |                |  |                  |  |                 |  |            
|Foundation (191,928 shares)                                            | 19             |  | 1,900                             |  | -          |  | -              |  | -              |  | -                |  | -               |  | 1,919      
|Common stock acquired by ESOP (511,808 shares)                         | -              |  | -                                 |  | -          |  | -              |  | -              |  | (5,118)          |  | -               |  | (5,118)    
|ESOP shares allocated (51,181 shares)                                  | -              |  | 253                               |  | -          |  | -              |  | -              |  | 512              |  | -               |  | 765        
|Purchase of treasury stock (255,904 shares)                            | -              |  | -                                 |  | -          |  | -              |  | (3,875)        |  | -                |  | -               |  | (3,875)    
|Stock awarded under the Management Recognition Plan (255,903 shares)   | -              |  | -                                 |  | (484)      |  | -              |  | 3,875          |  | -                |  | (3,391)         |  | -          
|Stock forfeited under the Management Recognition Plan (12,795 shares)  | -              |  | -                                 |  | -          |  | -              |  | (170)          |  | -                |  | 170             |  | -          
|Amortization of unearned restricted stock awards                       | -              |  | -                                 |  | -          |  | -              |  | -              |  | -                |  | 161             |  | 161        
|Balance at December 31, 2002                                           | 1,422          |  | 62,683                            |  | 103,593    |  | 5,575          |  | (170)          |  | (4,606)          |  | (3,060)         |  | 165,437    
|Net income                                                             | -              |  | -                                 |  | 14,046     |  | -              |  | -              |  | -                |  | -               |  | 14,046     
|Other comprehensive loss, net of tax                                   | -              |  | -                                 |  | -          |  | (3,673)        |  | -              |  | -                |  | -               |  | (3,673)    
|Cash dividends ($0.34 per minority share)                              | -              |  | -                                 |  | (2,078)    |  | -              |  | -              |  | -                |  | -               |  | (2,078)    
|ESOP shares allocated (51,181 shares)                                  | -              |  | 569                               |  | -          |  | -              |  | -              |  | 512              |  | -               |  | 1,081      
|Amortization of unearned restricted stock awards                       | -              |  | -                                 |  | -          |  | -              |  | -              |  | -                |  | 644             |  | 644        
|Tax benefit of MRP vesting                                             | -              |  | 158                               |  | -          |  | -              |  | -              |  | -                |  | -               |  | 158        
|Purchase of treasury stock (13,273 shares)                             | -              |  | -                                 |  | -          |  | -              |  | (320)          |  | -                |  | -               |  | (320)      
|Stock options exercised (3,000 shares)                                 | -              |  | -                                 |  | -          |  | -              |  | 40             |  | -                |  | -               |  | 40         
|                                                                       |                |  | $     1,422                       |  | $   63,410 |  | $ 115,561      |  | $        1,902 |  | $     (450)      |  | $   (4,094)     |  | $   (2,416)
|                                                                       |                |  |                                   |  |            |  |                |  |                |  |                  |  |                 |  |            
|See accompanying notes to consolidated financial statements.           |                |  |                                   |  |            |  |                |  |                |  |                  |  |                 |  |            





|Partners Trust Financial Group, Inc. and Subsidiary |                                                        |                                                             |                                                     |                  |         
|--------------------------------------------------- | ------------------------------------------------------ | ----------------------------------------------------------- | --------------------------------------------------- | ---------------- | --------
|Consolidated Statements of Cash Flows               |                                                        |                                                             |                                                     |                  |         
|Years Ended December 31, 2003, 2002 and 2001        |                                                        |                                                             |                                                     |                  |         
|                                                    |                                                        |                                                             |                                                     |                  |         
|                                                    |                                                        |                                                             |                                                     | 2003             |         
|                                                    |                                                        |                                                             |                                                     | (In thousands)  
|Operating activities                                |                                                        |                                                             |                                                     |                  |         
|                                                    | Net income                                             | $        14,046                                             |                                                     | $          8,412 |         
|                                                    | Adjustments to reconcile net income to net cash        |                                                             |                                                     |                  |         
|                                                    | provided by operating activities:                      |                                                             |                                                     |                  |         
|                                                    |                                                        | Provision for loan losses                                   | 1,100                                               |                  | 1,150   
|                                                    |                                                        | Depreciation and amortization                               | 1,911                                               |                  | 2,028   
|                                                    |                                                        | Income from bank-owned life insurance                       | (1,273)                                             |                  | (1,292) 
|                                                    |                                                        | Deferred tax expense (benefit)                              | 456                                                 |                  | 301     
|                                                    |                                                        | Net premium amortization (discount accretion) on securities | 2,230                                               |                  | (884)   
|                                                    |                                                        | Loss (gain) on sale of other real estate owned, net         | 88                                                  |                  | (42)    
|                                                    |                                                        | Proceeds from sales of loans held for sale                  | 32,918                                              |                  | 28,784  
|                                                    |                                                        | Loans originated for sale                                   | (27,787)                                            |                  | (27,908)
|                                                    |                                                        | Gain on sale of loans, net                                  | (666)                                               |                  | (467)   
|                                                    |                                                        | Writedown of land and buildings held for sale, net          | 32                                                  |                  | 34      
|                                                    |                                                        | Gain on sale of land and buildings held for sale            | (11)                                                |                  | -       
|                                                    |                                                        | (Gain) loss on disposal of equipment, net                   | (41)                                                |                  | 47      
|                                                    |                                                        | Net loss (gain) on sale of securities available-for-sale    | -                                                   |                  | 19      
|                                                    |                                                        | Contribution of stock to SBU Bank Charitable Foundation     | -                                                   |                  | 1,919   
|                                                    |                                                        | ESOP expense                                                | 1,081                                               |                  | 765     
|                                                    |                                                        | Management Recognition Plan expense                         | 644                                                 |                  | 161     
|                                                    |                                                        | Amortization of intangible assets                           | 1,189                                               |                  | -       
|                                                    |                                                        | Decrease in accrued interest receivable                     | 737                                                 |                  | 312     
|                                                    |                                                        | Net change in other assets and other liabilities            | 1,424                                               |                  | 10,950  
|                                                    |                                                        |                                                             | Net cash provided by operating activities           | 28,078           |         
|                                                    |                                                        |                                                             |                                                     |                  |         
|Investing activities:                               |                                                        |                                                             |                                                     |                  |         
|                                                    | Net cash used in acquisition activities                | -                                                           |                                                     | (27,272)         |         
|                                                    | Purchases of securities held-to-maturity               | (458)                                                       |                                                     | (298)            |         
|                                                    | Proceeds from redemptions, maturities and principal    |                                                             |                                                     |                  |         
|                                                    |                                                        | collected on securities held-to-maturity                    | 785                                                 |                  | 256     
|                                                    | Purchases of securities available-for-sale             | (179,906)                                                   |                                                     | (87,900)         |         
|                                                    | Proceeds from redemptions, maturities and principal    |                                                             |                                                     |                  |         
|                                                    |                                                        | collected on securities available-for-sale                  | 172,800                                             |                  | 121,059 
|                                                    | Proceeds from sales of securities available-for-sale   | -                                                           |                                                     | 1,301            |         
|                                                    | Purchases of FHLB stock                                | (2,175)                                                     |                                                     | (1,000)          |         
|                                                    | Redemptions of FHLB stock                              | 1,300                                                       |                                                     | -                |         
|                                                    | Proceeds from bank-owned life insurance                | -                                                           |                                                     | -                |         
|                                                    | Net loans (made to) repaid by customers                | (4,675)                                                     |                                                     | (16,158)         |         
|                                                    | Purchases of premises and equipment                    | (1,043)                                                     |                                                     | (932)            |         
|                                                    | Proceeds from sale of equipment                        | 61                                                          |                                                     | 61               |         
|                                                    | Proceeds from sale of land and buildings held for sale | 194                                                         |                                                     | 472              |         
|                                                    | Proceeds from sales of other real estate owned         | 3,028                                                       |                                                     | 502              |         
|                                                    |                                                        |                                                             | Net cash (used in) provided by investing activities | (10,089)         |         
|                                                    |                                                        |                                                             |                                                     |                  |         
|                                                    | (Continued)                                            |                                                             |                                                     |                  |         





|Partners Trust Financial Group, Inc. and Subsidiary          |                                                     |                                                 |                                                      |                 |                 
|------------------------------------------------------------ | --------------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------- | --------------- | ----------------
|Consolidated Statements of Cash Flows                        |                                                     |                                                 |                                                      |                 |                 
|Years Ended December 31, 2003, 2002 and 2001                 |                                                     |                                                 |                                                      |                 |                 
|                                                             |                                                     |                                                 |                                                      |                 |                 
|                                                             |                                                     |                                                 |                                                      | 2003            |                 
|                                                             |                                                     |                                                 |                                                      | (In thousands) 
|Financing activities:                                        |                                                     |                                                 |                                                      |                 |                 
|                                                             | Net decrease in deposits                            | $       (59,133)                                |                                                      | $      (29,943) |                 
|                                                             | Net (decrease) increase in mortgagors' escrow funds | 432                                             |                                                      | (721)           |                 
|                                                             | Net increase in short-term borrowings               | 1,000                                           |                                                      | -               |                 
|                                                             | Proceeds from FHLB advances                         | 115,000                                         |                                                      | 108,500         |                 
|                                                             | Repayment of FHLB advances                          | (98,500)                                        |                                                      | (88,500)        |                 
|                                                             | Net decrease in repurchase agreements               | (18,902)                                        |                                                      | (3,026)         |                 
|                                                             | Cash dividends                                      | (2,078)                                         |                                                      | (608)           |                 
|                                                             | Net proceeds from sale of common stock              | -                                               |                                                      | 61,933          |                 
|                                                             | Loan to ESOP for the purchase of common stock       | -                                               |                                                      | (5,118)         |                 
|                                                             | Capitalization of Partners Trust, MHC               | -                                               |                                                      | (100)           |                 
|                                                             | Purchase of treasury stock                          | (320)                                           |                                                      | (3,875)         |                 
|                                                             | Proceeds from exercise of stock options             | 40                                              |                                                      | -               |                 
|                                                             |                                                     |                                                 | Net cash (used in) provided by financing activities  | (62,461)        |                 
|                                                             |                                                     |                                                 | Net (decrease) increase in cash and cash equivalents | (44,472)        |                 
|Cash and cash equivalents at beginning of year               | 84,979                                              |                                                 | 32,057                                               |                 | 16,945          
|Cash and cash equivalents at end of year                     | $        40,507                                     |                                                 | $       84,979                                       |                 | $         32,057
|                                                             |                                                     |                                                 |                                                      |                 |                 
|Supplemental disclosures:                                    |                                                     |                                                 |                                                      |                 |                 
|                                                             | Cash paid during the year for:                      |                                                 |                                                      |                 |                 
|                                                             |                                                     | Interest on deposits and borrowings             | $        23,122                                      |                 | $       28,604  
|                                                             |                                                     | Income taxes                                    | 4,800                                                |                 | 5,772           
|                                                             |                                                     |                                                 |                                                      |                 |                 
|                                                             | Non-cash investing and financing activity:          |                                                 |                                                      |                 |                 
|                                                             |                                                     | Transfer of loans to other real estate owned    | 145                                                  |                 | 3,380           
|                                                             |                                                     | Transfer of securities from held-to-maturity to |                                                      |                 |                 
|                                                             |                                                     |                                                 | available-for-sale upon adoption of SFAS No. 133     |                 |                 
|                                                             |                                                     |                                                 | (fair value of $168,156 on date of transfer)         | -               |                 
|                                                             |                                                     | Transfer of premises and equipment to land      |                                                      |                 |                 
|                                                             |                                                     |                                                 | and buildings held for sale                          | -               |                 
|                                                             |                                                     |                                                 |                                                      |                 |                 
|                                                             | Acquisition activity:                               |                                                 |                                                      |                 |                 
|                                                             |                                                     | Fair value of non-cash assets acquired          | -                                                    |                 | 328,468         
|                                                             |                                                     | Fair value of liabilities assumed               | -                                                    |                 | 301,196         
|                                                             |                                                     |                                                 |                                                      |                 |                 
|See accompanying notes to consolidated financial statements. |                                                     |                                                 |                                                      |                 |                 

|Partners Trust Financial Group, Inc. and Subsidiary          |                                                             |                   |                     |       |                    
|------------------------------------------------------------ | ----------------------------------------------------------- | ----------------- | ------------------- | ----- | -------------------
|Consolidated Statements of Comprehensive Income              |                                                             |                   |                     |      
|Years Ended December 31, 2003, 2002 and 2001                 |                                                             |                   |                     |      
|                                                             |                                                             |                   | 2003                |       | 2002               
|                                                             |                                                             |                   | (In thousands)     
|Net income                                                   | $           14,046                                          |                   | $             8,412 |       | $             6,641
|Other comprehensive (loss) income, net of tax:               |                                                             |                   |                     |       |                    
|                                                             | (Decrease) increase in unrealized holding gains on          |                   |                     |       |                    
|                                                             | securities available-for-sale (pre-tax, ($5,295), $2,982,   |                   |                     |       |                    
|                                                             | and $6,259)                                                 | (3,177)           |                     | 1,789 |                    
|                                                             | Reclassification adjustment for net (gain)/loss on sales of |                   |                     |       |                    
|                                                             | available-for-sale securities realized in net income        |                   |                     |       |                    
|                                                             | (pre-tax amounts of $ -, $19 and ($266))                    | -                 |                     | 11    |                    
|                                                             | Minimum pension liability arising during the year           |                   |                     |       |                    
|                                                             |                                                             | (pre-tax, ($826)) | (496)               |       | -                  
|Total other comprehensive (loss) income                      | (3,673)                                                     |                   | 1,800               |       | 3,596              
|Comprehensive income                                         | $           10,373                                          |                   | $           10,212  |       | $           10,237 
|                                                             |                                                             |                   |                     |       |                    
|See accompanying notes to consolidated financial statements. |                                                             |                   |                     |      





1.	Summary of Significant Accounting Policies

Nature of Operations

Partners Trust Financial Group, Inc. (the "Company") began operations on April 3, 2002 upon the conversion of SBU Bank (the "Bank") from a mutual savings bank to a stock savings bank and the completion of the Company's initial public offering ("IPO").  Upon consummation of the conversion on April 3, 2002, the Company became the holding company for the Bank.

On April 3, 2002, under the Plan of Reorganization from a Mutual Savings Bank to a Mutual Holding Company and Stock Issuance Plan approved by the Bank's depositors at a Special Meeting held on March 28, 2002, the Bank completed its reorganization whereby the Bank converted to a stock savings bank and became a wholly-owned subsidiary of the Company, which is a mid-tier stock holding company and a majority-owned subsidiary of Partners Trust, MHC (the "MHC"), a mutual holding company.  In connection with the reorganization, the Company sold 6,397,594 shares of common stock at a price of $10.00 per share to the Bank's eligible depositors and to the Company's Employee Stock Ownership Plan ("ESOP"), and issued 7,627,353 shares to the MHC.  In addition, 191,928 shares and $200,000 in cash were contributed to the SBU Bank Charitable Foundation.  The shares sold to the ESOP were funded by a loan from the Company.  At December 31, 2003, the MHC owned 7,627,353 shares (or 53.7%) of the outstanding common shares of the Company, with the remaining 6,566,453 shares (or 46.3%) owned by other shareholders.

Effective February 8, 2002, the Bank was chartered by the Office of Thrift Supervision ("OTS") as a mutual institution.  Prior to February 8, 2002, the Bank was a New York State-chartered mutual savings bank.  The Bank provides retail and commercial banking services to individual and business customers in Oneida, Herkimer and surrounding counties in New York State.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Bank and the Bank's wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Management's Use of Estimates

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.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits (with an original maturity of three months or less) and federal funds sold.  Generally, federal funds are sold for one-day periods.

Securities

The Company classifies its securities as held-to-maturity or available-for-sale at the time of purchase.  Held-to-maturity securities are those for which the Company has the positive intent and ability to hold to maturity, and are reported at cost, adjusted for premiums and discounts.  Securities not classified as held-to-maturity are classified as available-for-sale and reported at fair value, with net unrealized gains and losses reflected as a separate component of accumulated other comprehensive income, net of taxes.  None of the Company's securities have been classified as trading securities.



1.	Summary of Significant Accounting Policies (Continued)

Securities (Continued)

Purchases and sales of securities are recorded as of the trade date.  Premiums and discounts on securities are amortized and accreted, respectively, using the level yield method over the period to maturity, estimated life, or earliest call date of the related security.  Gains and losses on securities sold are computed based on specific identification.

Federal Home Loan Bank of New York Stock

As a member of the Federal Home Loan Bank of New York ("FHLB"), the Company is required to hold stock in the FHLB. FHLB stock is carried at cost since there is no readily available market value.  The stock cannot be sold, but can be redeemed by the FHLB at cost.

Repurchase Agreements

The Company enters into sales of securities under agreements to repurchase ("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. Provided the Company maintains effective control over the transferred securities, repurchase agreements are accounted for as borrowings, and the obligations to repurchase securities sold are reflected as a liability in the balance sheet. The securities underlying the agreements continue to be carried in the Company's securities portfolio.

Loans

Loans are reported at their outstanding principal balance net of charge-offs, the allowance for loan losses, net deferred loan fees and costs on originated loans, and unamortized premiums or discounts on purchased loans.  Interest income on loans is accrued based on the principal amount outstanding.

Nonrefundable loan origination fees and related direct costs are netted, and the net amount is deferred and amortized over the contractual life of the loan using the interest method, which results in a constant effective yield over the loan term.

Loans that are delinquent three payments are reported as 60-89 days past due.  Loans that are delinquent four or more payments are reported as 90 days or more past due.

Allowance for Loan Losses

The allowance for loan losses is periodically evaluated by the Company in order to maintain the allowance at a level which represents management's estimate of all known and inherent losses in the loan portfolio at the balance sheet date.  Management's evaluation of the allowance is based on the Company's past loan loss experience, known and inherent losses in the loan portfolio, adverse circumstances that may affect the ability of borrowers to repay, the estimated value of collateral, and an analysis of the levels and trends of delinquencies, charge-offs, and the risk ratings of the various loan categories.  Other factors such as the level and trend of interest rates and the condition of the national and local economies are also considered.

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses.  When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance.

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 according to the contractual terms of the loan agreement. Smaller balance, homogeneous loans which are collectively evaluated for impairment, such as residential real estate and consumer loans, as well as commercial real estate and commercial loans less than $250,000, are specifically excluded from the classification of impaired loans. Impairment is measured based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of collateral.  Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable.



1.	Summary of Significant Accounting Policies (Continued)

Income Recognition on Impaired and Nonaccrual Loans

Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days (120 days for consumer loans), unless such loans are well-collateralized and in the process of collection.  If a loan or a portion of a loan is internally classified as doubtful or is partially charged-off, the loan is classified as nonaccrual.  Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt.

Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms of the loan.

While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is uncertain, any payments received are generally used to reduce the principal balance.  When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis.  In the case where a nonaccrual loan had been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate.  Interest collections in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

Loans Held for Sale and Mortgage Servicing Rights

The Company sells certain residential real estate loans in the secondary market.  The Company may retain the right to service the loan, or may sell the loan servicing released.  The Company makes the determination of whether or not to identify a loan as held for sale at the time the application is received from the borrower.  In addition, from time to time the Company may transfer loans from the loan portfolio to held for sale for asset/liability management purposes or to provide additional liquidity.  Loans held for sale are regularly evaluated on an aggregate basis to determine if fair value is less than carrying value.  If necessary, a valuation allowance is recorded by a charge to income for unrealized losses attributable to changes in market interest rates.  There was no valuation allowance necessary at December 31, 2003 or 2002.  Gains and losses on the disposition of loans held for sale are determined on the specific identification method.

The Bank also has rate lock commitments extended to borrowers that relate to the origination of residential mortgage loans ("rate locks").  To mitigate the interest rate risk inherent in rate locks, as well as closed mortgage loans held for sale ("loans held for sale"), the Bank enters into forward commitments to sell individual mortgage loans ("forward commitments").  Rate locks and forward commitments are considered to be derivatives under SFAS No. 133.  The impact of the estimated fair value of the rate locks offset by forward commitments, was not significant to the consolidated financial statements.

Originated mortgage servicing rights are recorded at their fair value at the time a loan is sold and servicing rights are retained. Originated mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income.  The Company uses a valuation model that calculates the present value of future cash flows to determine the fair value of servicing rights.  In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which include estimates of the cost to service the loan, the discount rate, float value, an inflation rate, ancillary income per loan and prepayment speeds.  The carrying value of originated mortgage servicing rights is periodically evaluated for impairment using current market assumptions.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation is generally computed by the straight-line method over the estimated useful life of each type of asset (generally 5 to 40 years for buildings and 3 to 5 years for furniture and equipment).  Leasehold improvements are stated at cost less an allowance for amortization, which is computed by the straight-line method over the shorter of the term of the related lease or the estimated useful life of the asset.  Maintenance and repairs are charged to operating expense as incurred.



1.	Summary of Significant Accounting Policies (Continued)



Bank-Owned Life Insurance

Bank-owned life insurance is carried at the cash surrender value of the underlying policies.  Income on the investments in the policies, net of insurance premiums, is recorded as non-interest income.

Other Real Estate Owned

Other real estate owned, representing properties acquired in settlement of loans, is recorded on an individual asset basis at the lower of the recorded investment in the loan or the fair value of the asset acquired less an estimate of the costs to sell the property.  At the time of foreclosure, the excess, if any, of the recorded investment in the loan over the fair value of the property received is charged to the allowance for loan losses.  Subsequent declines in the value of such property and net operating expenses of such properties are charged directly to non-interest expenses.

The recognition of gains and losses from the sale of other real estate owned is dependent on a number of factors relating to the nature of the property sold, terms of the sale, and the future involvement of the Company in the property sold.  If a real estate transaction does not meet certain down payment and loan amortization requirements, gain recognition is deferred and recognized under an alternative method.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired for transactions accounted for under the purchase method of accounting for business combinations.  Goodwill is not being amortized, but is required to be tested for impairment at least annually.  The core deposit intangible and trust relationship intangible are being amortized over a seven year period using an accelerated method.  These intangibles are tested for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Income Taxes

Provisions for income taxes are based on taxes currently payable or refundable, and deferred taxes which are based on temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.  Deferred tax assets and liabilities are reported in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.

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.

Employee Benefit Costs

The Company maintains a non-contributory pension plan covering substantially all employees that met eligibility requirements prior to November 1, 2002, and a supplemental retirement plan for an executive.  The cost of these plans, based on actuarial computations of current and future benefits, is charged to current operating expenses.  The Company also provides certain post-retirement medical, dental and life insurance benefits to substantially all employees and retirees that met eligibility requirements prior to November 1, 2002.  The cost of post-retirement benefits other than pensions is recognized on an accrual basis as eligible employees perform services to earn the benefits.

Stock-Based Compensation

Compensation expense is recognized for the Company's Employee Stock Ownership Plan ("ESOP") equal to the average fair value of shares committed to be released for allocation to participant accounts.  Any difference between the average fair value of the shares committed to be released for allocation and the ESOP's original acquisition cost is charged or credited to shareholders' equity (additional paid-in-capital).  The cost of unallocated ESOP shares (shares not yet released for allocation) is reflected as a reduction of shareholders' equity.



1.	Summary of Significant Accounting Policies (Continued)

Stock-Based Compensation (Continued)

The Company accounts for stock options granted under its Long-Term Equity Compensation Plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations.  Accordingly, for fixed stock option awards, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date.  Restricted stock awards granted under the Long-Term Equity Compensation Plan are also accounted for in accordance with APB Opinion No. 25.  The fair value of the shares awarded, measured as of the grant date, is recognized as unearned compensation (a component of shareholders' equity) and amortized to compensation expense over the five year vesting period of the awards.  Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," requires entities to provide pro forma disclosures of net income and earnings per share as if the fair value of all stock-based awards was recognized as compensation expense over the vesting period of the awards.

The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model.  The following weighted-average assumptions were used for grants made in 2002: dividend yield of 1.52%, expected volatility of 25.0%, risk-free interest rate of 2.67%, and expected life of 5 years.  The following weighted-average assumptions were used for grants made in 2003: dividend yield of 1.68%, expected volatility of 24.71%, risk-free interest rate of 2.97%, and expected life of 5 years.  The estimated weighted-average fair value of the options granted in October 2002, January 2003 and October 2003 was $2.97, $3.34 and $6.69 per option, respectively.

Pro forma disclosures for the years ended December 31, 2003 and 2002, utilizing the estimated fair value of the options granted, is as follows (dollars in thousands except per share data):





|                                                                          |                      |                  | 2003              |                   | 2002             
|------------------------------------------------------------------------- | -------------------- | ---------------- | ----------------- | ----------------- | -----------------
|Net income, as reported                                                   |                      | $         14,046 |                   | $           8,412
|Add:  Stock-based compensation expense related to restricted stock awards |                      |                  |                   |                  
|included in reported net income, net of related tax effects               |                      | 388              |                   | 97               
|Deduct:  Total stock-based compensation expense determined under fair     |                      |                  |                  
|value based method for all awards, net of related tax effects             |                      | (645)            |                   | (161)            
|                                                                          | Pro forma net income |                  | $         13,789  |                   | $           8,348
|Basic earnings per share:                                                 |                      |                  |                   |                  
|                                                                          | As reported          |                  | $            1.04 |                   | $            0.45
|                                                                          | Pro forma            |                  | $            1.02 |                   | $            0.44
|Diluted earnings per share:                                               |                      |                  |                   |                  
|                                                                          | As reported          |                  | $            1.02 |                   | $            0.45
|                                                                          | Pro forma            |                  | $            1.01 |                   | $            0.44



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 and 2002 should not be considered representative of the pro forma effects on reported net income and earnings per share for future years.  Additional information regarding the Company's stock options is located in note 11.



1.	Summary of Significant Accounting Policies (Continued)

Earnings Per Share

Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share are 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 number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as stock options and unvested restricted stock awards) were issued during the period, computed using the treasury stock method.  Prior to April 3, 2002, earnings per share are not applicable as there were no shares outstanding.  Unallocated shares held by the Company's ESOP are not included in the weighted average number of shares outstanding for either the basic or diluted earnings per share calculations.

Derivative Financial Instruments and Hedging Activities



Derivative instruments utilized by the Company have included interest rate floor and cap agreements.  The Company is a limited end-user of derivative instruments for interest rate management purposes, and does not conduct trading activities for derivatives.

The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective January 1, 2001.  SFAS No. 133 has since been amended by SFAS No. 138 and SFAS No. 149.  SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.  It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in the fair value of the derivative financial instruments are reported in either net income or as a component of other comprehensive income, depending on the use of the derivative and whether or not it qualifies for hedge accounting.

Special hedge accounting treatment is permitted only if specific criteria are met, including a requirement that the hedging relationship be highly effective both at inception and on an ongoing basis.  Accounting for hedges varies based on the type of hedge - fair value or cash flow.  Results of effective hedges are recognized in current earnings for fair value hedges and in other comprehensive income for cash flow hedges.  Ineffective portions of hedges are recognized immediately in earnings.

During 2000, the Company entered into three interest rate cap agreements, which expired at various dates through 2002.  The cap agreements were entered into as a hedge against the exposure to rising interest rates  on the Company's borrowings.

Upon the adoption of SFAS No. 133 as of January 1, 2001, the Company recorded the cap agreements at estimated fair value.  The impact to the Company's consolidated financial statements was not significant and therefore the impact has not been presented as the cumulative effect of a change in accounting principle in the consolidated statement of income for the year ended December 31, 2001.  As permitted by SFAS No. 133, as of January 1, 2001, the Company transferred securities classified as held-to-maturity with an amortized cost of approximately $166.5 million and a fair value of approximately $168.2 million to securities classified as available-for-sale.

Comprehensive Income

Comprehensive income consists of net income, the net change in unrealized gains and losses on securities available-for-sale, net of taxes and the change in minimum pension liability, net of taxes.

Segment Reporting

The Company operates as one segment.  Its operations are solely in the financial services industry and include providing to its customers traditional banking and other financial services.  The Company operates primarily in the geographical regions of Oneida, Herkimer and Onondaga counties of New York.  Management makes operating decisions and assesses performance based on an ongoing review of the Company's consolidated financial results.  Therefore, the Company has a single operating segment for financial reporting purposes.



1.	Summary of Significant Accounting Policies (Continued)

Reclassifications

Reclassifications are made to prior years' consolidated financial statements when necessary to conform to the current year's presentation.

2.	Business Combination

On December 27, 2002, the Company completed the acquisition of Herkimer Trust Corporation, Inc. ("Herkimer"), a bank holding company headquartered in Little Falls, New York.  Herkimer operated 12 branches in the Mohawk Valley region of New York State.  The Company paid $64.0 million in cash in exchange for the Herkimer shares outstanding at the time of acquisition, as well as $1.1 million in direct acquisition costs.

The transaction has been accounted for using the purchase method of accounting and, accordingly, operations acquired from Herkimer have been included in the Company's financial results since the acquisition date.  The assets acquired and liabilities assumed from Herkimer were recorded at their estimated fair values.  In connection with the acquisition, the Company recorded approximately $34.5 million of nondeductible goodwill, $3.8 million of core deposit intangible, and $207,000 of trust relationship intangible.  The goodwill is not being amortized, but is evaluated at least annually for impairment.  No impairment of goodwill was recognized in 2003.  The core deposit intangible and the trust relationship intangible are being amortized over seven years using an accelerated method.

The following table summarizes the Company's intangible assets that are subject to amortization (in thousands):





|                          |       |                           | December 31, 2003        
|------------------------- | ----- | ------------------------- | -------------------------
|                          |       |                           | Gross Carrying           
|                          |       |                           | Amount                   
|                          |       |                           |                          
|Core deposit intangible   |       | $                   3,839 |                          
|Mortgage servicing rights |       | 593                       |                          
|Other intangible assets   |       | 384                       |                          
|                          | Total |                           | $                   4,816
|                          |       |                           |                          
|                          |       |                           | December 31, 2002        
|                          |       |                           | Gross Carrying           
|                          |       |                           | Amount                   
|                          |       |                           |                          
|Core deposit intangible   |       | $                   3,839 |                          
|Mortgage servicing rights |       | 3,960                     |                          
|Other intangible assets   |       | 384                       |                          
|                          | Total |                           | $                   8,183



Amortization expense for intangible assets for the next five years is estimated as follows (in thousands):





|     |  | Core Deposit           |  | Mortage Servicing      |  | Trust Relationship      
|---- |  | ---------------------- |  | ---------------------- |  | ------------------------
|     |  | Intangible             |  | Rights                 |  | Intangible              
|2004 |  | $                  823 |  | $                   58 |  | $                     44
|2005 |  | 686                    |  | 44                     |  | 37                      
|2006 |  | 548                    |  | 34                     |  | 30                      
|2007 |  | 411                    |  | 26                     |  | 22                      
|2008 |  | 274                    |  | 20                     |  | 15                      





2.	Business Combination (Continued)



The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the Herkimer acquisition:





|At December 27, 2002 (dollars in thousands):                               |                          
|-------------------------------------------------------------------------- | -------------------------
|Cash and cash equivalents                                                  |                          
|Securities available-for-sale                                              |                          
|Loans receivable, net of allowance for loan losses and loans held for sale | 191,131                  
|Premises and equipment                                                     |                          
|Goodwill                                                                   |                          
|Core deposit intangible                                                    |                          
|Trust relationship intangible                                              |                          
|Other assets                                                               |                          
|                                                                           | Total assets acquired    
|Deposits and escrow accounts                                               |                          
|Borrowings                                                                 |                          
|Other liabilities                                                          |                          
|                                                                           | Total liabilities assumed
|                                                                           | Net assets acquired      



In connection with the integration of Herkimer's operations, the Company incurred $1.7 million of merger expenses in 2002.  These expenses primarily consisted of systems conversion costs, customer communication, personnel charges, and writedowns on Company properties that are no longer being used as a result of the merger.  All expenses related to the Herkimer merger were recorded in 2002.  At December 31, 2003 there is no liability for merger expenses.



Presented below is certain unaudited pro forma information for the years ended December 31, 2002 and 2001, as if Herkimer had been acquired on January 1, 2001.  These results combine the historical results of Herkimer into the Company's consolidated statements of income.  While certain adjustments were made for the estimated impact of the purchase accounting adjustments and other acquisition-related activity, they are not necessarily indicative of what would have occurred had the acquisition actually taken place at that time.  In particular, the Company had achieved operating cost savings as a result of the merger, which are not reflected in the pro forma amounts presented.





|(in thousands, except per share data)                                                           |  | For the Years Ended  
|----------------------------------------------------------------------------------------------- |  | ---------------------
|                                                                                                |  | December 31,         
|                                                                                                |  | 2002                 
|Net interest income                                                                             |  | $            47,741  
|Provision for loan losses                                                                       |  | (3,418)              
|Non-interest income                                                                             |  | 9,778                
|Non-interest expense                                                                            |  | (43,597)             
|Income tax expense                                                                              |  | (3,120)              
|Net income                                                                                      |  | $              7,384 
|Basic and diluted earnings per share                                                            |  | $                0.37
|                                                                                                |  |                      
|Earnings per share are not applicable prior to the conversion to a stock bank on April 3, 2002.





3.	Securities



The amortized cost and estimated fair value of securities are summarized as follows (in thousands):





|                    |                                     |                              |                          |                      |                  |                     | December 31, 2003
|------------------- | ----------------------------------- | ---------------------------- | ------------------------ | -------------------- | ---------------- | ------------------- | -----------------
|                    |                                     |                              |                          |                      |                  |                     | Amortized        
|                    |                                     |                              |                          |                      |                  |                     | Cost             
|Available-for-sale: |                                     |                              |                          |                      |                  |                     |                  
|                    | U.S. Treasury and obligations of    |                              |                          |                      |                  |                     |                  
|                    |                                     | U.S. government corporations |                          |                      |                  |                     |                  
|                    |                                     | and agencies                 | $          101,905       |                      | $          1,257 |                     | $             107
|                    | Municipal obligations               | 31,729                       |                          | 581                  |                  | 31                  |                  
|                    | Corporate debt securities           | 15,481                       |                          | 448                  |                  | 14                  |                  
|                    | Fannie Mae preferred stock          | 10,000                       |                          | -                    |                  | 1,807               |                  
|                    | Collateralized mortgage obligations | 42,209                       |                          | 366                  |                  | 30                  |                  
|                    | Other mortgage-backed securities    | 138,393                      |                          | 3,614                |                  | 280                 |                  
|                    |                                     |                              | Total available-for-sale | $           339,717  |                  | $          6,266    |                  
|                    |                                     |                              |                          |                      |                  |                     |                  
|Held-to-maturity:   |                                    
|                    | Other securities                    | $              1,240         |                          | $                 1  |                  | $                -  |                  
|                    |                                     |                              | Total held-to-maturity   | $              1,240 |                  | $                 1 |                  





|                    |                                     |                              |                          |                      |                  |                    | December 31, 2002 
|------------------- | ----------------------------------- | ---------------------------- | ------------------------ | -------------------- | ---------------- | ------------------ | ------------------
|                    |                                     |                              |                          |                      |                  |                    | Amortized         
|                    |                                     |                              |                          |                      |                  |                    | Cost              
|Available-for-sale: |                                     |                              |                          |                      |                  |                    |                   
|                    | U.S. Treasury and obligations of    |                              |                          |                      |                  |                    |                   
|                    |                                     | U.S. government corporations |                          |                      |                  |                    |                   
|                    |                                     | and agencies                 | $            79,703      |                      | $          2,167 |                    | $                -
|                    | Municipal obligations               | 28,462                       |                          | 3                    |                  | -                  |                   
|                    | Corporate debt securities           | 15,915                       |                          | 262                  |                  | -                  |                   
|                    | Fannie Mae preferred stock          | 10,000                       |                          | -                    |                  | 534                |                   
|                    | Collateralized mortgage obligations | 73,159                       |                          | 1,210                |                  | -                  |                   
|                    | Other mortgage-backed securities    | 127,602                      |                          | 6,184                |                  | -                  |                   
|                    |                                     |                              | Total available-for-sale | $           334,841  |                  | $          9,826   |                   
|                    |                                     |                              |                          |                      |                  |                    |                   
|Held-to-maturity:   |                                    
|                    | Other securities                    | $              1,567         |                          | $                -   |                  | $                - |                   
|                    |                                     |                              | Total held-to-maturity   | $              1,567 |                  | $                - |                   





3.	Securities (Continued)



The following provides information on temporarily impaired securities at December 31, 2003 (in thousands):





|                                    |                              |                                       | Less than 12 months |                | 12 Months or longer |                | Total        
|----------------------------------- | ---------------------------- | ------------------------------------- | ------------------- | -------------- | ------------------- | -------------- | -------------
|                                    |                              |                                       | Estimated           |                | Unrealized          |                | Estimated    
|                                    |                              |                                       | Fair Value          |                | Losses              |                | Fair Value   
|U.S. Treasury and obligations of    |                              |                                       |                     |                |                     |                |              
|                                    | U.S. government corporations |                                       |                     |                |                     |                |              
|                                    | and agencies                 | $     23,691                          |                     | $          107 |                     | $            - |              
|Municipal obligations               | 1,001                        |                                       | 31                  |                | -                   |                | -            
|Corporate debt securities           | 1,690                        |                                       | 14                  |                | -                   |                | -            
|Fannie Mae preferred stock          | -                            |                                       | -                   |                | 8,193               |                | 1,807        
|Collateralized mortgage obligations | 10,646                       |                                       | 30                  |                | -                   |                | -            
|Other mortgage-backed securities    | 45,421                       |                                       | 280                 |                | -                   |                | -            
|                                    |                              | Total temporarily impaired securities | $     82,449        |                | $          462      |                | $       8,193



The Fannie Mae preferred stock was not considered to be other than temporarily impaired because the loss is attributed primarily to the low level of market interest rates, as opposed to credit quality concerns.  Fannie Mae is a government sponsored enterprise, and was rated Aa3 by Moodys at December 31, 2003.  We are not aware of any event that would lead us to believe that the market value of the security has been negatively impacted by a reduction in the credit quality of Fannie Mae.  This stock has an adjustable rate, which declined along with market interest rates in recent years.  The effect of this rate decline was a reduction in the tax benefit of owning the stock (70% dividend received deduction), which reduced the market value of the security.  It is expected that, if and when market rates increase, the market value of this stock should increase.  We intend to hold this security for the foreseeable future.



Privately issued collateralized mortgage obligations totaled $8.2 million and $14.8 million at December 31, 2003 and 2002, respectively.  These bonds were AAA rated at each date.  All other mortgage-backed securities and collateralized mortgage obligations at December 31, 2003 and 2002, were backed by either Fannie Mae, Freddie Mac or Ginnie Mae.

The amortized cost and estimated fair value of debt securities at December 31, 2003, by contractual maturity are shown below (in thousands).  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.





|                    |                                               |                      |       |  |  |                       |         |                            |                      |  | Amortized                 |  | Estimated 
|------------------- | --------------------------------------------- | -------------------- | ----- |  |  | --------------------- | ------- | -------------------------- | -------------------- |  | ------------------------- |  | ----------
|                    |                                               |                      |       |  |  |                       |         |                            |                      |  | Cost                      |  | Fair Value
|Available-for-sale: |                                               |                      |       |  |  |                       |        
|                    | Due in one year or less                       |                      |       |  |  | $              39,694 |         | $                   40,096
|                    | Due after one year through five years         |                      |       |  |  | 82,537                |         | 83,573                    
|                    | Due after five years through ten years        |                      |       |  |  | 8,117                 |         | 8,282                     
|                    | Due after ten years                           |                      |       |  |  | 18,767                |         | 19,298                    
|                    |                                               |                      |       |  |  |                       |         |                            |                      |  | 149,115                   |  | 151,249   
|                    | Mortgage-backed securities and collateralized |                      |       |  |  |                       |         |                           
|                    |                                               | mortgage obligations |       |  |  |                       | 180,602 |                            | 184,272             
|                    |                                               |                      | Total |  |  |                       |         |                            | $            329,717 |  | $                 335,521



There were no sales of securities during 2003.  During the year ended December 31, 2002, the Company realized gross gains of $13,000 and gross losses of $32,000 related to the sales of securities available-for-sale. During the year ended December 31, 2001, the Company realized gross gains of $335,000 and gross losses of $69,000.



3.	Securities (Continued)

Securities at December 31, 2003 and 2002 include approximately $115.5 million and $127.8 million, respectively, of securities which are pledged under depository agreements, treasury, tax and loan accounts, and other collateral agreements, including repurchase agreements.

4.	Loans Receivable

The components of loans receivable at the dates indicated are as follows (in thousands):



|                                      |                                  |                      |                      |         |                      |         |                     |  | December 31,
|------------------------------------- | -------------------------------- | -------------------- | -------------------- | ------- | -------------------- | ------- | ------------------- |  | ------------
|                                      |                                  |                      |                      |         |                      |         |                     |  | 2003        
|Residential                           |                                  |                      | $            481,929 |         | $            434,312
|Commercial real estate                |                                  |                      | 139,555              |         | 170,430             
|Commercial                            |                                  |                      | 58,936               |         | 56,785              
|Consumer, including home equity loans |                                  |                      | 124,830              |         | 143,471             
|                                      | Total loans receivable           |                      |                      | 805,250 |                      | 804,998
|Less:                                 |                                  |                      |                      |         |                      |         |                     |  |             
|                                      | Net deferred loan fees and costs |                      |                      | 446     |                      | 442    
|                                      | Allowance for loan losses        |                      |                      | 8,608   |                      | 10,989 
|                                      |                                  | Net loans receivable |                      |         | $           796,196  |         | $           793,567



The Company grants commercial, consumer and residential loans primarily throughout Oneida, Herkimer and Onondaga Counties in New York State.  Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the employment and economic conditions within these counties.

At December 31, 2003, $334.0 million residential mortgages were pledged as collateral for FHLB advances.

At December 31, 2003 and 2002, loans to Company directors and officers were not significant.

At December 31, 2003, 2002 and 2001, impaired loans totaled approximately $1.9 million, $2.0 million and $4.9 million, respectively.  There was no allowance for loan losses on impaired loans at December 31, 2003.  The allowance for loan losses on impaired loans as of December 31, 2002and 2001, totaled approximately $1.0 million and $550,000, respectively.  For the years ended December 31, 2003, 2002 and 2001, the average recorded investment in impaired loans was approximately $1.4 million, $4.3 million and $1.7 million, respectively.  No interest income was recognized on impaired loans while such loans were considered impaired during the years ended December 31, 2003, 2002 or 2001.

The amount of loans on which the Company has ceased accruing interest totaled approximately $3.8 million, $10.5 million and $8.8 million at December 31, 2003, 2002 and 2001, respectively.  The amount of interest not recorded on these nonaccrual loans was approximately $223,000, $200,000 and $309,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

The amount of loans 90 days past due and still accruing at December 31, 2003 and 2002 totaled $480,000 and $461,000, respectively.

Changes in the allowance for loan losses for the years indicated are as follows (in thousands):





|                             |  |  |  |  |              |         |               |         |             |         | 2003 |  | 2002 |  | 2001
|---------------------------- |  |  |  |  | ------------ | ------- | ------------- | ------- | ----------- | ------- | ---- |  | ---- |  | ----
|Balance at beginning of year |  |  |  |  | $    10,989  |         | $       7,934 |         | $    7,564 
|Charge-offs                  |  |  |  |  |              | (4,051) |               | (3,097) |             | (2,767)
|Recoveries                   |  |  |  |  |              | 570     |               | 830     |             | 1,465  
|Provision for loan losses    |  |  |  |  | 1,100        |         | 1,150         |         | 1,672      
|Allowance acquired           |  |  |  |  | -            |         | 4,172         |         | -          
|Balance at end of year       |  |  |  |  | $      8,608 |         | $     10,989  |         | $     7,934





4.	Loans Receivable (Continued)

Loans serviced for others are not included in the accompanying consolidated balance sheets.  The unpaid principal balances of loans serviced for others was approximately $129.9 million, $187.7 million, and $212.6 million at December 31, 2003, 2002 and 2001, respectively.

Custodial escrow balances included in demand deposits were approximately $2.2 million and $3.0 million at December 31, 2003 and 2002, respectively.

5.	Premises and Equipment

Premises and equipment at cost less accumulated depreciation and amortization at the dates indicated are as follows (in thousands):





|                                                |  |  |            |  |          |        |                   |        | December 31,     
|----------------------------------------------- |  |  | ---------- |  | -------- | ------ | ----------------- | ------ | -----------------
|                                                |  |  |            |  |          |        |                   |        | 2003             
|Land                                            |  |  |            |  |          |        | $           3,073 |        | $           3,073
|Buildings                                       |  |  |            |  | 13,754   |        | 14,167           
|Leasehold improvements                          |  |  | 2,112      |  | 2,108   
|Furniture, fixtures and equipment               |  |  | 7,341      |  | 9,443   
|Computer software purchased                     |  |  | 2,434      |  | 2,348   
|Construction in progress                        |  |  | 205        |  | 47      
|                                                |  |  | Total cost |  |          | 28,919 |                   | 31,186
|Less: Accumulated depreciation and amortization |  |  | (15,296)   |  | (16,675)
|                                                |  |  |            |  |          |        |                   |        | $         13,623 



6.       Land and Buildings Held for Sale



In connection with the acquisition of Herkimer, the Company decided to close certain branches due to the close proximity to other branches.  Three of these branch buildings were owned and thus were considered held for sale.  The net book value of $352,000 at the time approximated the estimated fair value.  Depreciation expense was discontinued on these properties effective December 31, 2002.  One of these branches was sold in 2003 and a net gain of $13,000 was recognized.



During 2001, the Company recorded an impairment charge of $1.5 million on two buildings it was seeking to sell.  The charge reduced the recorded net book value of the properties to their estimated net fair value, which was $3.6 million at December 31, 2001. The net fair value of the properties was estimated by the Company's in-house appraiser in consultation with a commercial real estate broker.  One property is an office building that previously housed several operations functions of the Company.  As the Company did not expect to need the space for future operations, it was decided to list the property for sale with a commercial real estate broker.  Depreciation expense was discontinued on this property in 2001.  Additional impairment charges of $32,000 and $170,000 were recorded on this property during 2003 and 2002, respectively based on management's reassessment of the estimated fair value.  The second property was a former branch location that was consolidated into a new branch office less than a mile away.  This property was sold in 2002 for $472,000, resulting in a net gain of $136,000.



7.       Accrued Interest Receivable



Accrued interest receivable at the dates indicated consists of the following (in thousands):





|           |  |                                   |  |                    |                    |                    |                    | December 31,
|---------- |  | --------------------------------- |  | ------------------ | ------------------ | ------------------ | ------------------ | ------------
|           |  |                                   |  |                    |                    |                    |                    | 2003        
|Loans      |  |                                   |  |                    | $            2,734 |                    | $            3,338
|Securities |  |                                   |  | 2,502              |                    | 2,635             
|           |  | Total accrued interest receivable |  | $            5,236 |                    | $            5,973





8.       Deposits



Deposits consisted of the following at the dates indicated  (in thousands):





|                                 |                |  |               |               |               |               |  |  | December 31,
|-------------------------------- | -------------- |  | ------------- | ------------- | ------------- | ------------- |  |  | ------------
|                                 |                |  |               |               |               |               |  |  | 2003        
|                                 |                |  |               |               |               |               |  |  |             
|Savings accounts                 |                |  | $     156,469 |               | $     169,902
|Money market accounts            |                |  | 153,320       |               | 164,435      
|Time accounts                    |                |  | 297,273       |               | 328,806      
|Demand deposits and NOW accounts |                |  | 189,016       |               | 192,068      
|                                 | Total deposits |  |               | $     796,078 |               | $     855,211



The maturity of time accounts at December 31, 2003 follows (dollars in thousands):





|                               |  |                     |  |  |                       |  |                       |  | December 31, 2003
|------------------------------ |  | ------------------- |  |  | --------------------- |  | --------------------- |  | -----------------
|Maturity                       |  |                     |  |  |                       |  | Amount                |  | Percent          
|                               |  |                     |  |  |                       |  |                       |  |                  
|One year or less               |  |                     |  |  | $             193,408 |  | 65.1%                
|Over one year to two years     |  |                     |  |  | 54,213                |  | 18.2%                
|Over two years to three years  |  |                     |  |  | 22,815                |  | 7.7%                 
|Over three years to four years |  |                     |  |  | 20,497                |  | 6.9%                 
|Over four years to five years  |  |                     |  |  | 6,279                 |  | 2.1%                 
|Over five years                |  |                     |  |  | 61                    |  | 0.0%                 
|                               |  | Total time accounts |  |  |                       |  | $             297,273 |  | 100.0%           



The aggregate amount of time accounts $100,000 or greater was approximately $55.5 million at December 31, 2003 and 2002.  Deposit amounts in excess of $100,000 are not federally insured.



9.       Borrowings

The following is a summary of borrowings at the dates indicated (in thousands):





|                                                |  |                  |  |                  |  |                | December 31,
|----------------------------------------------- |  | ---------------- |  | ---------------- |  | -------------- | ------------
|                                                |  |                  |  |                  |  |                | 2003        
|                                                |  |                  |  |                  |  |                |             
|Repurchase agreements                           |  | $         26,069 |  | $         44,971
|Federal Home Loan Bank term advances            |  | 263,500          |  | 247,000         
|Federal Home Loan Bank overnight line of credit |  | 1,000            |  | -               
|                                                |  | Total borrowings |  | $      290,569   |  | $      291,971





9.	Borrowings (Continued)



The following table sets forth certain information with respect to the overnight line of credit and repurchase agreements at and for the years indicated (dollars in thousands):





|                                              |  |  |       | December 31,
|--------------------------------------------- |  |  | ----- | ------------
|                                              |  |  |       |             
|                                              |  |  |       |             
|FHLB Overnight Line of Credit:                |  |  |       |             
|Maximum month-end balance                     |  |  |       |             
|Balance at end of year                        |  |  |       |             
|Average balance during year                   |  |  |       |             
|Weighted average interest rate at end of year |  |  | 1.04% |             
|Weighted average interest rate during year    |  |  | 1.16% |             
|                                              |  |  |       |             
|Repurchase agreements:                        |  |  |       |             
|Maximum month-end balance                     |  |  |       |             
|Balance at end of year                        |  |  |       |             
|Average balance during year                   |  |  |       |             
|Weighted average interest rate at end of year |  |  | 1.04% |             
|Weighted average interest rate during year    |  |  | 1.21% |             



Repurchase agreements outstanding at December 31, 2003 are at interest rates ranging from 0.34% to 7.25%, and were at interest rates ranging from 0.87% to 7.25% at December 31, 2002.  At December 31, 2003 and 2002, the fair value of securities pledged under repurchase agreements approximated $46.1 million and $47.0 million, respectively.

As of the dates indicated, principal balances of FHLB term advances mature as follows (dollars in thousands):





|         |                          | December 31, 2003 |        | December 31, 2002
|-------- | ------------------------ | ----------------- | ------ | -----------------
|         |                          | Weighted          |        |                  
|         |                          | Average           |        |                  
|         |                          | Rate              |        | Amount           
|Maturing |                          |                   |       
|2003     |                          |                   |        |                  
|2004     | 2.91%                    |                   | 33,500 |                  
|2005     | 4.21%                    |                   | 70,000 |                  
|2006     | 3.63%                    |                   | 90,000 |                  
|2007     | 3.31%                    |                   | 55,000 |                  
|2008     | 2.79%                    |                   | 15,000 |                  
|         | Total FHLB term advances | 3.58%             |        | $    263,500     



One of the Company's fixed-rate term FHLB advances totaling $20.0 million at December 31, 2003 is callable quarterly. If called, the Company has the option to reprice the advance at the then-current FHLB rates, or repay the advance.  This advance has a rate of 6.31% and matures in August 2005.

The Company had available



10.     Employee Benefits Plan

Defined Benefit Plan and Postretirement Benefits

The Company has a noncontributory pension plan covering substantially all employees.  Effective November 1, 2002, the Company froze all pension benefit accruals and participation in the Plan.  Under the Plan, retirement benefits are primarily a function of both the years of service and the level of compensation.  The amounts contributed to the plan 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.  The Company also provides postretirement medical and life insurance benefits to eligible retirees.  The costs of these benefits are accrued over the employment period of the active employees.  The postretirement benefit plan is unfunded.  Participation in this plan is limited to personnel meeting eligibility requirements prior to November 1, 2002.  No additional employees are eligible for benefits subsequent to that date.

The following table represents a reconciliation of the change in the benefit obligation, plan assets and funded status of the plans at December 31 (using a measurement date of October 1) (in thousands):





|                              |                                     |                                    |                           |                       |                    |       | Pension Benefits    |       | Postretirement Benefits
|----------------------------- | ----------------------------------- | ---------------------------------- | ------------------------- | --------------------- | ------------------ | ----- | ------------------- | ----- | -----------------------
|                              |                                     |                                    |                           |                       |                    |       | 2003                |       | 2002                   
|Change in benefit obligation: |                                     |                                    |                           |                       |                    |       |                    
|                              | Benefit obligation at               |                                    |                           |                       |                    |       |                     |      
|                              |                                     | beginning of year                  | $           9,962         |                       | $          9,636   |       | $         3,160     |       | $         3,400        
|                              | Service cost                        | 26                                 |                           | 272                   |                    | 58    |                     | 44   
|                              | Interest cost                       | 586                                |                           | 665                   |                    | 205   |                     | 202  
|                              | Actuarial loss (gain)               | 748                                |                           | 181                   |                    | (597) |                     | (253)
|                              | Benefits paid                       | (529)                              |                           | (792)                 |                    | (122) |                     | (233)
|                              | Curtailment                         | (1,343)                            |                           | -                     |                    | -     |                     | -    
|                              |                                     |                                    | Benefit obligation at     |                       |                    |       |                     |       |                        
|                              |                                     |                                    |                           | end of year           | $           9,450  |       | $          9,962    |       | $         2,704        
|                              |                                     |                                    |                           |                       |                    |       |                     |       |                        
|Change in plan assets:        |                                     |                                    |                           |                       |                    |       |                    
|                              | Fair value of plan assets           |                                    |                           |                       |                    |       |                     |      
|                              |                                     | at beginning of year               | $           8,795         |                       | $        10,870    |       | $                 - |       | $                 -    
|                              | Actual return (loss) on plan assets | 1,003                              |                           | (1,283)               |                    | -     |                     | -    
|                              | Employer contributions              | -                                  |                           | -                     |                    | 122   |                     | 233  
|                              | Benefits paid                       | (529)                              |                           | (792)                 |                    | (122) |                     | (233)
|                              |                                     |                                    | Fair value of plan assets |                       |                    |       |                     |       |                        
|                              |                                     |                                    |                           | at end of year        | $           9,269  |       | $          8,795    |       | $                 -    
|                              |                                     |                                    |                           |                       |                    |       |                     |       |                        
|                              | Reconciliation of funded status to  |                                    |                           |                       |                    |       |                     |      
|                              | net amount recognized:              |                                    |                           |                       |                    |       |                     |      
|                              |                                     | Funded status                      | $             (181)       |                       | $        (1,167)   |       | $        (2,704)    |       | $        (3,160)       
|                              |                                     | Unrecognized prior service cost    | -                         |                       | 54                 |       | 263                 |       | 285                    
|                              |                                     | Unrecognized actuarial loss (gain) | 826                       |                       | 1,405              |       | (1,879)             |       | (1,350)                
|                              |                                     |                                    |                           | Net amount recognized | $              645 |       | $             292   |       | $        (4,320)       





10.     Employee Benefits Plan (Continued)



Amounts recognized in the consolidated balance sheet consist of (in thousands):





|                             |                   | Pension Benefits |                | Postretirement Benefits
|---------------------------- | ----------------- | ---------------- | -------------- | -----------------------
|                             |                   | 2003             |                | 2002                   
|Prepaid benefit cost         | $               - |                  | $          292 |                        
|Accrued benefit cost         | (181)             |                  | -              |                        
|Additional minimum liability | 826               |                  | -              |                        
|Net amount recognized        | $          645    |                  | $          292 |                        



The following table is presented as the plans have an accumulated benefit obligation in excess of plan assets (in thousands):





|                               |                 | Pension Benefits |                 | Postretirement Benefits
|------------------------------ | --------------- | ---------------- | --------------- | -----------------------
|                               |                 | 2003             |                 | 2002                   
|Projected benefit obligation   | $         9,450 |                  | $         9,962 |                        
|Accumulated benefit obligation | 9,450           |                  | 8,625           |                        
|Fair value of plan assets      | 9,269           |                  | 8,795           |                        



The composition of the net periodic benefit plan (credit) cost for the years ended December 31, 2003, 2002 and 2001 is as follows (in thousands):





|                                            |                                         |               | Pension Benefits |              | Postretirement Benefits
|------------------------------------------- | --------------------------------------- | ------------- | ---------------- | ------------ | -----------------------
|                                            |                                         |               | 2003             |              | 2002                   
|Service cost                                |                                         | $          26 |                  | $        272 |                        
|Interest cost                               |                                         | 586           |                  | 665          |                        
|Amortization of unrecognized actuarial gain | -                                       |               | (151)            |              | (247)                  
|Amortization of unrecognized                |                                         |               |                  |              |                        
|                                            | prior service cost                      |               | 1                |              | 7                      
|Expected return on plan assets              |                                         | (879)         |                  | (1,093)      |                        
|Curtailment credit                          |                                         | (87)          |                  | -            |                        
|                                            | Net periodic benefit plan (credit) cost |               | $      (353)     |              | $      (300)           



Unrecognized net actuarial gains or losses in excess of 10% of the greater of the projected benefit obligation or the fair value of the plan assets are amortized over the average remaining service period of active plan participants.



The following weighted-average assumptions were used to determine benefit obligations for these plans:





|                              |       |  |       |  | Pension Benefits |  | Postretirement Benefits
|----------------------------- | ----- |  | ----- |  | ---------------- |  | -----------------------
|                              |       |  |       |  | 2003             |  | 2002                   
|Discount rate                 | 6.25% |  | 6.75% |  | 7.25%            |  | 6.25%                  
|Rate of compensation increase | N/A   |  | 4.00% |  | 4.50%            |  |                        



The rate of compensation increase is not applicable in 2003 since the Company froze the plan as of November 1, 2002.



10.      Employee Benefits Plan (Continued)



The following weighted-average assumptions were used to determine net periodic benefit cost for the years ended December 31:





|                               |       | Pension Benefits |       | Postretirement Benefits
|------------------------------ | ----- | ---------------- | ----- | -----------------------
|                               |       | 2003             |       | 2002                   
|                               |       |                  |       |                        
|Discount rate                  | 6.75% |                  | 7.25% |                        
|Expected return on plan assets | 9.00% |                  | 9.00% |                        
|Rate of compensation increase  | 4.00% |                  | 4.50% |                        



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 expected rate of return is determined to be 9.0% which is approximately the midpoint of the range of expected returns.



For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003.  This rate was assumed to decrease gradually to 4.5% by 2008 and remain at that level thereafter.

The health care cost trend rate assumption can have a significant effect on the amounts reported.  If the health care cost trend rate were increased one percent, the accumulated post-retirement benefit obligation as of December 31, 2003 would have increased by $303,000 and the aggregate of service and interest cost would have increased by $36,000.  If the health care cost trend rate were decreased one percent, the accumulated post-retirement benefit obligation as of December 31, 2003 would have decreased by $251,000 and the aggregate of service and interest cost would have decreased by $29,000.

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





|                                    |  | Plan assets at  |  | Plan assets at 
|----------------------------------- |  | --------------- |  | ---------------
|                                    |  | October 1, 2003 |  | October 1, 2002
|Equity securities                   |  | 67%             |  | 62%            
|Debt securities (bond mutual funds) |  | 33%             |  | 38%            
|Total                               |  | 100%            |  | 100%           



Plan assets are invested in six diversified investment funds of the RSI Retirement Trust (the "Trust"), a no load series open-ended mutual fund.  In addition, a small portion of the assets (less than 1%) is invested in RS Group common stock.  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 Plan Sponsor to determine the appropriate strategic asset allocation versus plan liabilities, as governed by the Trust's Statement of Investment Objectives and Guidelines (the "Guidelines").



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).



10.      Employee Benefits Plan (Continued)



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.  Performance volatility is also monitored.  Risk and volatility are further managed by the distinct investment objectives of each of the Trust funds and the diversification within each fund.



The Company does not expect to make any contributions to its pension plan in 2004.  The Company expects its contributions to the postretirement plan in 2004 to remain consistent with 2003, unless there is a significant change in healthcare costs or the health of the participants in the plan.



Defined Contribution Plan



The Company also maintains a defined contribution employee savings 401(k) plan.  Company contributions associated with the plan amounted to approximately $299,000, $214,000 and $224,000 for the years ended December 31, 2003, 2002 and 2001, respectively.



Supplemental Retirement Income Agreement



In June 2001, the Company entered into an Executive Supplemental Retirement Income Agreement (the "SERP") with the Chief Executive Officer (the "CEO").  Under the terms of the SERP, upon the CEO's retirement on or after attainment of age 65, the CEO will be entitled to an annual supplemental retirement income benefit equal to 60% of his average annual base salary over the three years prior to retirement or attainment of age 65, payable in monthly installments for 180 months.  The SERP also contains provisions regarding the benefits payable to the CEO or his beneficiary in the event of early retirement, disability, death or a change in control of the Company.  The Company has also entered into an endorsement split dollar agreement for the benefit of the CEO, under which the Company purchased life insurance to provide death benefits to the CEO's beneficiary until the CEO attains age 60.  The Company will pay the annual premiums on the policy and will have an interest in the policy equal to the greater of the aggregate amount of the premiums paid or the policy's entire cash surrender value.  The accrued benefit liability under the SERP was approximately $310,000 and  $190,000 as of December 31, 2003 and 2002, respectively.  For the years ended December 31, 2003, 2002 and 2001, the Company recorded a net expense of approximately $124,000, $156,000 and $161,000, respectively, related to the SERP, including premiums paid and earnings on the life insurance policy.  The cash surrender value of the life insurance policy as of December 31, 2003 and 2002 was $142,000 and $55,000, respectively.





11.      Stock-Based Compensation Plans



Employee Stock Ownership Plan

The Company established an ESOP in 2002 in conjunction with the initial public offering to provide substantially all employees of the Company the opportunity to also become shareholders.  The ESOP borrowed $5.1 million from the Company and used the funds to purchase approximately 8.0% of the shares issued in the offering, or 511,808 shares.  The loan will be repaid principally from the Company's discretionary contributions to the ESOP over a period of ten years.  At December 31, 2003 and 2002, the loan had an outstanding balance of $4.2 million and $4.7 million, respectively, and an interest rate of 5.75%.  Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid.  Shares released from the suspense account are allocated among participants at the end of the plan year on the basis of relative compensation in the year of allocation.  Unallocated ESOP shares are pledged as collateral on the loan and are reported as a reduction of shareholders' equity.  The Company reports compensation expense equal to the average market price of the shares to be released from collateral at the end of the plan year.  Both the loan obligation and the unearned compensation are reduced by the amount of loan repayments made to the ESOP each plan year ending on December 31.  The Company recorded approximately $1.1 million and $765,000 of compensation expense related to the ESOP for the years ended December 31, 2003 and 2002, respectively.





|The ESOP shares as of December 31 were as follows: |                                                                  | 2003 |                   | 2002
|-------------------------------------------------- | ---------------------------------------------------------------- | ---- | ----------------- | ----
|                                                   | Allocated shares                                                 |      | 102,362           |     
|                                                   | Unallocated shares                                               |      | 409,446           |     
|                                                   | Total ESOP shares                                                |      | 511,808           |     
|                                                   | Market value of unallocated shares at December 31 (in thousands) |      | $          13,921 |     



Long-Term Equity Compensation Plan

On October 10, 2002, the Company's shareholders approved the Partners Trust Financial Group, Inc. Long-Term Equity Compensation Plan (the "LTECP").

The LTECP consists of a stock option plan and a Management Recognition Plan (the "MRP").  The primary objective of the LTECP is to enhance the Company's ability to attract and retain highly qualified officers, employees and directors, by providing such persons with stronger incentives to continue to serve the Company and its subsidiary and to expend maximum effort to improve the business results and earnings of the Company.

Under the LTECP, 639,759 shares of authorized but unissued common stock are reserved for issuance upon option exercises.  The Company also has the alternative to fund option exercises with treasury stock.  Options under the LTECP may be either nonqualified stock options or incentive stock options.  Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value of the stock on the grant date.  Options expire no later than ten years following the grant date and vest at a rate of 20% per year.

The following is a summary of the Company's stock option plan as of and for the years ended December 31, 2003 and 2002:



|                                 |           |         | 2003    |                        | 2002            
|-------------------------------- | --------- | ------- | ------- | ---------------------- | ----------------
|                                 |           |         |         |                        | Weighted Average
|                                 |           |         | Shares  |                        | Exercise Price  
|Outstanding at beginning of year |           | 546,000 |         | $                13.25 |                 
|                                 | Granted   |         | 24,000  |                        | 17.67           
|                                 | Exercised |         | (3,000) |                        | 13.25           
|                                 | Forfeited |         | -       |                        | -               
|Outstanding at end of year       |           | 567,000 |         | $                13.44 |                 
|Exercisable at end of year       |           | 106,200 |         | $                13.25 |                 





11.      Stock Based Compensation Plans (Continued)



The following table summarizes information on the Company's stock options at December 31, 2003 and 2002:





|                         |             |         | 2003               
|------------------------ | ----------- | ------- | -------------------
|                         |             |         | Options Outstanding
|                         |             |         |                    
|                         |             |         |                    
|                         |             |         | Options            
|Range of Exercise Prices | Outstanding |         | Price              
|                         |             |         |                    
|$13.25 - 22.65           |             | 567,000 |                    





|                                     |             | 2002               
|------------------------------------ | ----------- | -------------------
|                                     |             | Options Outstanding
|                                     |             |                    
|                                     |             |                    
|                                     |             | Options            
|Range of Exercise Prices             | Outstanding |                    
|                                     |             |                    
|$                              13.25 |             | 546,000            



Under the MRP, 255,904 shares of authorized but unissued shares are reserved for issuance.  The Company also can fund the MRP with treasury stock.  The fair market value of the shares awarded under the MRP is being amortized to expense on a straight-line basis over the five year vesting period of the underlying shares.  Compensation expense related to the MRP was $644,000 in 2003 and $161,000 from the grant date (October 10, 2002) through December 31, 2002.  The remaining unearned compensation cost of $2.4 million and $3.1 million was reported as a reduction of shareholders' equity at December 31, 2003 and 2002, respectively.  Shares awarded under the MRP were transferred from treasury stock at cost with the difference between the fair market value on the grant date and the cost basis of the shares recorded as a reduction to retained earnings.  The following is a summary of the MRP as of and for the years ended December 31, 2003 and 2002:





|                  |  | 2003     |  | 2002              
|----------------- |  | -------- |  | ------------------
|                  |  |          |  | Weighted Average  
|                  |  | Shares   |  | Grant Price       
|Beginning of year |  | 243,108  |  | $            13.25
|Granted           |  | -        |  | -                 
|Forfeited         |  | -        |  | -                 
|Vested            |  | (36,679) |  | 13.25             
|End of year       |  | 206,429  |  | $            13.25





12.     Income Taxes



The provision for income taxes consisted of the following for the years ended December 31 (in thousands):





|          |         |  |  |  |  |  |               |     |               | 2003           |              | 2002           |  | 2001         
|--------- | ------- |  |  |  |  |  | ------------- | --- | ------------- | -------------- | ------------ | -------------- |  | -------------
|Current:  |         |  |  |  |  |  |               |     |               |                |             
|          | Federal |  |  |  |  |  | $       5,986 |     | $       3,247 |                | $      3,187
|          | State   |  |  |  |  |  |               | 826 |               | 270            |              | 515           
|          |         |  |  |  |  |  |               |     |               |                |              |                |  |              
|Deferred: |         |  |  |  |  |  |               |     |               |               
|          | Federal |  |  |  |  |  | 385           |     | 292           |                | (1,109)     
|          | State   |  |  |  |  |  |               | 71  |               | 9              |              | (264)         
|          |         |  |  |  |  |  |               |     |               | $        7,268 |              | $        3,818 |  | $       2,329



A reconciliation of the applicable federal statutory rate to the effective income tax rate for the years indicated is as follows:



|                                             |  |  |  |     |      |     |      |     |      |  | 2003 |  | 2002 |  | 2001
|-------------------------------------------- |  |  |  | --- | ---- | --- | ---- | --- | ---- |  | ---- |  | ---- |  | ----
|                                             |  |  |  |     |      |     |      |     |      |  |      |  |     
|Federal statutory income tax rate            |  |  |  |     | 35 % |     | 34 % |     | 34 %
|State tax, net of Federal benefit            |  |  |  |     | 3    |     | 2    |     | 2   
|Tax exempt income on securities and loans    |  |  |  | (3) |      | (2) |      | (3)
|Income from bank-owned life insurance        |  |  |  |     | (2)  |     | (4)  |     | (5) 
|Death benefit from bank-owned life insurance |  |  |  | -   |      | -   |      | (3)
|Other                                        |  |  |  |     |      |     |      |     | 1    |  | 1    |  | 1   
|Effective income tax rate                    |  |  |  |     | 34 % |     | 31 % |     | 26 %





12.     Income Taxes (Continued)



The components of deferred income taxes included in other assets in the consolidated balance sheets are as follows (in thousands):





|                                             |                                                                   |                                |         |                                                                    |                               |                   |         |       | December 31,
|-------------------------------------------- | ----------------------------------------------------------------- | ------------------------------ | ------- | ------------------------------------------------------------------ | ----------------------------- | ----------------- | ------- | ----- | ------------
|                                             |                                                                   |                                |         |                                                                    |                               |                   |         |       | 2003        
|Deferred tax assets:                         |                                                                   |                                |         |                                                                    |                              
|                                             | Allowance for loan losses                                         |                                |         | $          2,894                                                   |                               | $          3,686 
|                                             | Accrued postretirement benefits                                   |                                |         | 1,737                                                              |                               | 1,701            
|                                             | Depreciation                                                      |                                |         | 208                                                                |                               | 356              
|                                             | Deferred compensation                                             |                                |         | 504                                                                |                               | 589              
|                                             | Interest on non-accrual loans                                     |                                |         | 319                                                                |                               | 478              
|                                             | Writedown of land and buildings held for sale                     |                                | 519     |                                                                    | 495                          
|                                             | Charitable contribution carryforward                              |                                |         | 126                                                                |                               | 455              
|                                             | Minimum pension liability adjustment                              |                                |         | 330                                                                |                               | -                
|                                             | Other                                                             |                                |         |                                                                    |                               |                   | 623     |       | 601         
|                                             |                                                                   | Total deferred tax assets      |         |                                                                    | 7,260                         |                   | 8,361  
|                                             |                                                                   |                                |         |                                                                    |                               |                   |         |       |             
|Deferred tax liabilities:                    |                                                                   |                                |         |                                                                    |                              
|                                             | Bond discount accretion                                           |                                |         | (167)                                                              |                               | (184)            
|                                             | Purchase accounting adjustments, net                              |                                |         | (3,103)                                                            |                               | (4,061)          
|                                             | Net unrealized gain on securities available-for-sale              |                                | (1,599) |                                                                    | (3,717)                      
|                                             |                                                                   | Total deferred tax liabilities |         |                                                                    | (4,869)                       |                   | (7,962)
|Net deferred tax assets at end of year       |                                                                   |                                | 2,391   |                                                                    | 399                          
|Net deferred tax assets at beginning of year |                                                                   | 399                            |         | 3,912                                                             
|Change in net deferred tax asset             |                                                                   |                                | 1,992   |                                                                    | (3,513)                      
|                                             | Less:  Change in deferred tax liability on net unrealized gain on |                                |         |                                                                    |                              
|                                             |                                                                   |                                |         |                                                                    | securities available-for-sale |                   |         | 2,118 |             
|                                             |                                                                   |                                |         | Change in deferred tax asset on minimum pension liability          | 330                           |                   | -      
|                                             |                                                                   |                                |         | Net deferred tax liabilities recorded at purchase acquisition date | -                             |                   | (2,011)
|                                             | Deferred tax expense                                              |                                |         | $           (456)                                                  |                               | $           (301)



The Company's tax deduction for charitable contributions is subject to limitations based on a percentage of taxable income.  Contributions in excess of this limitation are carried forward and may be deducted in one or more of the succeeding five tax years.  As a result of the cash and common stock contribution to The SBU Bank Charitable Foundation, at December 31, 2003 and 2002, the Company had unused charitable contribution carryforwards of approximately $255,000 and $1.2 million, respectively.  The carryforwards are available for deduction through 2007.

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, as well as anticipated future taxable income, the Company believes it is more likely than not that the gross deferred tax assets at December 31, 2003 and 2002 will be realized.

As a thrift institution, the Company is subject to special provisions in the Federal and New York State tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. These deductions historically have been determined using methods based on loss experience or a percentage of taxable income. Tax bad debt reserves are maintained equal to the excess of allowable deductions over actual bad debt losses and other reserve reductions. These reserves consist of a defined base-year amount, plus additional amounts ("excess reserves") accumulated after the base year. Deferred tax liabilities are recognized with respect to such excess reserves, as well as any portion of the base-year amount which is expected to become taxable (or "recaptured") in the foreseeable future.



12.	Income Taxes (Continued)

In accordance with SFAS No. 109, deferred tax liabilities have not been recognized with respect to the Federal base-year reserve of $5.1 million at December 31, 2003, and the New York State base-year reserve of $20.8 million at December 31, 2003, since the Company does not expect that these amounts will become taxable in the foreseeable future.  As discussed in note 18, the Company has signed a definitive merger agreement to acquire BSB Bancorp, Inc., the holding company for BSB Bank & Trust.  BSB Bank & Trust is a commercial bank.  Subsequent to the acquisition it is likely that the Company's asset mix will change and have an impact on the test that determines whether the Company qualifies as a thrift for tax purposes.  If the Company takes no action, it is possible that the Company, subsequent to the acquisition of BSB Bancorp, Inc., could fail to qualify as a thrift for tax purposes causing recapture of the New York State base-year tax bad debt reserves.  However, the Company believes it can manage its assets prior to and subsequent to the acquisition of BSB Bancorp, Inc. in order to continue to qualify as a thrift.  The unrecognized deferred tax liability with respect to the Federal base-year reserve was $1.8 million at December 31, 2003. The unrecognized deferred tax liability with respect to the New York State base-year reserve was $1.0 million (net of Federal benefit) at December 31, 2003.

13.	Earnings Per Share

The following summarizes the computation of earnings per share for the year ended December 31, 2003 and for the period from the conversion to a stock bank on April 3, 2002 through December 31, 2002 (in thousands except per share data):



|                                            |                                  |                        | 2003 |                      | 2002
|------------------------------------------- | -------------------------------- | ---------------------- | ---- | -------------------- | ----
|Basic earnings per share:                   |                                  |                        |      |                     
|Income available to common shareholders     |                                  | $             14,046   |      | $             6,104 
|Weighted average basic shares outstanding   |                                  | 13,532                 |      | 13,678              
|Basic earnings per share                    |                                  | $                 1.04 |      | $               0.45
|                                            |                                  |                        |      |                      |     
|Diluted earnings per share:                 |                                  |                        |      |                     
|Income available to common shareholders     |                                  | $             14,046   |      | $             6,104 
|Weighted average basic shares outstanding   |                                  | 13,532                 |      | 13,678              
|Effect of dilutive securities:              |                                  |                        |      |                     
|                                            | Stock options                    |                        | 150  |                      | 16  
|                                            | Unearned restricted stock awards |                        | 67   |                      | 8   
|Weighted average diluted shares outstanding |                                  | 13,749                 |      | 13,702              
|Diluted earnings per share                  |                                  | $                 1.02 |      | $               0.45



14.     Commitments and Contingencies

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 balance sheet.   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 credit loss in the event of nonperformance 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.



14.     Commitments and Contingencies (Continued)



The following presents financial instruments whose contract amounts represent credit risk at the dates indicated (in thousands):



|                             |  |  |                     |  |                    |  | Contract Amount at
|---------------------------- |  |  | ------------------- |  | ------------------ |  | ------------------
|                             |  |  |                     |  |                    |  | December 31,      
|                             |  |  |                     |  |                    |  | 2003              
|                             |  |  |                     |  |                    |  |                   
|Commitments to extend credit |  |  | $            84,216 |  | $          106,455
|Letters of credit            |  |  | 1,018               |  | 2,000             



As of December 31, 2003 and 2002, fixed rate loan commitments totaled $16.3 million and $34.5 million, with rates between 3.74% - 13.75% and 4.74% - 14.50%, respectively.

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.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others; an Interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34."  FIN No. 45 requires certain new disclosures and potential liability-recognition for the fair value at issuance of guarantees that fall within its scope.  Under FIN No. 45, the Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.

Standby letters of credit 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.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.

For both commitments to extend credit and letters of credit, the amount of collateral obtained, if any, is based on management's credit evaluation of the counterparty.  Collateral held varies, but may include residential and commercial real estate.  The fair value of the Company's standby letters of credit at December 31, 2003 and 2002 was insignificant.

The Company is required to maintain a reserve balance, as established by the Federal Reserve Bank of New York.  The required average total reserve for the 14-day maintenance periods including December 31, 2003 and 2002 was $15.3 million and $14.6 million, respectively, which was satisfied by cash on hand and balances with the Federal Reserve Bank.

The Company leases office space and certain branches under noncancelable operating lease agreements having initial terms which expire at various dates through 2010.  Certain leases provide for renewal options of two five-year terms.  Rent expense totaled approximately $513,000, $303,000 and $443,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

Minimum rentals under the initial terms of these leases are summarized as follows:





|Year ending December 31 (in thousands): |                             
|--------------------------------------- | ----------------------------
|                                        | 2004                        
|                                        | 2005                        
|                                        | 2006                        
|                                        | 2007                        
|                                        | 2008                        
|                                        | Thereafter                  
|                                        | Total minimum lease payments

14.     Commitments and Contingencies (Continued)



The payment of dividends by the Bank to the Company is restricted by various laws and regulations.  Under current OTS regulations, while the Bank must provide written notice to the OTS prior to any dividend declaration, an application must be approved by the OTS if the total of all dividends declared in any year would exceed the net income for the year plus the retained net income (as defined) of the preceding two years.  The ability to pay dividends also is subject to the depository institution being in compliance with regulatory capital requirements.  The Bank is currently in compliance with these requirements.  The Bank paid no dividends to the Company during 2003 and 2002.  As of December 31, 2003, approximately $23.2 million was available at the Bank to pay future dividends to the Company without prior OTS approval.

For as long as the Bank is controlled by the MHC, the dollar amount of the Company's dividends waived by the MHC is considered a restriction to the retained earnings of the Bank.  In 2003 and 2002 the MHC waived dividends from the Company of $2.6 million and $763,000, respectively.

The Company is subject to litigation in the ordinary course of business.  Management does not expect such litigation will have a material adverse effect on the Company's financial position.

15.     Disclosures about Fair Values of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, 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, the derived 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.  SFAS No. 107 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents

The carrying values reported in the balance sheet for cash and cash equivalents are equal to the assets' fair value.

Securities

Fair values for securities are based on quoted market prices or dealer quotes.  The fair value of accrued interest approximates carrying value.

FHLB Stock

Fair value of FHLB stock is equal to its book value since there is no readily available market value and the stock cannot be sold, but can be redeemed by the FHLB at cost.

Loans

Fair values for loans are estimated using discounted cash flow analysis, based on interest rates approximating those currently being offered for loans with similar terms and credit quality.  The fair value of accrued interest approximates carrying value.

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.  The fair value of accrued interest approximates carrying value.



15.      Disclosures about Fair Values of Financial Instruments (Continued)

Borrowings

The carrying amounts of repurchase agreements and other short-term borrowings approximate their fair values.  Fair values of long-term borrowings are estimated using a discounted cash flow approach, based on current market rates for similar borrowings.  The fair value of accrued interest approximates carrying value.

Mortgagors' Escrow Funds

The fair value for mortgagors' escrow funds approximates carrying value.  The fair value of accrued interest approximates carrying value.

Off-Balance Sheet and Derivative Instruments

Off-balance sheet financial instruments consist of letters of credit and commitments to extend credit.    The Company had no derivative instruments other then rate locks and forward commitments at            December 31, 2003 and 2002.  The fair value of these instruments is not material.

The net carrying amounts and fair values of financial instruments as of the dates indicated are as follows (in thousands):





|                       |                             |  |                      |  |              |             |              |             |              | December 31,
|---------------------- | --------------------------- |  | -------------------- |  | ------------ | ----------- | ------------ | ----------- | ------------ | ------------
|                       |                             |  |                      |  |              |             |              |             | 2003         |             
|                       |                             |  |                      |  |              |             |              |             |              | Carrying    
|                       |                             |  |                      |  |              |             |              |             |              | Amount      
|Financial assets:      |                             |  |                      |  |              |             |              |             |              |             
|                       | Cash and cash equivalents   |  |                      |  | $     40,507 |             | $     40,507 |             | $     84,979 |             
|                       | Securities                  |  |                      |  |              | 344,954     |              | 344,955     |              | 345,700     
|                       | FHLB stock                  |  |                      |  | 13,225       |             | 13,225       |             | 12,350       |             
|                       | Loans held for sale         |  |                      |  | 1,390        |             | 1,390        |             | 5,054        |             
|                       | Loans receivable            |  |                      |  | 804,804      |             | 830,726      |             | 804,556      |             
|                       | Allowance for loan losses   |  |                      |  | (8,608)      |             | -            |             | (10,989)     |             
|                       |                             |  | Net loans receivable |  |              |             | 796,196      |             | 830,726      |             
|                       |                             |  |                      |  |              |             |              |             |              |             
|                       | Accrued interest receivable |  |                      |  | 5,236        |             | 5,236        |             | 5,973        |             
|                       |                             |  |                      |  |              |             |              |             |              |             
|Financial liabilities: |                             |  |                      |  |              |             |              |             |              |             
|                       | Deposits                    |  |                      |  |              | $   796,078 |              | $   801,092 |              | $   855,211 
|                       | Borrowings                  |  |                      |  | 290,569      |             | 292,176      |             | 291,971      |             
|                       | Mortgagors' escrow funds    |  |                      |  | 6,056        |             | 6,056        |             | 5,624        |             
|                       | Accrued interest payable    |  |                      |  | 785          |             | 785          |             | 1,324        |             



16.     Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), of Tier I capital (as defined) to assets (as defined), and of tangible capital (as defined) to tangible assets (as defined).  Management believes, as of December 31, 2003 and 2002, that the Bank met all capital adequacy requirements to which it was subject.



16.     Regulatory Matters (Continued)

As of December 31, 2003, the most recent notification from the Office of Thrift Supervision categorized the Bank and as well capitalized under the regulatory framework of prompt corrective action.  To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios.  There are no conditions or events since that notification that management believes have changed the Bank's category.  Although the Office of Thrift Supervision does not impose minimum capital requirements on thrift holding companies, the Company's consolidated regulatory capital amounts and ratios for capital adequacy purposes as of December 31, 2003 and 2002 are also presented in the following table (dollars in thousands):





|                         |                                          |         |  |            |        |                   |                   |             |             |                         |       |                 | To Be Well Capitalized
|------------------------ | ---------------------------------------- | ------- |  | ---------- | ------ | ----------------- | ----------------- | ----------- | ----------- | ----------------------- | ----- | --------------- | ----------------------
|                         |                                          |         |  |            |        |                   |                   |             | For Capital | Under Prompt Corrective
|                         |                                          |         |  |            | Actual | Adequacy Purposes | Action Provisions
|                         |                                          |         |  |            | Amount |                   | Ratio             |             | Amount      |                         | Ratio |                 | Amount                
|As of December 31, 2003: |                                          |         |  |            |        |                   |                   |             |             |                         |       |                
|                         | Total Capital (to Risk-Weighted Assets)  |         |  |            |        |                   |                   |             |             |                         |       |                
|                         |                                          | Company |  | $  143,963 |        | 19.7%             |                   | $    58,619 |             | 8%                      |       | $             - |                       
|                         |                                          | Bank    |  | 123,415    |        | 16.9%             |                   | 58,569      |             | 8%                      |       | 73,211          |                       
|                         | Tier I Capital (to Risk-Weighted Assets) |         |  |            |        |                   |                   |             |             |                         |       |                
|                         |                                          | Company |  | 135,355    |        | 18.5%             |                   | 29,310      |             | 4%                      |       | -               |                       
|                         |                                          | Bank    |  | 114,807    |        | 15.7%             |                   | 29,284      |             | 4%                      |       | 43,927          |                       
|                         | Tier I Capital (to Assets)               |         |  |            |        |                   |                   |             |             |                         |       |                 |                       
|                         |                                          | Company |  | 135,355    |        | 10.8%             |                   | 37,460      |             | 3%                      |       | -               |                       
|                         |                                          | Bank    |  | 114,807    |        | 9.2%              |                   | 37,365      |             | 3%                      |       | 62,275          |                       
|                         | Tangible Capital (to Tangible Assets)    |         |  |            |        |                   |                   |             |             |                         |       |                 |                       
|                         |                                          | Company |  | 135,355    |        | 10.8%             |                   | 18,730      |             | 1.5%                    |       | -               |                       
|                         |                                          | Bank    |  | 114,807    |        | 9.2%              |                   | 18,682      |             | 1.5%                    |       | -               |                       
|                         |                                          |         |  |            |        |                   |                   |             |             |                         |       |                 |                       
|                         |                                          |         |  |            |        |                   |                   |             |             |                         |       |                 |                       
|As of December 31, 2002: |                                          |         |  |            |        |                   |                   |             |             |                         |       |                
|                         | Total Capital (to Risk-Weighted Assets)  |         |  |            |        |                   |                   |             |             |                         |       |                
|                         |                                          | Company |  | $  131,214 |        | 16.2%             |                   | $    64,710 |             | 8%                      |       | $           -   |                       
|                         |                                          | Bank    |  | 108,919    |        | 13.5%             |                   | 64,710      |             | 8%                      |       | 80,887          |                       
|                         | Tier I Capital (to Risk-Weighted Assets) |         |  |            |        |                   |                   |             |             |                         |       |                
|                         |                                          | Company |  | 121,092    |        | 15.0%             |                   | 32,355      |             | 4%                      |       | -               |                       
|                         |                                          | Bank    |  | 98,797     |        | 12.2%             |                   | 32,355      |             | 4%                      |       | 48,532          |                       
|                         | Tier I Capital (to Assets)               |         |  |            |        |                   |                   |             |             |                         |       |                 |                       
|                         |                                          | Company |  | 121,092    |        | 9.4%              |                   | 38,775      |             | 3%                      |       | -               |                       
|                         |                                          | Bank    |  | 98,797     |        | 7.6%              |                   | 38,775      |             | 3%                      |       | 64,625          |                       
|                         | Tangible Capital (to Tangible Assets)    |         |  |            |        |                   |                   |             |             |                         |       |                 |                       
|                         |                                          | Company |  | 121,092    |        | 9.4%              |                   | 19,388      |             | 1.5%                    |       | -               |                       
|                         |                                          | Bank    |  | 98,797     |        | 7.6%              |                   | 19,388      |             | 1.5%                    |       | -               |                       





16.     Regulatory Matters (Continued)

The following is a reconciliation of the Company's equity under accounting principles generally accepted in the United States of America (GAAP) to regulatory capital as of the dates indicated (in thousands):





|            |                                                    | December 31,  
|----------- | -------------------------------------------------- | --------------
|            |                                                    | 2003          
|GAAP equity |                                                    | $ 175,335     
|Less:       |                                                    |               
|            | Disallowed intangible assets                       |               
|            | Unrealized holding gains on securities             |               
|            | available-for-sale, net of tax                     |               
|            |                                                    | Tier I capital
|Plus:       |                                                    |               
|            | Allowable portion of the allowance for loan losses |               
|            |                                                    | Total capital 



17.     Parent Company Only Financial Statements

Presented below is the condensed balance sheet as of December 31, 2003 and 2002, and statement of income and statement of cash flows for the year ended December 31, 2003 and for the period from April 3, 2002 to December 31, 2002, for Partners Trust Financial Group, Inc. (in thousands).  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto.





|Condensed Balance Sheet                                                | 2003                                         |                   | 2002                                                    
|---------------------------------------------------------------------- | -------------------------------------------- | ----------------- | --------------------------------------------------------
|Assets:                                                                |                                              |                   |                                                         
|                                                                       | Cash and due from subsidiary bank            | $          20,865 |                                                         
|                                                                       | Securities available-for-sale, at fair value | 3,132             |                                                         
|                                                                       | Investment in subsidiary bank                | 154,804           |                                                         
|                                                                       | Other assets                                 | 41                |                                                         
|                                                                       |                                              |                   | Total assets                                            
|                                                                       |                                              |                   |                                                         
|Total liabilities                                                      | $            3,507                           |                   | $               921                                     
|Total shareholders' equity                                             | 175,335                                      |                   | 165,437                                                 
|                                                                       |                                              |                   | Total liabilities and shareholders' equity              
|                                                                       |                                              |                   |                                                         
|Condensed Statement of Income                                          |                                              |                   |                                                         
|Interest income                                                        | $               257                          |                   | $               379                                     
|Other income                                                           | 10                                           |                   | -                                                       
|                                                                       |                                              |                   | Total income                                            
|                                                                       |                                              |                   |                                                         
|Employee benefits                                                      | 1,726                                        |                   | 926                                                     
|Contribution of cash and Company common stock to charitable foundation | -                                            |                   | 2,100                                                   
|Other operating expenses                                               | 345                                          |                   | 188                                                     
|                                                                       |                                              |                   | Total operating expenses                                
|                                                                       |                                              |                   | Net loss before income taxes and equity in undistributed
|                                                                       |                                              |                   | income of subsidiary bank                               
|                                                                       |                                              |                   |                                                         
|Income tax benefit                                                     | 532                                          |                   | 1,019                                                   
|Equity in undistributed income of subsidiary bank                      | 15,318                                       |                   | 7,920                                                   
|                                                                       |                                              |                   | Net income                                              



17.   Parent Company Only Financial Statements (Continued)





|Condensed Statement of Cash Flows                                                   | 2003                                                |                                                                                   | 2002                                                         
|----------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------------------------
|Operating activities:                                                               |                                                     |                                                                                   |                                                              
|                                                                                    | Net income                                          | $     14,046                                                                      |                                                              
|                                                                                    |                                                     | Adjustments to reconcile net income to net cash provided by operating activities: |                                                              
|                                                                                    |                                                     |                                                                                   | Equity in undistributed income of subsidiary bank            
|                                                                                    |                                                     |                                                                                   | Net premium amortization on securities                       
|                                                                                    |                                                     |                                                                                   | Increase in other assets                                     
|                                                                                    |                                                     |                                                                                   | Increase in other liabilities                                
|                                                                                    |                                                     |                                                                                   | Contribution of Company common stock to charitable foundation
|                                                                                    |                                                     |                                                                                   | ESOP expense                                                 
|                                                                                    |                                                     |                                                                                   | MRP expense                                                  
|                                                                                    |                                                     |                                                                                   |                                                              
|                                                                                    |                                                     |                                                                                   |                                                              
|Investing activities:                                                               |                                                     |                                                                                   |                                                              
|                                                                                    | Purchases of securities available-for-sale          | (4,165)                                                                           |                                                              
|                                                                                    | Proceeds from redemptions, maturities and principal |                                                                                   |                                                              
|                                                                                    |                                                     | collected on securities available-for-sale                                        | 1,000                                                        
|                                                                                    | Investment in equity of subsidiary bank             | -                                                                                 |                                                              
|                                                                                    |                                                     |                                                                                   |                                                              
|                                                                                    |                                                     |                                                                                   |                                                              
|Financing activities:                                                               |                                                     |                                                                                   |                                                              
|                                                                                    | Cash dividends                                      | (2,078)                                                                           |                                                              
|                                                                                    | Net proceeds from sale of common stock              | -                                                                                 |                                                              
|                                                                                    | Loan to ESOP for the purchase of common stock       | -                                                                                 |                                                              
|                                                                                    | Capitalization of Partners Trust, MHC               | -                                                                                 |                                                              
|                                                                                    | Purchase of treasury stock                          | (320)                                                                             |                                                              
|                                                                                    | Proceeds from exercise of stock options             | 40                                                                                |                                                              
|                                                                                    |                                                     |                                                                                   |                                                              
|                                                                                    |                                                     |                                                                                   |                                                              
|Net (decrease) increase in cash and cash equivalents                                | (2,351)                                             |                                                                                   | 23,216                                                       
|Cash and cash equivalents at beginning of period                                    | 23,216                                              |                                                                                   | -                                                            
|Cash and cash equivalents at end of year                                            | $    20,865                                         |                                                                                   | $     23,216                                                 
|                                                                                    |                                                     |                                                                                   |                                                              
|Supplemental disclosure of non-cash investing and financing activities:             |                                                     |                                                                                   |                                                              
|Recognition of subsidiary bank's existing equity on date of investment in equity of |                                                     |                                                                                   |                                                              
|                                                                                    | subsidiary bank                                     | $             -                                                                   |                                                              



18.	Adoption of Plan of Conversion and Reorganization and Acquisition (Unaudited)

On December 23, 2003, the Board of Directors of the MHC, the Company and the Bank adopted the Plan of Conversion and Reorganization of Partners Trust, MHC (the "Plan") for the conversion and restructuring of the Company and the MHC into a full capital stock corporation.  The Plan requires regulatory approvals, the approval of the depositors of the Bank entitled to vote on the Plan and the approval of stockholders.  Pursuant to the Plan, the reorganization will be effected in a manner that is consistent with applicable federal law and regulations.



18.	Adoption of Plan of Conversion and Reorganization and Acquisition (Unaudited) (Continued)

The reorganization will be accounted for as a change in corporate form with no resulting change in the historical basis of the Company's assets, liabilities and equity.  Direct offering costs are being deferred and will be deducted from the proceeds of the shares sold in the offering.  If the reorganization and conversion is not completed, all costs will be charged to expense.  As of December 31, 2003 no costs had been deferred.

On December 23, 2003, the Company also signed a definitive merger agreement to acquire BSB Bancorp, Inc. ("BSB"), the holding company for BSB Bank & Trust Company.  Under the agreement, following the conversion, BSB will be merged into the reorganized Partners Trust.  The acquisition will only occur if the conversion is completed.  The consideration to be paid in the merger will be 40% cash and 60% stock.  Shareholders of BSB 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 final 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 $347.0 million.  The conversion, offering and acquisition are expected to be completed in mid-2004, subject to regulatory and stockholder approvals.  The acquisition is to occur immediately upon completion of the conversion.  As of December 31, 2003, BSB has total assets of $2.21 billion, total deposits of $1.59 billion and total shareholders' equity of $146.3 million.



ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE



None.

ITEM 9A.	CONTROLS AND PROCEDURES

The Company's management, including the Company's 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 15(d)-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 Commissions rules and forms.



There were no changes made in the Company's internal controls over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company's internal control over financial reporting.



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, SBU Bank.  The Board of Directors currently consists of ten members.  The Company's Bylaws provide that the directors shall be divided into three classes as nearly equal in number as possible.The Class I directors, whose terms expire in 2004, are Messrs. Griffith, Matt, and Stetson, the Class II directors whose terms expire in 2005 are, Messrs. Zawadzki, Vicks, Zapisek and Ms. Dugan, and the Class III directors, whose terms expire in 2006 are, Messrs. Hayes, Schrauth and Dr. McCall.

|Name                   | Age | Position                                                                 
|---------------------- | --- | -------------------------------------------------------------------------
|Elizabeth B. Dugan     | 64  | Director                                                                 
|Richard R. Griffith    | 56  | Director                                                                 
|Gordon M. Hayes, Jr.   | 55  | Director                                                                 
|Nicholas O. Matt       | 58  | Director                                                                 
|Dr. Marybeth K. McCall | 51  | Director                                                                 
|William L. Schrauth    | 68  | Director                                                                 
|John B. Stetson        | 75  | Director                                                                 
|Dwight E. Vicks, Jr.   | 70  | Director                                                                 
|John A. Zapisek        | 65  | Director                                                                 
|John A. Zawadzki       | 55  | Director, President and Chief Executive Officer                          
|Steven A. Covert       | 41  | Executive Vice President, Chief Financial Officer and Corporate Secretary
|Richard F. Callahan    | 51  | Senior Vice President - Sales and Marketing of SBU Bank                  
|Daniel J. O'Toole      | 40  | Senior Vice President and Chief Credit Officer of SBU Bank               

Elizabeth B. Dugan.  Ms. Dugan has been a director of the Company since its formation in 2002 and a director of SBU Bank since 1988.  Since 2000, Ms. Dugan has been retired.  She previously served as Interim President of the United Way of the Greater Utica Area, Inc. from February 1999 to February 2000.  From September 1998 to February 1999, she served as the Campaign Director for the United Way of the Greater Utica Area, Inc.



Richard R. Griffith.  Mr. Griffith has been a director of the Company since its formation in 2002 and a director of SBU Bank since 2001.  Mr. Griffith has been President of Sturges Manufacturing Co. Inc., a manufacturer of webbing straps and related assemblies located in Utica, New York, since February 1992.  Mr. Griffith also serves on the board of Commercial Travelers Insurance Company.



Gordon M. Hayes, Jr.  Mr. Hayes has been a director of the Company since its formation in 2002 and a director of SBU Bank since 1990.  Mr. Hayes has served as the Associate Director of Planned Giving for Colgate University, located in Hamilton, New York since November 2001.  Prior to that time, he served as Executive Director of the Community Foundation of Oneida and Herkimer Counties from July 1989 to July 2001.



Nicholas O. Matt.  Mr. Matt has been a director of the Company since its formation in 2002 and a director of SBU Bank since 2001.  Mr. Matt has been President of the Matt Brewing Co., Inc., brewers of Saranac beer and soft drinks, located in Utica, New York, since 1989.  He serves on a number of local community and business boards, including the board of Utica National Insurance Group.



Dr. Marybeth K. McCall.  Dr. McCall has been a director of the Company since its formation in 2002 and a director of SBU Bank since 1997.  Dr. McCall has served as Chief Medical Officer of Crouse Hospital since April 2002.  Prior to that time, she served as Senior Vice President of Crouse Hospital since October 2001 and Senior Vice President and Medical Director of Faxton-St. Lukes' Healthcare from January 1995 to June 2001.



William L. Schrauth.  Mr. Schrauth has been a director of the Company since its formation in 2002 and a director of SBU Bank since 1975.  Since August 2000, Mr. Schrauth has been retired.  Previously, Mr. Schrauth served in several positions at SBU Bank since 1977, most recently as President and Chief Executive Officer of SBU Bank until August 2000.



John B. Stetson.  Mr. Stetson has been a director of the Company since its formation in 2002 and a director of SBU Bank since 1968.  Mr. Stetson has been a business and engineering consultant since 1993.  Previously, he was president of Stetson-Harza, an architectural and engineering firm.  Mr. Stetson serves on a number of local community and business boards, including Commercial Travelers Insurance Company.



Dwight E. Vicks, Jr.  Mr. Vicks has been a director of the Company since its formation in 2002 and a director of SBU Bank since 1977.  Mr. Vicks has been the Chairman of Vicks Lithograph and Printing Corporation, since 1957.  He also serves as a director of Commercial Travelers Mutual Insurance Company, Monitor Life Insurance Company, Utica First Insurance Company, and Chairman of the Board of Directors of Galaxy Funds, a mutual fund family for Fleet/Boston Financial.



John A. Zapisek.  Mr. Zapisek has been a director of the Company since its formation in 2002 and a director of SBU Bank since 1987.  Mr. Zapisek served as the Investment Coordinator of Utica Mutual Insurance Company from July 2001 to June 2003.  He also serves as a director of this company.  He also serves as a director of the Graphic Arts Mutual Insurance Company and the Republic-Franklin Insurance Company.  Previously, he served as the Executive Vice President, Chief Financial Officer, Treasurer and a Director of the Utica Mutual Insurance Company, Graphic Arts Mutual Insurance Company and the Republic-Franklin Insurance Company from January 1998 to June 2001.



John A. Zawadzki.  Mr. Zawadzki has been the President, Chief Executive Officer and a director of Partners Trust since its formation in 2002.  He has been the President, Chief Executive Officer and a director of SBU Bank since August 2000.  Prior to that time, he served as Regional President of Fleet National Bank from September 1991 to August 2000.  Mr. Zawadzki also serves as a director of Utica First Insurance Co., Inc.



Steven A. Covert.  Mr. Covert has served as Executive Vice President and Chief Financial Officer of Partners Trust and SBU Bank since December 2002.  Previously, he was the Senior Vice President and Chief Financial Officer of Partners Trust from April 2002 to December 2002 and the Senior Vice President and Chief Financial Officer of SBU Bank from December 2000 to December 2002.  He has also served as Partners Trust's Corporate Secretary since its formation in 2002.  He was previously the Executive Vice President and Chief Financial Officer of CNY Financial Corp. and its subsidiary, Cortland Savings Bank, from June 1998 to July 2000.

Richard F. Callahan.  Mr. Callahan has served as Senior Vice President - Sales and Marketing of SBU Bank since January 2001.  Since November 2002, he has also served as Partners Trust's Assistant Secretary.  Prior to joining the Bank, he served as District Manager and Senior Vice President of Fleet National Bank in Utica, New York from January 1996 to December 2000.

Daniel J. O'Toole.  Mr. O'Toole has served as Senior Vice President and Chief Credit Officer of SBU Bank since September 2002.  From June 1992 to September 2002, he was employed by HSBC Bank USA.  From August 2000 to September 2002, he was the Senior Vice President and Commercial Executive for HSBC's Central Region.

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. Zawadzki is not considered independent because he is an executive officer of the Company.

Audit Committee Matters

The Company has a standing Audit Committee.  The Audit Committee currently has five members, Messrs. Hayes (Chairman), Stetson, Zapisek Griffith and Matt.  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 Mr. Zapisek qualifies 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.partnerstrust.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.

ITEM 11.	EXECUTIVE COMPENSATION

Summary Compensation Table. The executive officers of Partners Trust Financial Group are compensated pursuant to their corresponding employment arrangements with SBU Bank.  The following table sets forth for the years ended December 31, 2003, 2002 and 2001, certain information as to the total remuneration paid by SBU Bank to its Chief Executive Officer, as well as to the other executive officers of SBU Bank, other than the Chief Executive Officer, who received total annual compensation in excess of $100,000.

|                                                                                                              | Annual Compensation | Long TermCompensation |                
|------------------------------------------------------------------------------------------------------------- | ------------------- | --------------------- | ---------------
|Name and Position                                                                                             | Year                | Salary                | Bonus          
|John A. Zawadzki, President and Chief Executive Officer                                                       | 2003                | $296,210              | $150,000       
|2002                                                                                                          | $278,000            | $110,000              | -              
|2001                                                                                                          | $270,000            | $185,000              | -              
|                                                                                                              |                     |                       |                
|Steven A. Covert, Executive Vice President, Chief Financial Officer and Corporate Secretary                   | 2003                | $167,923              | $55,000        
|2002                                                                                                          | $158,000            | $92,028               | -              
|2001                                                                                                          | $150,000            | $50,000               | -              
|                                                                                                              |                     |                       |                
|Richard F. Callahan, Assistant Corporate Secretary and Senior Vice President, Sales and Marketing of SBU Bank | 2003                | $128,442              | $30,000        
|2002                                                                                                          | $121,000            | $38,028               | -              
|2001                                                                                                          | $115,000            | $20,873               | -              
|                                                                                                              |                     |                       |                
|Daniel J. O'Toole, Senior Vice President and Chief Credit Officer of SBU Bank                                 | 2003
2002           | $140,000
$32,308      | $20,873
$25,000
|                                                                                                              |                     |                       |                

(1)	The dollar value of perquisites and other personal benefits for each of the named executive officers was less than the established reporting thresholds.



(2)	As of December 31, 2003, the executive officers held the following shares of restricted stock:  Mr. Zawadzki, 51,181 shares with a value of $1,740,154; Mr. Covert, 40,946 shares with a value of $1,392,164; Mr. Callahan, 25,590 shares with a value of $870,060; and Mr. O'Toole, 10,236 shares with a value of $348,024.  The values are based on the closing price of Partners Trust Financial Group's common stock on the Nasdaq National Market of $34.00 on December 31, 2003.  The 2002 awards are calculated based on the closing market price of the Company's common stock on the Nasdaq National Market of $13.25 on October 10, 2002, the grant date.  The total number of shares of restricted stock awarded to Messrs. Zawadzki, Covert, Callahan and O'Toole in fiscal 2002 was 63,976 shares, 51,182 shares, 25,590 shares and 12,795 shares, respectively.  This restricted stock vests in five annual installments beginning on October 10, 2003. Dividends are being paid on all restricted stock grants.  As a mutual institution until April 3, 2002, SBU Bank did not have any stock based plans prior to that date.



(3)	The amounts shown represent (a) contributions made by SBU Bank under SBU Bank's 401(k) plan ($5,598 in 2003, $5,931 in 2002, and $2,337 in 2001 for Mr. Zawadzki; $5,609 in 2003 and $5,888 in 2002 for Mr. Covert; and $3,853 in 2003 and $3,796 in 2002 for Mr. Callahan), (b) the dollar value of the benefit of premiums paid for split-dollar life insurance policies, projected on an actuarial basis ($1,111 in 2003 and $1,085 in 2002 for Mr. Zawadzki), (c) life insurance premiums paid by SBU Bank ($720 in 2003, $630 in 2002 and $630 in 2001 for Mr. Zawadzki; $720 in 2003, $630 in 2002 and $525 in 2001 for Mr. Covert; $720 in 2003, $630 in 2002 and $473 in 2001 for Mr. Callahan and $720 for Mr. O'Toole), and (d) $60,000 in 2003, $60,000 in 2002 and $60,000 in 2001 paid to Mr. Zawadzki to compensate him for options he forfeited in connection with leaving his position at his prior employer.



Benefit Plans

SBU Bank is the principal operating subsidiary of Partners Trust Financial Group.  As such, our benefit plans are principally organized at the SBU Bank level, as described below.

Employment Agreements. We have employment agreements with Messrs. Zawadzki and Covert. The initial terms of these agreements were three years ending on August 6, 2003 for Mr. Zawadzki and on December 10, 2003 for Mr. Covert. However, the agreements provide that they will remain in force from year to year, subject to termination on notice as provided in the agreement. Under the agreements, the base salaries for Messrs. Zawadzki and Covert for 2004 are $350,000 and $185,000, respectively. In addition to the base salary, each agreement provides for, among other things, participation in bonus programs, and other employee pension benefit and fringe benefit plans applicable to executive employees. In addition, the agreements provide for four weeks paid vacation, reasonable sick leave, reimbursement of moving expenses and reimbursement of certain club membership fees incurred by each executive. Mr. Zawadzki's employment agreement also entitles him to the use of a bank-owned automobile.

The agreements provide for voluntary termination by the executive with 60 days written notice or termination by SBU Bank for cause at any time. In both cases, the executive would have no right to receive compensation or other benefits for any period after termination.

Under each employment agreement, if an executive becomes disabled or incapacitated to the extent that the executive is unable to perform his duties, he will be entitled to 100% of his compensation for twenty-six consecutive weeks following his use of all available sick leave reduced to the extent benefits are received under disability insurance, workers' compensation or other similar programs. SBU Bank may terminate the executive at the end of this period. In the event of executive's death during the term of the agreement, SBU Bank will pay executive's base salary to his designated beneficiary for a period of 30 days following his death.

Messrs. Zawadzki and Covert have also agreed not to compete with SBU Bank or any of its affiliates in any area or market for a period of 24 months after termination of their employment with SBU Bank (unless they are terminated by SBU Bank without cause).

If the executive's employment terminates as a result of a change in control (as defined in the agreement), either involuntarily or due to resignation following (i) a significant change in the nature or scope of authority, (ii) a reduction in total compensation from that prior to a change in control, (iii) a change in the general location where the employee is required to perform services (or in the case of Mr. Covert's employment agreement, by more than 50 miles) from that prior to the change in control, then the executive would be entitled to a severance benefit equal to 2.99 times the executive's average annual compensation included in gross income in the five years preceding the change in control. Messrs. Zawadzki and Covert would receive an aggregate of approximately $1.7 million and $879,000, respectively, pursuant to their employment agreements upon a change in control of SBU Bank, based upon current levels of compensation.

In the event SBU Bank terminates the executive's employment for reasons other than for cause (or due to death, disability or a change in control), the executive would be entitled to a lump sum payment equivalent to the unpaid compensation and benefits that would have been earned by the executive under the agreement if he had continued to work for 12 months. Such payment would be made within 30 days of the date of termination.

Employment Protection Agreements. We have employment protection agreements with Messrs. Callahan and O'Toole that end on August 25, 2006.  Our Board of Directors may renew either agreement for one additional year by written notice to the employee.  The agreement provides that if either Messrs. Callahan or O'Toole voluntarily terminates employment for good reason (as defined in the agreements) or is involuntarily terminated by us without cause (as defined in the agreements) in connection with or for one year after a change of control (as defined in the agreements), he will receive a lump sum cash payment equal to one year's base compensation.  In addition, he will continue to receive medical, prescription, dental, and life insurance coverage for one year after termination.  However, if this payment and any other benefits due to Messrs. Callahan or O'Toole at termination of employment would constitute an excess parachute payment, the payment will be limited to the extent necessary to ensure that no amount paid will constitute an excess parachute payment under Sections 280G or 4999 of the Internal Revenue Code.

Incentive Savings Plan. SBU Bank maintains an Incentive Savings Plan. Employees age 21 or older who have worked at SBU Bank for one year in which they have 1,000 or more hours of service are eligible for membership in the Incentive Savings Plan. Participants may contribute up to 15% of their compensation (as defined) to the incentive savings plan on a before-tax basis and up to 5% on an after-tax basis. SBU Bank matches 100% of before-tax contributions up to 2% of each participant's compensation and up to 50% of the next 2% of the participant's compensation, for a maximum matching contribution equal to 3% of compensation. SBU Bank may from time to time change the incentive savings plan to provide for a different matching contribution. Participants become vested in the employer matching contributions at the rate of 20% per year of service, starting upon completion of one year of service, and become fully vested upon completion of five years of service. In addition, participants' accounts become fully vested in the event of termination of employment due to retirement, disability or death.

The Incentive Savings Plan permits participants to direct the investment of their accounts into various investment options set forth under the plan, including an "Employer Stock Fund" which purchased stock of Partners Trust Financial Group in the April 2002 initial stock offering and makes open market purchases.  Each participant who directs the trustee to invest all or part of his or her account in the Employer Stock Fund will have assets in his or her account applied to the purchase of shares of Partners Trust Financial Group.

Upon termination of employment at the normal or postponed retirement date or in the event of disability, the standard form of distribution will be a single cash payment as soon as administratively possible. A participant may also elect to receive the value of his plan account in monthly, semi-annual or annual installments, for a period not exceeding his life expectancy and the life expectancy of his beneficiary. In the event of the participant's death, the value of the plan account will be paid to the participant's beneficiary in a single cash payment. If the participant had elected to receive payments in installments and dies before receiving all his installments, his beneficiary will continue to receive the installments.

Retirement Plan. We maintain the Retirement Plan of SBU Bank in RSI Retirement Trust (the "Retirement Plan"). Employees age 21 or older who have worked at SBU Bank for one year in which they have accrued 1,000 or more hours of service are eligible to participate in the Retirement Plan. Retirement Plan participants become entitled to retirement benefits upon attainment of normal retirement age (for employees who became participants on or after October 1, 1988, normal retirement age is the later of attainment of age 65 or the fifth anniversary of participation in the plan; for employees who became participants before October 1, 1988, normal retirement age is age 65). The normal retirement benefit is equal to (a) 2% of the participant's average annual earnings multiplied by credited service prior to January 1, 1986, plus (b) 1-2/3% of the participant's average annual earnings multiplied by the participant's credited service after December 31, 1985, reduced by (c) a portion of the participant's primary Social Security benefit offset. The sum of years of credited service of (a) and (b) may not exceed 30 years.  Effective November 1, 2002, SBU Bank froze all pension benefit accruals and participation in the Retirement Plan.



The following table sets forth, as of December 31, 2003, the estimated annual retirement benefits that would be payable under the Retirement Plan upon retirement at or after a participant's normal retirement date, expressed in the form of a single life annuity for the average annual earnings and credited service classifications specified below, and not reduced by Social Security or another other offset amount.



|                           | Years of Service and Benefit Payable at Retirement
|-------------------------- | --------------------------------------------------
|Final Average Compensation | 15                                                
|$ 50,000                   | $ 8,043                                           
|75,000                     | 13,662                                            
|100,000                    | 19,820                                            
|125,000                    | 26,082                                            
|150,000                    | 32,345                                            
|$200,000 and above         | 44,870                                            



As of December 31, 2003, Messrs. Zawadzki, Covert and Callahan each had 2 years of credited service under the Retirement Plan.  Mr. O'Toole is not a participant in the plan.



Executive Supplemental Retirement Income Agreement and Split Dollar Life Insurance Arrangement. In June 2001, we entered into an unfunded Executive Supplemental Retirement Income Agreement (the "SERP") with John A. Zawadzki. Upon Mr. Zawadzki's retirement from SBU Bank at or after age 65, he will be entitled to an annual supplemental retirement income benefit equal to 60% of his average annual base salary during the preceding 36 months, payable in monthly installments over 180 months. Assuming a 3% increase in base salary per year based on Mr. Zawadzki's 2004 base salary of $300,000, the annual retirement benefits payable to him at age 65 would be [$228,085]. If Mr. Zawadzki remains in continuous service with SBU Bank, he may elect to receive an early retirement benefit at or after age 62 equal to a percentage of his supplemental retirement income benefit. The percentage will be 70% if he retires at age 62, 80% at age 63 and 90% at age 64.

If Mr. Zawadzki becomes disabled after age 60 but before age 65, he will be entitled to a supplemental disability benefit equal to a percentage of his supplemental retirement income benefit. The percentage will be 60% if he is disabled at age 60, 65% at age 61 and otherwise in accordance with the percentages attributable to the early retirement provisions discussed above.  In the event Mr. Zawadzki dies after termination of employment but before commencement or completion of payment of his 180 monthly benefits, SBU Bank will continue payment of the monthly installments to his beneficiary.  If Mr. Zawadzki dies after attainment of age 60 but before termination of employment, his beneficiary will receive a survivor's benefit over 180 months equal to the supplemental retirement income benefit, calculated as if Mr. Zawadzki had died on or immediately following attainment of age 65 and assuming annual three percent increases in his base salary until such age. Upon the request of his beneficiary after his death, and in the sole discretion of the Board of Directors, any monthly installments remaining under any of the above arrangements may be paid in a lump sum equivalent to the present value of the remaining monthly payments.

In the event Mr. Zawadzki terminates employment within three years following a change in control (as defined in the SERP), he will be entitled to receive the full supplemental retirement income benefit, calculated as if he had retired following attainment of age 65 and had received annual three percent increases in his base salary until attaining that age.  If Mr. Zawadzki is terminated for cause (as defined in the SERP) at any time, including within three years following a change of control, his benefits under the SERP will be forfeited and the SERP will become null and void.  Mr. Zawadzki has also agreed not to directly or indirectly compete with SBU Bank from the time of termination of employment until the final payment is made under the SERP without the bank's prior written consent.  In the event that he violates this non-compete provision under the SERP, payments under the SERP will be suspended and all rights to further payments will be terminated if the violation continues for an additional six months.  However, if Mr. Zawadzki's termination of employment follows a change in control or other material change in the bank's structure or business activities, he will be entitled to his benefits under the SERP regardless of whether his post-termination activities compete with the bank.

SBU Bank has also entered into an endorsement split dollar agreement for the benefit of Mr. Zawadzki under which SBU Bank purchased life insurance to provide death benefits to Mr. Zawadzki's beneficiary if Mr. Zawadzki dies before he attains age 60. SBU Bank will pay the annual premiums on the split dollar life insurance policy and will have an interest in the policy equal to the greater of the aggregated amount of the premiums paid or the policy's entire cash surrender value. Upon Mr. Zawadzki's death, SBU Bank will be entitled to receive an amount equal to its interest in the policy, less the amount of any indebtedness against the policy and any interest due on such indebtedness, and Mr. Zawadzki's beneficiary will receive the death benefits provided under the policy in excess of the amount payable to SBU Bank.  The split dollar agreement will terminate once Mr. Zawadzki attains age 60, upon a disability on or after age 57, or termination of employment prior to age 60.

Deferred Compensation Plans. We maintain the Board of Directors Deferred Compensation Plan to allow non-employee members of SBU Bank's Board of Directors to defer all or a portion of their directors fees and the Management Employee Deferred Compensation Plan to allow eligible employees designated by our Board of Directors to defer portions of their annual compensation. Deferrals under both plans will continue until either a distribution of benefits is made under the Plan or the participant instructs the plan administrator in writing prior to the end of any calendar year to cease the deferrals.  Participants in the plan may direct that their deferred compensation account balances be adjusted as if the account had been invested in one or more investment options designated by SBU Bank in its sole discretion. Upon a participant's retirement, death, disability, or termination of service or employment before retirement for reasons other than death or disability, benefits under the plan will be paid either in a single lump sum or in up to 15 annual installment payments, pursuant to the participant's payment schedule. In the event the participant's account balance is less than $10,000, the payment will be made in a single lump sum. If the participant's account balance is at least $10,000, the participant may request to defer a distribution payable as a result of disability, retirement, or termination of service or employment. In the event a participant dies before receiving the full amount of his account balance, the remaining amounts will be paid to the participant's beneficiary.

Employee Stock Ownership Plan and Trust. We adopted the Partners Trust Financial Group, Inc. Employee Stock Ownership Plan (the "ESOP"), effective January 1, 2002, in connection with the April 2002 initial public offering. Employees who are at least 21 years old, who have at least one year of employment with SBU Bank or an affiliated corporation and who complete at least 1,000 hours of service each calendar year, are eligible to participate. As part of the April 2002 initial public offering, the ESOP borrowed funds from Partners Trust at a fixed rate of interest equal to the prime rate on the date of the loan and used those funds to purchase [511,808] shares in the stock offering, pledging the purchased common stock as collateral for the loan. The loan will be repaid principally from discretionary employer contributions to the ESOP over a period of up to 10 years. The loan documents provide that the loan may be repaid over a shorter period, without penalty. Shares purchased by the ESOP are being held in a suspense account for allocation among participants as the loan is repaid.

Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan will be allocated among ESOP participants on the basis of compensation (as such term is defined in the ESOP) in the year of allocation. Account balances under the plan become vested at the rate of 20% per year, starting upon completion of one year of credited service, and will be fully vested upon completion of five years of credited service. A participant's interest in his account under the plan will also fully vest in the event of termination of service due to a participant's early or normal retirement, death, disability, or upon a change in control (as defined in the plan). Vested benefits will be payable in the form of common stock or cash or a combination of cash and shares. Contributions to the ESOP are discretionary, subject to the loan terms and tax law limits. Benefits payable under the ESOP therefore cannot be estimated. Under generally accepted accounting principles, however, a participating employer will be required to record compensation expense each year in an amount equal to the fair market value of the shares released from the suspense account. In the event of a change in control, the ESOP will terminate and participants will become fully vested in their account balances, which will be distributed to them.

Director Compensation

The members of the Board of Directors of Partners Trust are the same as the members of the Board of Directors of SBU Bank.  SBU Bank pays each non-employee director a quarterly retainer of $2,250.  A fee of $1,000 is provided to each non-employee director for attendance at a board meeting.  Non-employee directors receive a fee of $400 for each committee meeting attended.  No separate fees are paid to directors in their role as directors of Partners Trust.

Option Grants

There were no stock options granted to the Company's named executive officers during the year ended       December 31, 2003.



Long-Term Equity Compensation Plan.  The Board of Directors and shareholders of Partners Trust Financial Group adopted and approved the Partners Trust Financial Group Long-Term Equity Compensation Plan (the "LTECP"), which provides eligible directors, officers and employees with the opportunity to obtain a proprietary interest in Partners Trust Financial Group.  The LTECP consists of a stock option plan and a Management Recognition Plan (the "MRP") through which restricted stock and restricted stock units may be awarded.  The primary objective of the LTECP is to enhance Partners Trust Financial Group's ability to attract and retain highly qualified officers, employees and directors by providing such persons with stronger incentives to continue to serve Partners Trust Financial Group and to expend maximum effort to improve the business results and earnings of Partners Trust Financial Group.

Options under the LTECP may be either nonqualified stock options or incentive stock options.  Each option entitles the holder to purchase one share of stock on the grant date and expires no later than ten years following the grant date.  The vesting schedule for each option is set in the award agreement, but generally the options vest at a rate of 20% per year.  The option price is also set in the award agreement and is fixed by the Board of Directors at not less than the fair market value of Partners Trust Financial Group's stock on the grant date.

Under the LTECP, 639,759 shares of authorized but unissued common stock have been reserved for issuance upon option exercises and 255,904 shares of authorized but unissued common stock have been reserved for grants of restricted stock and restricted stock units under the MRP.  Partners Trust Financial Group also has the alternative to issue treasury stock under the LTECP.

The following table sets forth information with respect to each of the named executive officers concerning the exercise of stock options during the fiscal year ended December 31, 2003 and the year-end value of all unexercised options held by such individuals.



Aggregated Option Exercises in Fiscal 2003 and Fiscal Year-End Option Values

|                    |                     |               | Number of Securities                    |                                                      
|------------------- | ------------------- | ------------- | --------------------------------------- | -----------------------------------------------------
|                    | Shares              |               | Underlying UnexercisedOptions at FY-end | Value of Unexercised in-theMoney Options at FY-end(1)
|Name                | Acquired onExercise | ValueRealized | Exercisable/Unexercisable               | Exercisable/Unexercisable                            
|                    | (#)                 | ($)           | (#)                                     | ($)                                                  
|John A. Zawadzki    | -                   | -             | 25,000/100,000                          | $518,750/$2,075,000                                  
|Steven A. Covert    | -                   | -             | 20,000/80,000                           | $415,000/$1,660,000                                  
|Richard F. Callahan | -                   | -             | 8,000/32,000                            | $166,000/$664,000                                    
|Daniel J. O'Toole   | -                   | -             | 8,000/32,000                            | $166,000/$664,000                                    
|                    |                     |               |                                         |                                                      

(1)	Based on the closing price per share of the Company's Common Stock on the Nasdaq National Market of $34.00 on December 31, 2003, less the exercise price, of exercisable and unexercisable stock options having an exercise price less than that closing price per share.





COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Company has adopted a multi-faceted approach towards compensating all of its employees, including executive officers.  The underlying philosophy and description of major components of the total compensation program are described below.

The total compensation program is intended to align compensation with business objectives and enable the Company to attract and retain individuals who are contributing to the long-term success of the Company.

The Company regularly compares its cash, equity and benefits based compensation practices with those of other companies of similar size, operating in similar geographic market areas, many of which are represented in the stock performance graph included herein, and establishes compensation parameters based on that review.

The Company recognizes that its long-term success results from the coordinated efforts of employees working towards common, well established objectives.  While individual accomplishments are encouraged and rewarded, the performance of the Company is a determining factor in total compensation opportunities.

The Company strives to ensure that compensation levels accurately reflect the level of accountability that each individual has within the Company; employees are informed of the total compensation program; decisions made regarding individual performance which affect compensation matters are based upon an objective assessment of performance; and all employees have equal access to positions within the Company which provide for increased levels of total compensation.

The process of assessing performance involves the following:

1.	Prior to the beginning of each fiscal year, the Chief Executive Officer establishes goals which are quantified in the Company's budget and strategic plan, which must be approved by the full Board.  Those goals include specific financial targets relative to earnings and asset quality.

2.	Individuals at each successive level of management establish written goals, which must be approved by their respective managers, and are linked to the strategic objectives in the Company's strategic plan.

3.	All goals are reviewed on an ongoing basis to ensure that the Company is responding to changes in the marketplace and economic climate, and that accomplishment of retained goals is ensured.

4.	At the end of the fiscal year, performance is evaluated against goals and other key position responsibilities.  Such evaluations affect decisions on salary, cash incentive, and stock option matters.



Compensation Programs

The Company defines itself as a leading community oriented financial institution which provides products of a more comprehensive and advanced nature than those offered by smaller institutions, while simultaneously providing a level of service which exceeds the service quality delivered by larger regional and money center organizations.  The delivery of those products and services, in ways that enhance shareholder value, requires that the Company attract key people, promote teamwork, and reward results.  In furtherance of those requirements, the Company maintains the following compensation programs.

Base Salaries

The Company sets base salaries for employees by reviewing the total cash compensation opportunities for competitive positions in the market.  In order to more closely align employee compensation to the Company's performance, the Company uses a combination of competitive base salaries and performance incentive opportunities to provide for total compensation that may exceed those in comparable companies which do not generate comparable financial results.

Stock Compensation

In October 2002, Partners Trust's shareholders approved the Long-Term Equity Compensation Plan that provides directors, officers and employees with the opportunity to obtain a proprietary interest in Partners Trust.  The purpose of this plan is to provide additional incentives to employees to work to maximize shareholder value.  This plan serves as an effective tool in recruiting key individuals and utilizes vesting periods to encourage these individuals to continue in the employ of the Company.

The Company believes that the use of equity-based compensation such as stock options and restricted stock is important in that it aligns the interests of key personnel with those of the shareholders.

CEO Compensation

The key performance measure used to determine Mr. Zawadzki's 2003 compensation was the Committee's assessment of his ability and dedication to provide the leadership and vision necessary to enhance the long-term value of Partners Trust.  In addition to leading Partners Trust to financial achievements, Mr. Zawadzki has established a strong record in the areas of innovation and management efficiency, and has built a strong management team, and aggressively pursued new areas for growth.



Consistent with Partners Trust's executive compensation philosophy, Mr. Zawadzki's total compensation package depends largely on annual and long-term incentive compensation.  The annual incentive component is currently made up of the possibility of a cash bonus under the terms of his employment agreement, determined by the Board of Directors.  The long-term incentive component has taken the form of stock options and restricted stock granted under the Long-term Equity Compensation Plan.  Both the annual and long-term components of Mr. Zawadzki's incentive compensation are variable and closely tied to corporate performance in a manner that encourages dedication to building shareholder value.



The Committee annually reviews the CEO's performance against pre-established goals and with respect to our performance.  The Committee considers improvements in historical measures such as return on equity, return on assets, non-performing assets to total assets and net non-interest expense to total expense in its assessment of performance.



Mr. Zawadzki's annual base salary is fixed, subject to increases by the Board of Directors in its sole discretion.  For 2003, his base salary was $300,000.  In 2003, an independent review of the total compensation of the CEO was conducted by a nationally recognized compensation consulting firm.  Compensation levels were compared to other comparable situated publicly traded regional banking and financial services companies with a median asset size of $1.8 billion within New York and New Jersey.  The review determined that Mr. Zawadzki's base salary and the combination of base salary, cash incentives and equity compensation are within the competitive target range of similarly situated banking and financial services companies.



Compensation Committee

Marybeth K. McCall (Chairman)
Dwight E. Vicks, Jr.
Elizabeth B. Dugan
William L. Schrauth
Nicholas O. Matt



Compensation Committee Interlocks and Insider Participation

From time to time SBU Bank makes loans to its directors and executive officers and related persons and entities for the financing of homes, as well as home improvement, consumer and commercial loans.It is the belief of management that these loans are made in the ordinary course of business, are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and neither involve more than normal risk of collectibility nor present other unfavorable features.

Comparative Company Performance

The following graph sets forth comparative information regarding Partners Trust's cumulative shareholder return on its Common Stock since April 4, 2002.  Total shareholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period plus share price change for a period by the share price at the beginning of the measurement period.  Partners Trust's cumulative shareholder return is based on an investment of $100 on April 4, 2002, which was the date Partner Trust's Common Stock began trading on the Nasdaq Stock Market, and is compared to the cumulative total return of the NASDAQ Stock Market (US Companies) and the SNL MHC Thrifts Index.



[GRAPHIC OMITTED HERE]





ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED SHAREHOLDER MATTERS

The following table shows information regarding the beneficial ownership of our common stock as of January 27, 2004 by (1) any person known to us to be the beneficial owner of more than 5% of our common stock, (2) each director, (3) each nominee for election as director, (3) each of the named executive officers and (4) all directors and executive officers as a group.

|Name of Beneficial Owner (a)                                               | Amount and
Nature of BeneficialOwnership (b) | PercentageOf Ownership
|-------------------------------------------------------------------------- | -------------------------------------------- | ----------------------
|Partners Trust, MHC                                                        | 7,627,353                                    | 53.7%                 
|John A. Zawadzki                                                           | 113,181 (c)                                  | *                     
|President and Chief Executive Officer, Director                            |                                              |                       
|Elizabeth B. Dugan                                                         | 23,830                                       | *                     
|Director                                                                   |                                              |                       
|Richard R. Griffith                                                        | 19,528 (d)                                   | *                     
|Director                                                                   |                                              |                       
|Gordon M. Hayes, Jr.                                                       | 13,660                                       | *                     
|Director                                                                   |                                              |                       
|Nicholas O. Matt                                                           | 19,524                                       | *                     
|Director                                                                   |                                              |                       
|Dr. Marybeth K. McCall                                                     | 22,330 (e)                                   | *                     
|Director                                                                   |                                              |                       
|William L. Schrauth                                                        | 15,330                                       | *                     
|Director                                                                   |                                              |                       
|John B. Stetson                                                            | 29,739                                       | *                     
|Director                                                                   |                                              |                       
|Dwight E. Vicks, Jr.                                                       | 32,330                                       | *                     
|Director                                                                   |                                              |                       
|John R. Zapisek                                                            | 30,624                                       | *                     
|Director                                                                   |                                              |                       
|Steven A. Covert                                                           | 88,421 (f)                                   | *                     
|Executive Vice President, Chief Financial Officer and 
Corporate Secretary |                                              |                       
|Richard F. Callahan                                                        | 47,978                                       | *                     
|Senior Vice President - Sales & Marketing of SBU Bank                      |                                              |                       
|                                                                           |                                              |                       
|Daniel J. O'Toole                                                          | 20,795                                       | *                     
|Senior Vice President and Chief Credit Officer of SBU Bank                 |                                              |                       
|                                                                           |                                              |                       
|All directors and executive officers as a group (13 persons)               | 477,270                                      | 3.4%                  

__________

*  Less than 1%.

(a)	The address of each beneficial owner listed above is c/o Partners Trust Financial Group, Inc., 233 Genesee Street, Utica, New York 13501.

(b)  	In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, a person is deemed to be the beneficial owner of a security for purposes of the Rule if such person has or shares voting power or investment power with respect to such security or has the right to acquire beneficial ownership at any time within 60 days from January 27, 2004.  As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares.  The table includes: 95,200 shares subject to outstanding options which are exercisable within 60 days from January 27, 2004 (25,000 shares for Mr. Zawadzki, 20,000 shares for Mr. Covert, 8,000 shares for Mr. Callahan, 8,000 shares for Mr. O'Toole, and 3,800 shares for each of Messrs. Griffith, Hayes, Matt, Schrauth, Stetson, Vicks, Zapisek, Ms. Dugan and Dr. McCall) and 196,193 shares of restricted stock that were not vested as of   January 27, 2004 (51,181 shares for Mr. Zawadzki, 6,824 shares for each of Messrs. Stetson, Vicks, Zapisek, Ms. Dugan and Dr. McCall, 8,530 shares for each of Messrs. Griffith, Hayes, Matt and Schrauth, 40,946 shares for Mr. Covert, 25,590 shares for Mr. Callahan, and 10,236 shares for Mr. O'Toole.)



(c)	Mr. Zawadzki's share ownership includes 20,000 shares held in Mr. Zawadzki's IRA.



(d)	Mr. Griffith's share ownership consists of 7,198 shares held in Mr. Griffith's IRA.



(e)	Dr. McCall's share ownership consists of 10,000 shares held in Dr. McCall's IRA.



(f)	Mr. Covert's share ownership consists of 21,870 shares held in Mr. Covert's IRA.

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 |  | Weighted-average exercise price of outstanding options |  | 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     | 567,000                                                                  |  | $13.44                                                 |  | 69,759                                                                                                                                           
|                                                           |                                                                          |  |                                                        |  |                                                                                                                                                  
|Equity compensation plans not approved by security holders | -                                                                        |  | -                                                      |  | -                                                                                                                                                
|                                                           |                                                                          |  |                                                        |  |                                                                                                                                                  
|Total                                                      | 567,000                                                                  |  | $13.44                                                 |  | 69,759                                                                                                                                           

ITEM 13.	Certain Relationships and Related Transactions

For a description of loans made to SBU Bank's directors, executive officers and related persons and entities, see "Compensation Committee Interlocks and Insider Participation" in Item 11.

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit and Non-Audit Fees

The following table presents fees, including reimbursement for expenses, for professional audit services rendered by KPMG LLP for the audit of the Company's annual 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)         | $     141,300 |  | $   148,700
|Audit Related Fees (2) | 21,800        |  | 26,370     
|Tax Fees (3)           | 82,580        |  | 62,850     
|All Other Fees (4)     | -             |  | 26,390     
|Total                  | $     245,680 |  | $   264,310



(1)



(2)



(3)



(4)

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

Pre-approval of all audit and permissible non-audit services provided by the Company's independent auditor 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 fee.  The Audit Committee may delegate authority to a Committee member or members the authority to pre-approve certain audit and permissible non-audit services.  Any decisions by the member or members under this delegated authority will be reported at the next meeting of the Audit Committee.



PART IV



ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND

REPORTS ON FORM 8-K



The financial statement schedules and exhibits filed as a part of this Form 10-K are as follows:



(a)(1)	The following Consolidated Financial Statements are included in Part II, Item 8 hereof:



Independent Auditors' Report

Consolidated Balance Sheets at December 31, 2003 and 2002

Consolidated Statements of Income for the Years Ended December 31, 2003, 2002 and 2001

Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2003, 2002 and 2001

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2003, 2002 and 2001

Notes to Consolidated Financial Statements



(a)(2)	N/A



(a)(3)	Exhibits



3.1	Charter of Partners Trust Financial Group, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Form S-1 Registration Statement (No. 333-75514) filed with the Securities and Exchange Commission on December 19, 2001)



3.2	Bylaws of Partners Trust Financial Group, Inc. (incorporated by reference to Exhibit 3.2 of the Company's Form S-1 Registration Statement (No. 333-75514) filed with the Securities and Exchange Commission on December 19, 2001)



4	Form of Common Stock (incorporated by reference to Exhibit 3.1 of the Company's Form S-1 Registration Statement (No. 333-75514) filed with the Securities and Exchange Commission on December 19, 2001)



10.1	Employment Agreement between The Savings Bank of Utica and John A. Zawadzki (incorporated by reference to Exhibit 10.1 of the Company's Form S-1 Registration Statement (No. 333-75514) filed with the Securities and Exchange Commission on December 19, 2001)



10.2	Employment Agreement between The Savings Bank of Utica and Steven A. Covert (incorporated by reference to Exhibit 10.2 of the Company's Form S-1 Registration Statement (No. 333-75514) filed with the Securities and Exchange Commission on December 19, 2001)



10.3	Partners Trust Financial Group, Inc. Long-Term Equity Compensation Plan (filed as Exhibit A to the definitive proxy statement filed with the Securities and Exchange Commission on September 6, 2002 and incorporated by reference herein)



10.4	Agreement and Plan of Merger, dated as of August 13, 2002 by and among Partners Trust Financial Group, Inc., SBU Bank, Hydraulic Acquisition Corporation and Herkimer Trust Corporation, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed with the SEC on August 15, 2002)



10.5	Plan of Conversion and Reorganization of Partners Trust, MHC, dated as of December 23, 2003 (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed with the SEC on December 29, 2003)



10.6	Agreement and Plan of Merger By and Between Partners Trust Financial Group, Inc., SBU Bank, Wicked Acquisition Corporation, Partners Trust, MHC and BSB Bancorp, Inc. dated as of December 23, 2003 (incorporated by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K filed with the SEC on December 29, 2003)



21	Subsidiaries of the Registrant



23	Consent of KPMG LLP



31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32.1	Written Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



32.2	Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



(b)	Reports on Form 8-K:

During the last quarter of the period covered by this report, the Company filed a Current Report on      Form 8-K on October 16, 2003 reporting the press release announcing the Company's financial results for the quarter ended September 30, 2003, a Form 8-K on November 26, 2003 announcing its cash dividend for the quarter ended December 31, 2003, and a Form 8-K on December 29, 2003 announcing the plan of conversion and reorganization and the acquisition of BSB Bancorp, Inc.





SIGNATURES



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



PARTNERS TRUST FINANCIAL GROUP, INC.





Date:  February 11, 2004	By:	/s/ John A. Zawadzki		John A. Zawadzki
		President and Chief Executive Officer

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.



|Signatures                                   | Title                                                                                             | Date             
|-------------------------------------------- | ------------------------------------------------------------------------------------------------- | -----------------
|/s/ John A. ZawadzkiJohn A. Zawadzki         | President, Chief Executive Officer and Director (Principal Executive Officer)                     | February 11, 2004
|/s/ Steven A. CovertSteven A. Covert         | Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) | February 11, 2004
|Elizabeth B. Dugan                           | Director                                                                                          |                  
|/s/ Richard R. GriffithRichard R. Griffith   | Director                                                                                          | February 11, 2004
|/s/ Gordon M. Hayes, Jr.Gordon M. Hayes, Jr. | Director                                                                                          | February 11, 2004
|Nicholas O. Matt                             | Director                                                                                          |                  
|/s/ Marybeth K. McCallDr. Marybeth K. McCall | Director                                                                                          | February 11, 2004
|/s/ William L. SchrauthWilliam L. Schrauth   | Director                                                                                          | February 11, 2004
|/s/ John B. Stetson
John B. Stetson          | Director                                                                                          | February 11, 2004
|/s/ Dwight E. Vicks, Jr.Dwight E. Vicks, Jr. | Director                                                                                          | February 11, 2004
|/s/ John R. ZapisekJohn R. Zapisek           | Director                                                                                          | February 11, 2004

EXHIBIT INDEX





3.1	Charter of Partners Trust Financial Group, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Form S-1 Registration Statement (No. 333-75514) filed with the Securities and Exchange Commission on December 19, 2001)

3.2	Bylaws of Partners Trust Financial Group, Inc. (incorporated by reference to Exhibit 3.2 of the Company's Form S-1 Registration Statement (No. 333-75514) filed with the Securities and Exchange Commission on December 19, 2001)

4	Form of Common Stock (incorporated by reference to Exhibit 3.1 of the Company's Form S-1 Registration Statement (No. 333-75514) filed with the Securities and Exchange Commission on December 19, 2001)

10.1	Employment Agreement between The Savings Bank of Utica and John A. Zawadzki (incorporated by reference to Exhibit 10.1 of the Company's Form S-1 Registration Statement (No. 333-75514) filed with the Securities and Exchange Commission on December 19, 2001)

10.2	Employment Agreement between The Savings Bank of Utica and Steven A. Covert (incorporated by reference to Exhibit 10.2 of the Company's Form S-1 Registration Statement (No. 333-75514) filed with the Securities and Exchange Commission on December 19, 2001)

10.3	Partners Trust Financial Group, Inc. Long-Term Equity Compensation Plan (filed as Exhibit A to the definitive proxy statement filed with the Securities and Exchange Commission on September 6, 2002 and incorporated by reference herein)

10.4	Agreement and Plan of merger, dated as of August 13, 2002 by and among Partners Trust Financial Group, Inc., SBU Bank, Hydraulic Acquisition Corporation and Herkimer Trust Corporation, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed with the SEC on August 15, 2002)

10.5	Plan of Conversion and Reorganization of Partners Trust, MHC, dated as of December 23, 2003 (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed with the SEC on December 29, 2003)

10.6	Agreement and Plan of Merger By and Between Partners Trust Financial Group, Inc., SBU Bank, Wicked Acquisition Corporation, Partners Trust, MHC and BSB Bancorp, Inc. dated as of December 23, 2003 (incorporated by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K filed with the SEC on December 29, 2003)

21	Subsidiaries of the Registrant

23	Consent of KPMG LLP

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Written Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.