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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number: 0-17177



BSB Bancorp, Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                         
|-------------------------------------------------------------- |  | ------------------------
|Delaware                                                       |  | 16-1327860              
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Number)



58-68 Exchange
Street, Binghamton, New York 13901

(Address of principal executive offices) (Zip Code)



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



n/a

Former name, former address and former fiscal year, if changed since last report



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



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



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. As of May 5, 2004: 9,377,242 shares of common stock, $0.01 par value.



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INDEX



|         |  |                                                                                                                    |  |      
|-------- |  | ------------------------------------------------------------------------------------------------------------------ |  | -----
|         |  |                                                                                                                    |  | PAGE 
|PART I.  |  | FINANCIAL INFORMATION                                                                                              |  |      
|         |  |                                                                                                                   
|Item 1:  |  | Interim Financial Statements (unaudited) Consolidated Statements of Condition March 31, 2004 and December 31, 2003 |  | 1    
|         |  |                                                                                                                   
|         |  | Consolidated Statements of Income Three Months Ended March 31, 2004 and March 31, 2003                             |  | 2    
|         |  |                                                                                                                   
|         |  | Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2004 and March 31, 2003               |  | 3    
|         |  |                                                                                                                   
|         |  | Consolidated Statements of Changes in Shareholders Equity Three Months Ended March 31, 2004 and March 31, 2003    |  | 4    
|         |  |                                                                                                                   
|         |  | Consolidated Statements of Cash Flows Three Months Ended March 31, 2004 and March 31, 2003                         |  | 5-6  
|         |  |                                                                                                                   
|         |  | Notes to Unaudited Interim Consolidated Financial Statements                                                       |  | 7-10 
|         |  |                                                                                                                   
|Item 2:  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 11-27
|         |  |                                                                                                                   
|Item 3:  |  | Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 28   
|         |  |                                                                                                                   
|Item 4:  |  | Controls and Procedures                                                                                            |  | 29   
|         |  |                                                                                                                   
|PART II. |  | OTHER INFORMATION                                                                                                  |  |      
|         |  |                                                                                                                   
|Item 1:  |  | Legal Proceedings                                                                                                  |  | 30   
|         |  |                                                                                                                   
|Item 2:  |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                                   |  | 30   
|         |  |                                                                                                                   
|Item 3.  |  | Defaults Upon Senior Securities                                                                                    |  | 30   
|         |  |                                                                                                                   
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                |  | 30   
|         |  |                                                                                                                   
|Item 5.  |  | Other Information                                                                                                  |  | 30   
|         |  |                                                                                                                   
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                   |  | 30   
|         |  |                                                                                                                   
|         |  | Signatures                                                                                                         |  | 31   





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Part 1

Item 1



BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)



|                                                                                                                            |  |               |           |   |                  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|(In Thousands, Except Share and Per Share Data)                                                                             |  | March 31,2004 |           |   | December 31,2003 |  
|ASSETS                                                                                                                      |  |               |           |   |                  |   |           |  
|Cash and due from banks                                                                                                     |  | $             | 40,576    |   |                  | $ | 45,670    |  
|Federal funds sold                                                                                                          |  |               | 47,200    |   |                  |   | 16,000    |  
|                                                                                                                            |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                   |  |               | 87,776    |   |                  |   | 61,670    |  
|                                                                                                                            |  |               |           |   |                  |   |           |  
|Investment securities available for sale, at fair value                                                                     |  |               | 639,541   |   |                  |   | 623,832   |  
|Federal Home Loan Bank of New York stock                                                                                    |  |               | 20,041    |   |                  |   | 19,541    |  
|Loans held for sale                                                                                                         |  |               | 678       |   |                  |   | 1,144     |  
|Loans:                                                                                                                      |  |               |           |   |                  |   |           |  
|Commercial                                                                                                                  |  |               | 306,376   |   |                  |   | 323,634   |  
|Consumer                                                                                                                    |  |               | 351,539   |   |                  |   | 367,412   |  
|Residential real estate                                                                                                     |  |               | 573,677   |   |                  |   | 558,781   |  
|Commercial real estate                                                                                                      |  |               | 192,792   |   |                  |   | 199,417   |  
|                                                                                                                            |  |               |           |   |                  |   |           |  
|Total loans                                                                                                                 |  |               | 1,424,384 |   |                  |   | 1,449,244 |  
|Net deferred costs                                                                                                          |  |               | 2,992     |   |                  |   | 2,953     |  
|Allowance for loan losses                                                                                                   |  |               | (48,080   | ) |                  |   | (47,421   | )
|                                                                                                                            |  |               |           |   |                  |   |           |  
|Net loans                                                                                                                   |  |               | 1,379,296 |   |                  |   | 1,404,776 |  
|                                                                                                                            |  |               |           |   |                  |   |           |  
|Bank premises and equipment, net                                                                                            |  |               | 14,892    |   |                  |   | 15,223    |  
|Accrued interest receivable                                                                                                 |  |               | 8,540     |   |                  |   | 7,981     |  
|Other real estate owned and repossessed assets                                                                              |  |               | 832       |   |                  |   | 1,231     |  
|Bank owned life insurance                                                                                                   |  |               | 41,522    |   |                  |   | 41,054    |  
|Other assets                                                                                                                |  |               | 28,357    |   |                  |   | 35,659    |  
|                                                                                                                            |  |               |           |   |                  |   |           |  
|Total assets                                                                                                                |  | $             | 2,221,475 |   |                  | $ | 2,212,111 |  
|                                                                                                                            |  |               |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                        |  |               |           |   |                  |   |           |  
|Deposits                                                                                                                    |  | $             | 1,580,617 |   |                  | $ | 1,589,086 |  
|Borrowings                                                                                                                  |  |               | 420,599   |   |                  |   | 410,768   |  
|Other liabilities                                                                                                           |  |               | 18,376    |   |                  |   | 17,752    |  
|Junior subordinated obligations issued to unconsolidated subsidiary trusts (Junior subordinated obligations)                |  |               | 48,202    |   |                  |   | 48,202    |  
|                                                                                                                            |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                           |  |               | 2,067,794 |   |                  |   | 2,065,808 |  
|                                                                                                                            |  |               |           |   |                  |   |           |  
|Shareholders Equity:                                                                                                       |  |               |           |   |                  |   |           |  
|Preferred stock, par value $0.01 per share; 2,500,000 shares authorized; none issued                                        |  |               |          |   |                  |   |          |  
|Common stock, par value $0.01 per share;                                                                                    |  |               |           |   |                  |   |           |  
|30,000,000 shares authorized; 11,918,894 and 11,788,182 shares issued at March 31, 2004 and December 31, 2003, respectively |  |               | 119       |   |                  |   | 118       |  
|Additional paid-in capital                                                                                                  |  |               | 47,524    |   |                  |   | 44,243    |  
|Retained earnings                                                                                                           |  |               | 144,526   |   |                  |   | 142,743   |  
|Accumulated other comprehensive income                                                                                      |  |               | 5,463     |   |                  |   | 3,049     |  
|Treasury stock, at cost: 2,544,251 and 2,541,668 shares at March 31, 2004 and December 31, 2003, respectively               |  |               | (43,951   | ) |                  |   | (43,850   | )
|                                                                                                                            |  |               |           |   |                  |   |           |  
|Total shareholders equity                                                                                                  |  |               | 153,681   |   |                  |   | 146,303   |  
|                                                                                                                            |  |               |           |   |                  |   |           |  
|Total liabilities and shareholders equity                                                                                  |  | $             | 2,221,475 |   |                  | $ | 2,212,111 |  
|                                                                                                                            |  |               |           |   |                  |   |           |  



See accompanying notes
to unaudited interim consolidated financial statements.



1



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Item 1 - continued



BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)



|                                                            |  |                    |        |               |   |       
|----------------------------------------------------------- |  | ------------------ | ------ | ------------- | - | ------
|                                                            |  | Three Months Ended
|(In Thousands, Except Per Share Data)                       |  | March 31,2004      |        | March 31,2003
|Interest income:                                            |  |                    |        |               |   |       
|Interest and fees on loans                                  |  | $                  | 20,412 |               | $ | 22,195
|Interest on federal funds sold                              |  |                    | 93     |               |   | 66    
|Interest on investment securities                           |  |                    | 7,060  |               |   | 7,089 
|Interest on loans held for sale                             |  |                    | 22     |               |   | 26    
|                                                            |  |                    |        |               |   |       
|Total interest income                                       |  |                    | 27,587 |               |   | 29,376
|                                                            |  |                    |        |               |   |       
|Interest expense:                                           |  |                    |        |               |   |       
|Interest on savings deposits                                |  |                    | 273    |               |   | 416   
|Interest on time deposits                                   |  |                    | 4,438  |               |   | 5,104 
|Interest on money market deposit accounts                   |  |                    | 1,279  |               |   | 1,092 
|Interest on NOW accounts                                    |  |                    | 71     |               |   | 82    
|Interest on borrowings                                      |  |                    | 3,558  |               |   | 3,424 
|Interest on junior subordinated obligations                 |  |                    | 738    |               |   |      
|Interest on trust preferred securities                      |  |                    |       |               |   | 778   
|                                                            |  |                    |        |               |   |       
|Total interest expense                                      |  |                    | 10,357 |               |   | 10,896
|                                                            |  |                    |        |               |   |       
|Net interest income                                         |  |                    | 17,230 |               |   | 18,480
|Provision for loan losses                                   |  |                    | 1,620  |               |   | 3,968 
|                                                            |  |                    |        |               |   |       
|Net interest income after provision for loan losses         |  |                    | 15,610 |               |   | 14,512
|                                                            |  |                    |        |               |   |       
|Non-interest income:                                        |  |                    |        |               |   |       
|Service charges on deposit accounts                         |  |                    | 1,162  |               |   | 1,250 
|Checkcard interchange fees                                  |  |                    | 330    |               |   | 359   
|Mortgage servicing fees                                     |  |                    | 171    |               |   | 145   
|Fees and commissions - brokerage services                   |  |                    | 183    |               |   | 222   
|Trust fees                                                  |  |                    | 326    |               |   | 278   
|Income from bank owned life insurance                       |  |                    | 468    |               |   | 247   
|Gain on sale of securities, net                             |  |                    | 34     |               |   | 329   
|Other income                                                |  |                    | 554    |               |   | 528   
|                                                            |  |                    |        |               |   |       
|Total non-interest income                                   |  |                    | 3,228  |               |   | 3,358 
|                                                            |  |                    |        |               |   |       
|Operating expense:                                          |  |                    |        |               |   |       
|Salaries, pensions and other employee benefits              |  |                    | 7,098  |               |   | 6,503 
|Building occupancy                                          |  |                    | 1,223  |               |   | 1,107 
|Advertising and promotion                                   |  |                    | 450    |               |   | 334   
|Professional fees                                           |  |                    | 434    |               |   | 736   
|Data processing costs                                       |  |                    | 1,090  |               |   | 1,244 
|Services                                                    |  |                    | 717    |               |   | 752   
|Merger related expenses                                     |  |                    | 172    |               |   |      
|Other real estate owned and repossessed asset expenses, net |  |                    | 119    |               |   | 159   
|Other expenses                                              |  |                    | 1,387  |               |   | 1,228 
|                                                            |  |                    |        |               |   |       
|Total operating expense                                     |  |                    | 12,690 |               |   | 12,063
|                                                            |  |                    |        |               |   |       
|Income before income taxes                                  |  |                    | 6,148  |               |   | 5,807 
|Income tax expense                                          |  |                    | 2,031  |               |   | 1,930 
|                                                            |  |                    |        |               |   |       
|Net income                                                  |  | $                  | 4,117  |               | $ | 3,877 
|                                                            |  |                    |        |               |   |       
|Earnings per share:                                         |  |                    |        |               |   |       
|Basic                                                       |  | $                  | 0.44   |               | $ | 0.42  
|Diluted                                                     |  | $                  | 0.43   |               | $ | 0.41  
|                                                            |  |                    |        |               |   |       



See accompanying notes
to unaudited interim consolidated financial statements.



2



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Item - continued



BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)



|                                                                                               |  |                             |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                               |  | Three Months EndedMarch 31, |       
|(Dollars in Thousands)                                                                         |  | 2004                        |        |   | 2003 |  
|Net income                                                                                     |  | $                           | 4,117  |   |      | $ | 3,877  |  
|Other comprehensive income (loss):                                                             |  |                             |        |   |      |   |        |  
|Unrealized net holding gains (losses) on securities available for sale arising during the year |  |                             | 4,071  |   |      |   | (1,426 | )
|Net unrealized gains on securities transferred                                                 |  |                             |        |   |      |   |        |  
|from held to maturity to available for sale                                                    |  |                             |       |   |      |   | 312    |  
|Reclassification adjustment for net realized                                                   |  |                             |        |   |      |   |        |  
|gains included in net income                                                                   |  |                             | (34    | ) |      |   | (329   | )
|                                                                                               |  |                             |        |   |      |   |        |  
|Other comprehensive income (loss), before income tax                                           |  |                             | 4,037  |   |      |   | (1,443 | )
|Income tax (benefit) expense on other comprehensive income (loss)                              |  |                             | (1,623 | ) |      |   | 580    |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Total other comprehensive income (loss), net of tax                                            |  |                             | 2,414  |   |      |   | (863   | )
|                                                                                               |  |                             |        |   |      |   |        |  
|Comprehensive income                                                                           |  | $                           | 6,531  |   |      | $ | 3,014  |  
|                                                                                               |  |                             |        |   |      |   |        |  



See accompanying notes
to unaudited interim consolidated financial statements.



3



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Item 1 - continued



BSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY(unaudited)

(In Thousands, Except Share and Per Share Data)



|                                                     |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   |         |  
|---------------------------------------------------- |  | ----------------------- |  | ------------ | --- | -------------------------- | - | ----------------- |  | - | --------------------------------------------- | - |  | -------------- | ----- | - | ----- | - | ------- | - |  | - | ------- | -
|Three Months Ended March 31, 2003                    |  | Number of Shares Issued |  | Common Stock |     | Additional Paid-In Capital |   | Retained Earnings |  |   | Accumulated Other Comprehensive Income (Loss) |   |  | Treasury Stock |       |   | Total |  
|Balance at December 31, 2002                         |  | 11,660,726              |  | $            | 117 |                            | $ | 41,704            |  | $ | 134,903                                       |   |  | $              | 8,970 |   |       | $ | (36,768 | ) |  | $ | 148,926 |  
|Net income                                           |  |                         |  |              |     |                            |   |                   |  |   | 3,877                                         |   |  |                |       |   |       |   |         |   |  |   | 3,877   |  
|Other comprehensive loss                             |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                | (863  | ) |       |   |         |   |  |   | (863    | )
|                                                     |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   |         |  
|Comprehensive income                                 |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   | 3,014   |  
|                                                     |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   |         |  
|Stock options exercised, net                         |  | 22,673                  |  |              |     |                            |   | 288               |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   | 288     |  
|Cash dividend paid on common stock ($0.25 per share) |  |                         |  |              |     |                            |   |                   |  |   | (2,284                                        | ) |  |                |       |   |       |   |         |   |  |   | (2,284  | )
|Treasury stock purchased (316,108 shares)            |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   | (6,998  | ) |  |   | (6,998  | )
|                                                     |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   |         |  
|Balance at March 31, 2003                            |  | 11,683,399              |  | $            | 117 |                            | $ | 41,992            |  | $ | 136,496                                       |   |  | $              | 8,107 |   |       | $ | (43,766 | ) |  | $ | 142,946 |  
|                                                     |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   |         |  
|Three Months Ended March 31, 2004                    |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   |         |  
|Balance at December 31, 2003                         |  | 11,788,182              |  | $            | 118 |                            | $ | 44,243            |  | $ | 142,743                                       |   |  | $              | 3,049 |   |       | $ | (43,850 | ) |  | $ | 146,303 |  
|Net income                                           |  |                         |  |              |     |                            |   |                   |  |   | 4,117                                         |   |  |                |       |   |       |   |         |   |  |   | 4,117   |  
|Other comprehensive income                           |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                | 2,414 |   |       |   |         |   |  |   | 2,414   |  
|                                                     |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   |         |  
|Comprehensive income                                 |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   | 6,531   |  
|                                                     |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   |         |  
|Stock options exercised, net                         |  | 130,712                 |  |              | 1   |                            |   | 3,281             |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   | 3,282   |  
|Cash dividend paid on common stock ($0.25 per share) |  |                         |  |              |     |                            |   |                   |  |   | (2,334                                        | ) |  |                |       |   |       |   |         |   |  |   | (2,334  | )
|Treasury stock purchased (2,583 shares)              |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   | (101    | ) |  |   | (101    | )
|                                                     |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   |         |  
|Balance at March 31, 2004                            |  | 11,918,894              |  | $            | 119 |                            | $ | 47,524            |  | $ | 144,526                                       |   |  | $              | 5,463 |   |       | $ | (43,951 | ) |  | $ | 153,681 |  
|                                                     |  |                         |  |              |     |                            |   |                   |  |   |                                               |   |  |                |       |   |       |   |         |   |  |   |         |  



See accompanying notes
to unaudited interim consolidated financial statements.



4



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Item 1 - continued



BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)



|                                                                                                 |  |                              |         |   |      |   |          |  
|------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                                 |  | Three Months Ended March 31, |        
|(In Thousands)                                                                                   |  | 2004                         |         |   | 2003 |  
|Operating activities:                                                                            |  |                              |         |   |      |   |          |  
|Net income                                                                                       |  | $                            | 4,117   |   |      | $ | 3,877    |  
|Adjustments to reconcile net income to net cash provided by operating activities:                |  |                              |         |   |      |   |          |  
|Provision for loan losses                                                                        |  |                              | 1,620   |   |      |   | 3,968    |  
|Gain on sale of securities, net                                                                  |  |                              | (34     | ) |      |   | (329     | )
|Gain on sale of loans held for sale, net                                                         |  |                              | (78     | ) |      |   | (75      | )
|Gain on sale of bank premises and equipment, other real estate owned and repossessed assets, net |  |                              | (1      | ) |      |   | (21      | )
|Depreciation and amortization                                                                    |  |                              | 567     |   |      |   | 503      |  
|Net amortization of premiums and discounts on investment securities                              |  |                              | 310     |   |      |   | 425      |  
|Income from bank owned life insurance                                                            |  |                              | (468    | ) |      |   | (247     | )
|Proceeds from sales of loans held for sale                                                       |  |                              | 6,054   |   |      |   | 5,755    |  
|Loans originated and held for sale                                                               |  |                              | (5,509  | ) |      |   | (4,462   | )
|Writedowns of other real estate owned and repossessed assets                                     |  |                              | 63      |   |      |   | 6        |  
|Net change in other assets and liabilities                                                       |  |                              | 5,744   |   |      |   | 5,573    |  
|                                                                                                 |  |                              |         |   |      |   |          |  
|Net cash provided by operating activities                                                        |  |                              | 12,385  |   |      |   | 14,973   |  
|                                                                                                 |  |                              |         |   |      |   |          |  
|Investing activities:                                                                            |  |                              |         |   |      |   |          |  
|Proceeds from sales and calls of available for sale investment securities                        |  |                              | 29,603  |   |      |   | 35,396   |  
|Principal collected on available for sale investment securities                                  |  |                              | 32,532  |   |      |   | 68,633   |  
|Purchases of available for sale investment securities                                            |  |                              | (74,083 | ) |      |   | (100,926 | )
|Proceeds from sales of held to maturity investment securities                                    |  |                              |        |   |      |   | 9,266    |  
|Purchases of held to maturity investment securities                                              |  |                              |        |   |      |   | (1,317   | )
|Principal collected on held to maturity investment securities                                    |  |                              |        |   |      |   | 889      |  
|Purchases of Federal Home Loan Bank (FHLB) stock                                               |  |                              | (1,000  | ) |      |   | (1,000   | )
|Redemptions of FHLB stock                                                                        |  |                              | 500     |   |      |   | 2,641    |  
|Net loans repaid by (made to) customers                                                          |  |                              | 23,640  |   |      |   | (50,137  | )
|Proceeds from sale of other real estate owned and repossessed assets                             |  |                              | 556     |   |      |   | 281      |  
|Purchases of bank premises and equipment                                                         |  |                              | (236    | ) |      |   | (1,038   | )
|                                                                                                 |  |                              |         |   |      |   |          |  
|Net cash provided by (used in) investing activities                                              |  |                              | 11,512  |   |      |   | (37,312  | )
|                                                                                                 |  |                              |         |   |      |   |          |  
|Financing activities:                                                                            |  |                              |         |   |      |   |          |  
|Net (decrease) increase in deposits                                                              |  |                              | (8,469  | ) |      |   | 6,123    |  
|Net (decrease) increase in repurchase agreements and FHLB line of credit advances                |  |                              | (157    | ) |      |   | 12,418   |  
|Proceeds from FHLB term advances                                                                 |  |                              | 30,000  |   |      |   | 15,000   |  
|Repayments of FHLB term advances                                                                 |  |                              | (20,012 | ) |      |   | (5,012   | )
|Proceeds from exercises of stock options                                                         |  |                              | 3,282   |   |      |   | 288      |  
|Purchases of treasury stock                                                                      |  |                              | (101    | ) |      |   | (6,998   | )
|Dividends paid                                                                                   |  |                              | (2,334  | ) |      |   | (2,284   | )
|                                                                                                 |  |                              |         |   |      |   |          |  
|Net cash provided by financing activities                                                        |  |                              | 2,209   |   |      |   | 19,535   |  
|                                                                                                 |  |                              |         |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                                             |  |                              | 26,106  |   |      |   | (2,804   | )
|Cash and cash equivalents at beginning of period                                                 |  |                              | 61,670  |   |      |   | 46,912   |  
|                                                                                                 |  |                              |         |   |      |   |          |  
|Cash and cash equivalents at end of period                                                       |  | $                            | 87,776  |   |      | $ | 44,108   |  
|                                                                                                 |  |                              |         |   |      |   |          |  



5



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Item 1 - continued



BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS(continued) (unaudited)



|                                                                                               |  |                              |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                               |  | Three Months Ended March 31, |       
|(In Thousands)                                                                                 |  | 2004                         |        |   | 2003 |  
|Supplemental information:                                                                      |  |                              |        |   |      |   |        |  
|Cash paid (refunded) during the period for:                                                    |  |                              |        |   |      |   |        |  
|Interest on deposits and borrowings                                                            |  | $                            | 10,379 |   |      | $ | 11,456 |  
|Income taxes                                                                                   |  | $                            | (3,915 | ) |      | $ |       |  
|                                                                                               |  |                              |        |   |      |   |        |  
|Non-cash investing activity:                                                                   |  |                              |        |   |      |   |        |  
|Transfer from loans to other real estate owned and repossessed assets                          |  | $                            | 220    |   |      | $ | 826    |  
|Transfer of securities from held to maturity to available for sale (amortized cost of $44,926) |  | $                            |       |   |      | $ | 45,238 |  
|Adjustment of available for sale investment securities to fair value, net of tax               |  | $                            | 2,414  |   |      | $ | (863   | )
|                                                                                               |  |                              |        |   |      |   |        |  



See accompanying notes
to unaudited interim consolidated financial statements.



6



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Item 1 - continued



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004



|1. | Basis of Presentation
|-- | ---------------------



In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments which are of a normal recurring nature necessary for a fair
presentation of the results for the interim periods presented. All intercompany transactions have been eliminated in consolidation. Amounts in the prior periods financial statements are reclassified whenever necessary to conform to the current
periods presentation. The December 31, 2003 Consolidated Statement of Condition is derived from the audited consolidated financial statements included in the Companys 2003 Annual Report on Form 10-K. The accompanying unaudited interim
consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes included in the Companys 2003 Annual Report on Form 10-K. The results of operations for the
March 31, 2004 interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year ended December 31, 2004, or any other interim periods.



|2. | Earnings Per Share
|-- | ------------------



Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic
earnings per share, except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as stock
options) were issued during the reporting period, computed using the treasury stock method. The following table provides information on the calculation of basic earnings per share and diluted earnings per share for the quarters ended March 31, 2004
and 2003, respectively.



|                                                                              |  |            |       |                         |           |                    |   |     
|----------------------------------------------------------------------------- |  | ---------- | ----- | ----------------------- | --------- | ------------------ | - | ----
|Quarters ended March 31, 2004 (In
Thousands, Except Share and Per Share Data) |  | Net Income |       | Weighted Average Shares |           | Earnings Per Share
|Basic earnings per share                                                      |  | $          | 4,117 |                         | 9,329,022 |                    | $ | 0.44
|Dilutive effect of stock options                                              |  |            |       |                         | 299,871   |                    |   |     
|                                                                              |  |            |       |                         |           |                    |   |     
|Diluted earnings per share                                                    |  | $          | 4,117 |                         | 9,628,893 |                    | $ | 0.43
|                                                                              |  |            |       |                         |           |                    |   |     
|Anti-dilutive stock options                                                   |  |            |       |                         | 4,143     |                    |   |     
|                                                                              |  |            |       |                         |           |                    |   |     
|                                                                              |  |            |      
|2003 (In Thousands, Except Share and Per
Share Data)                          |  |            |       |                         |           |                   
|Basic earnings per share                                                      |  | $          | 3,877 |                         | 9,309,002 |                    | $ | 0.42
|Dilutive effect of stock options                                              |  |            |       |                         | 103,379   |                    |   |     
|                                                                              |  |            |       |                         |           |                    |   |     
|Diluted earnings per share                                                    |  | $          | 3,877 |                         | 9,412,381 |                    | $ | 0.41
|                                                                              |  |            |       |                         |           |                    |   |     
|Anti-dilutive stock options                                                   |  |            |       |                         | 97,774    |                    |   |     
|                                                                              |  |            |       |                         |           |                    |   |     



|3. | Trust Preferred Securities
|-- | --------------------------



The Company has a subsidiary business trust, BSB Capital Trust I (Trust I), formed in 1998 for the purpose of issuing trust preferred securities which qualify
as Tier 1 capital of the Company. Trust I issued at par $30.0 million of 8.125% trust preferred securities in an exempt offering. The trust preferred securities are non-voting, mandatorily redeemable in 2028 and guaranteed by the Company. The entire
net proceeds to Trust I from the offering were invested in junior subordinated obligations of the Company, which are the sole assets of Trust I. During 2002, the Company repurchased $7.0 million of these preferred securities at a net gain of
approximately $726,000, before taxes. In 2003, the Company repurchased $1.5 million of these preferred securities at a net gain of approximately $6,000, before taxes.



During 2002, two new subsidiary trusts were formed for the purpose of issuing additional trust preferred securities that are
non-voting and guaranteed by the Company. BSB Capital Trust II (Trust II) was formed in the second quarter of 2002 for the purpose of issuing trust preferred securities which qualify as Tier I capital for the Company. Trust II issued at
par $10.0 million of floating rate securities maturing in 2032. These preferred securities pay interest at the six-month London InterBank Offering Rate (LIBOR) plus 370 basis points. BSB Capital Trust III (Trust III) was
formed in the fourth quarter of 2002 for the purpose of issuing trust preferred securities which qualify as Tier I capital for the Company. Trust III issued at par $15.0 million of floating rate securities maturing in 2033. These preferred
securities pay interest at the three-month LIBOR plus 335 basis points. The entire net proceeds from Trust II and Trust



7



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Item 1 - continued



III were invested in junior subordinated obligations of the Company, which are the sole assets of the respective trusts. The proceeds from each of these
trusts were used for general corporate purposes.



See Note 7
for discussion of FIN No. 46 and its impact on trust preferred securities.



|4. | Investment Securities Held to Maturity
|-- | --------------------------------------



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



|5. | Stock-Based Compensation
|-- | ------------------------



The Company has two stock-based compensation plans that are described more fully in Note 15 to the Consolidated Financial Statements in the Companys 2003 Annual
Report on Form 10-K. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based compensation cost has
been reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share as
if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to its stock-based compensation plans.



|                                                                                                                           |  |                    |       |   |               |   |       |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------- | - | ----- | -
|                                                                                                                           |  | Three Months Ended |      
|(Dollars in Thousands, Except Per Share Data)                                                                              |  | March 31,2004      |       |   | March 31,2003 |  
|Net income, as reported                                                                                                    |  | $                  | 4,117 |   |               | $ | 3,877 |  
|Deduct:                                                                                                                    |  |                    |       |   |               |   |       |  
|Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |  |                    | (271  | ) |               |   | (183  | )
|                                                                                                                           |  |                    |       |   |               |   |       |  
|Pro forma net income                                                                                                       |  | $                  | 3,846 |   |               | $ | 3,694 |  
|                                                                                                                           |  |                    |       |   |               |   |       |  
|Earnings Per Share:                                                                                                        |  |                    |       |   |               |   |       |  
|Basic - as reported                                                                                                        |  | $                  | 0.44  |   |               | $ | 0.42  |  
|Basic - pro forma                                                                                                          |  | $                  | 0.41  |   |               | $ | 0.40  |  
|Diluted - as reported                                                                                                      |  | $                  | 0.43  |   |               | $ | 0.41  |  
|Diluted - pro forma                                                                                                        |  | $                  | 0.40  |   |               | $ | 0.39  |  



During the first three
months of 2004, the Company granted 15,750 stock options at the exercise price of $38.10. For 2003, the Company granted 246,116 options in the first quarter, at exercise prices ranging from $20.82 to $21.18, and 289,996 options in the fourth
quarter, at the exercise price of $39.50, under the stock-based compensation plans in effect.



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 quarters ended March 31, 2004 and 2003 may not be representative of the pro forma effects on reported net income and earnings per share for future periods.



8



---

Item 1 - continued



|6. | Guarantees
|-- | ----------



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



For 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 and business related assets. As required by a letter of credit agreement for one commercial relationship, the
Company has $281,000 in a pledged deposit account at a commercial bank with no corporate securities pledged at March 31, 2004. By comparison, the Company pledged as collateral corporate securities having a fair value of approximately $280,000 at
December 31, 2003. With respect to a second standby letter of credit agreement which had a notional value of $1.0 million, the Company has $1.6 million in corporate securities pledged to the Bank at March 31, 2004 and $1.7 million in corporate
securities pledged to the Bank at December 31, 2003.



|7. | Employee Benefits
|-- | -----------------



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



|                                                         |  |                  |          |   |                          |   |          |      |  |      |         |      |   |         |      |   |       |   |  |   |       |  
|-------------------------------------------------------- |  | ---------------- | -------- | - | ------------------------ | - | -------- | ---- |  | ---- | ------- | ---- | - | ------- | ---- | - | ----- | - |  | - | ----- | -
|                                                         |  | Pension Benefits |          |   | Life and Health Benefits |   | SERP     |     
|(Dollars in Thousands)                                   |  | 2004             |          |   | 2003                     |   |          | 2004 |  | 2003 |         | 2004 |   |         | 2003 |  
|Service cost                                             |  | $                | 276,638  |   |                          | $ | 284,795  |      |  | $    | 49,781  |      | $ | 41,071  |      | $ |      |   |  | $ |      |  
|Interest cost                                            |  |                  | 438,482  |   |                          |   | 423,379  |      |  |      | 87,851  |      |   | 84,355  |      |   | 3,336 |   |  |   | 3,415 |  
|Expected return on plan assets                           |  |                  | (539,117 | ) |                          |   | (536,507 | )    |  |      |        |      |   |        |      |   |      |   |  |   |      |  
|Amortization of unrecognized transition/obligation       |  |                  |         |   |                          |   |         |      |  |      | 43,300  |      |   | 43,300  |      |   | (520  | ) |  |   | (668  | )
|Amortization of unrecognized (gain) loss                 |  |                  | 179,758  |   |                          |   | 121,111  |      |  |      |        |      |   | 430     |      |   |       |   |  |   |       |  
|Amortization of unrecognized prior (credit) service cost |  |                  | (5,016   | ) |                          |   | (6,194   | )    |  |      |        |      |   |        |      |   | 1,314 |   |  |   | 1,315 |  
|                                                         |  |                  |          |   |                          |   |          |      |  |      |         |      |   |         |      |   |       |   |  |   |       |  
|Net periodic benefit cost                                |  | $                | 350,745  |   |                          | $ | 286,584  |      |  | $    | 180,932 |      | $ | 169,156 |      | $ | 4,130 |   |  | $ | 4,062 |  
|                                                         |  |                  |          |   |                          |   |          |      |  |      |         |      |   |         |      |   |       |   |  |   |       |  



As previously
disclosed in our financial statements for the year ended December 31, 2003, the Company expected to contribute $500,000 to the pension plan. As of March 31, 2004, the Company has not made a contribution to the plan.



|8. | Recent Accounting Pronouncements
|-- | --------------------------------



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



9



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Item 1 - continued



for 2003. During the three months ended March 31, 2004, interest expense on the junior subordinated obligations has separate presentation on the consolidated
statement of income from interest expense on the trust preferred securities in 2003. Adoption of FIN 46 R had no impact on net interest income for the three months ended March 31, 2004.



10



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|Item 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------ | -------------------------------------------------------------------------------------



General Information



BSB Bancorp, Inc. (BSB or the Company), holding company for BSB Bank & Trust Company (the Bank), earned net income
for the quarter ended March 31, 2004 of $4.1 million or $0.43 per diluted share, compared to net income of $4.9 million or $0.52 per diluted share for the fourth quarter of 2003 and $3.9 million or $0.41 per diluted share for the first quarter of
2003.



On April 26, 2004, the Board of Directors declared a
quarterly cash dividend of $0.25 per share payable on June 10, 2004 to shareholders of record at the close of business on May 21, 2004.



Recent Developments



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



Critical Accounting Policies



In the course of the Companys normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in the consolidated financial
statements of the Company. Some of these policies are more critical than others. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy because of the uncertainty and subjectivity
inherent in estimating the levels of allowance needed to cover probable credit losses within the loan portfolio and the material effect that these estimates can have on the Companys results of operations. While managements evaluation of
the allowance for loan losses as of March 31, 2004 considers the allowance to be adequate, under adversely different conditions or assumptions, the Company may need to increase the allowance. In addition, the assumptions and estimates used in the
internal reviews of the Companys non-performing loans and potential problem loans, as well as the associated evaluation of the related collateral coverage for these loans, have a significant impact on the overall analysis of the adequacy of
the allowance for loan losses. Though management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Companys allowance for loan losses
policy would also require making additional provisions for loan losses. All accounting policies are important and the reader of the financial statements should review these policies, described in Note 1 to the Consolidated Financial Statements
included in the Companys 2003 Annual Report on Form 10-K, to gain a greater understanding of how the Companys financial performance is reported.



11



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Item 2 - continued



Forward-looking Statements



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



FINANCIAL CONDITION



Total assets of the Company increased to $2,221.5 million at March 31, 2004 from $2,212.1 million at December 31, 2003. Changes in the composition of
total assets relate directly to the Companys strategy to reduce credit risk and maintain a loan portfolio consistent with the objectives of management in preparation for the pending merger with Partners Trust Financial Group, Inc. discussed
earlier. The most significant elements of change relate to increases of $15.7 million in investment securities and $31.2 million in federal funds partially offset by the decrease of $25.5 million in the aggregate net loan portfolio.



The Companys total loan portfolio decreased $24.9 million or 1.7% to
$1,424.4 million at March 31, 2004 from $1,449.2 million at December 31, 2003. The overall decrease in the total loan portfolio relates to decreases in commercial and industrial loan (C&I) ($17.3 million), consumer ($15.9) and
commercial real estate ($6.6 million) portfolios. The impact of such decreases on the loan portfolio was partially offset by the $14.9 million net increase in residential real estate loans to $573.7 million at March 31, 2004.



The Company continues to actively pursue opportunities to be a leader of the
residential mortgage business in its primary markets. Residential mortgage loan originations, in the first quarter of 2004, have slowed dramatically, consistent with national trends after setting quarterly records during 2003. Originations were
$39.5 million for the first quarter of 2004, as compared to $86.9 million in the first three months of 2003. Despite the recent slowdown, the Company considers itself well positioned to maintain a leadership role in the residential mortgage market
within the Banks primary geographic areas. In addition, the Company continues to successfully market a fixed-rate, bi-weekly mortgage loan product, which provides the most significant origination volume in our key market areas. For the first
three months of 2004, bi-weekly mortgage loan originations were $22.8 million or 57.8% of the aggregate originations for the same period. Also, current mortgage originations include refinanced mortgage loans at a 72.6% level. As a result, with
bi-weekly originations of 10- and 15-year loans being approximately 89.1% of all bi-weekly originations, the overall residential loan portfolio increased with shorter durations. The bi-weekly mortgage loan products promoted by the Company also
require payment by automatic debit to a checking account with the Company. Such deposit account relationships have contributed directly to the Companys growth in checking accounts, discussed later, since they tend to retain higher than average
deposit balances. In 2004, the Company also continued to sell most residential real estate loans originated with extended maturities of 20 years or longer in order to maintain flexibility within the real estate portfolio. Sales of residential real
estate loans amounted to $6.1 million for the three months of 2004 compared to $5.8 million for the comparative period in 2003.



12



---

Item 2 - continued



The commercial real estate loan portfolio decreased 3.3% to $192.8 million at March 31, 2004 compared
to $199.4 million at December 31, 2003. The commercial real estate portfolio in the Companys primary market area continues to be hindered by slow economic growth of moderate-sized commercial organizations within the region. The Company has
used this period to evaluate the long-term strategy and objectives of the organization once the pending merger is completed. As a result, commercial real estate originations were $9.1 million for the first quarter of 2004 with $6.2 million
representing additional draws for existing loan relationships. By comparison, commercial real estate originations were $16.8 million for the same period in 2003.



During the first three months of 2004, the commercial and industrial (C&I) loan portfolio decreased $17.2
million to $306.4 million at March 31, 2004 from $323.6 million at December 31, 2003. The majority of this decline was attributed to principal reductions and loan pay-offs, as well as a reduction of $2.2 million associated with loan charge-offs (see
Asset Quality) for the period. As discussed under commercial real estate, the Company has used this period to assess strategic objectives for this line of business in terms of corporate risk, targeted geographic growth and customer
service relationships following the pending merger. As a result, commercial loan originations were only $3.1 million for the quarter ended March 31, 2004 compared to $17.9 million for the same period in 2003.



Consumer loans decreased to $351.5 million at March 31, 2004 from $367.4
million at December 31, 2003, which reflects continued softening in this market mix. Consumer loans generally provide opportunities to meet the credit needs of our individual customers, and the short-term nature of these loans shortens the duration
of the entire loan portfolio. The decrease in consumer loans reflects the overall decline of $13.3 million in consumer loan originations, with the most significant declines in both direct and indirect auto loan originations. New auto loans continued
to lag due to heavy competition in the new car market from auto manufacturers incentives provided to market their products. In the first quarter of 2004, the Companys more strict underwriting guidelines and the seasonal decline in auto
sales resulted in a decline of $5.3 million in indirect used car loans. Equity lines of credit were the only consumer loan sector to increase during the first quarter of 2004. Originations of equity lines of credit were $5.6 million for the first
quarter of 2004 representing 23.6% of overall consumer loan originations for the same period. Such originations tend to have longer repayment terms than the remainder of this portfolio.



The Companys investment portfolio activity continues to reflect the ongoing role for such assets demands
associated with fluctuations in loan demand, as well as fulfilling the regulatory and operational liquidity demands of day-to-day business activities. Despite the continued rapid amortization and calls of securities related to the low interest rate
environment, the Company maintained investment securities (including Federal Home Loan Bank of New York stock) at $659.6 million at March 31, 2004 compared to $643.4 million at December 31, 2003. Mortgage-backed securities, including collateralized
mortgage obligations (CMOs), represented approximately 54% of the aggregate portfolio at March 31, 2004 compared to 58% at December 31, 2003. Other securities consist of United States Treasury securities, United States Government Agency
securities, as well as obligations of state and local governments and corporate debt and equity securities. Continued high levels of prepayments on mortgage-backed securities impacted the current year-to-date yield of the investment portfolio;
however, they provide sufficient liquidity to fund current operating requirements as the Company prepares for the transition under the terms of the pending merger.



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



Other real estate owned and repossessed assets
decreased to $832,000 at March 31, 2004 compared to $1.2 million at December 31, 2003. Other real estate owned, as a component of such total, included $731,000 at March 31, 2004 compared to $1.1 million at December 31, 2003. Activity for the period
included the transfer of approximately $39,000 in loans, principally commercial, with sales and recoveries of $374,000 for the period. Repossessed assets were $102,000 at March 31, 2004 as well as December 31, 2003.



13



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Item 2 - continued



The Company initially purchased $20.0 million of bank owned life insurance (BOLI) in
December 2002 with an additional $20.0 million acquired in December 2003. The Companys BOLI investment was acquired to provide funding for certain employee benefits, and is carried at the cash surrender value of the underlying policies. BOLI
provides tax-exempt income (recorded as non-interest income) based on increases in the cash surrender value of the underlying policies. Income from this source was $468,000 for the first quarter of 2004 compared to $247,000 for the first quarter of
2003.



Other assets decreased to $28.4 million at March 31,
2004 from $35.7 million at December 31, 2003. The most significant factor associated with the $7.3 million decrease in other assets relates to refundable federal income taxes of $3.9 million received in March 2004. In addition, deferred income taxes
associated with the increase in the fair value of securities held for sale resulted in a $1.6 million decrease in other assets during the period.



Total deposits decreased to $1,580.6 million at March 31, 2004 compared to $1,589.1 million at December 31, 2003. Core deposits are generally considered
deposit accounts other than time deposits. Money market deposits increased by $8.6 million during the first quarter of 2004, primarily due to the $12.6 million increase in municipal accounts, which tend to be cyclical, consistent with the related
government activities. Time deposits decreased $18.3 million at March 31, 2004 compared to December 31, 2003. Retail time deposits, principally maturities of six months to less than two years, declined $19.1 million, while municipal time deposits
provided a partial offset with an increase of $3.4 million. Non-interest-bearing demand accounts decreased $2.4 million during the first quarter of 2004 with the decrease primarily attributed to the $6.5 million decline in commercial checking
accounts. These declines were primarily offset by increases in a variety of retail checking accounts as well as a $1.4 million increase in municipal checking accounts.



The following table shows the detail composition at both dates:



|                                     |  |                |           |         |                   |   |        |   |           |  |        |  
|------------------------------------ |  | -------------- | --------- | ------- | ----------------- | - | ------ | - | --------- |  | ------ | -
|                                     |  | March 31, 2004 |           |         | December 31, 2003 |  
|(Dollars in Thousands)               |  | Amount         |           | Percent |                   |   | Amount |   | Percent   | 
|Savings deposit accounts             |  | $              | 182,198   |         | 11.53             | % |        | $ | 181,720   |  | 11.44  | %
|Money market deposit accounts        |  |                | 437,937   |         | 27.71             | % |        |   | 429,376   |  | 27.02  | %
|Time deposit accounts                |  |                | 674,603   |         | 42.67             | % |        |   | 692,912   |  | 43.60  | %
|NOW accounts                         |  |                | 131,643   |         | 8.33              | % |        |   | 128,400   |  | 8.08   | %
|Non-interest-bearing demand accounts |  |                | 154,236   |         | 9.76              | % |        |   | 156,678   |  | 9.86   | %
|                                     |  |                |           |         |                   |   |        |   |           |  |        |  
|Total deposits                       |  | $              | 1,580,617 |         | 100.00            | % |        | $ | 1,589,086 |  | 100.00 | %
|                                     |  |                |           |         |                   |   |        |   |           |  |        |  



The Companys
borrowings increased to $420.6 million at March 31, 2004 from $410.8 million at December 31, 2003. The primary source of borrowings is Federal Home Loan Bank (FHLB) advances which accounted for $400.8 million and $390.8 million of
aggregate borrowings at March 31, 2004 and December 31, 2003, respectively. New FHLB advances for 2004 have a weighted average term of 2.8 years at March 31, 2004. The comparative weighted average term for all FHLB advances outstanding at March 31,
2004 was 5.3 years. Other borrowings at March 31, 2004 were primarily comprised of $18.7 million of securities sold under agreements to repurchase and no FHLB line of credit was utilized. These borrowings, along with deposits, are used to fund the
Companys lending and investment activities.



Total
shareholders equity increased by $7.4 million in the first three months of 2004 primarily due to net income of $4.1 million and the increase of $3.3 million from the proceeds of the exercise of stock options, including related tax benefits.
Cash dividends of $2.3 million were paid, offset by a $2.4 million increase in accumulated other comprehensive income.



Asset Quality



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



14



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Item 2 - continued



Total non-performing assets were $17.5 million or 0.79% of total assets at March 31, 2004, compared
to $14.4 million or 0.65% of total assets at December 31, 2003. Loans are placed on a non-accrual status when, in the judgment of management, the probability of collection of principal or interest is deemed to be insufficient to warrant further
accrual. When a loan is placed in a non-accrual status, previously accrued but unpaid interest is deducted from interest income. Other than with respect to consumer loans, the Company does not accrue interest on loans greater than 90 days past due
unless the estimated fair value of the collateral and active collection efforts are believed to be adequate to result in full recovery.



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



|                                                                           |  |                |        |   |                   |   |        |                    |  |   |               |   |  |                |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | ------------------ |  | - | ------------- | - |  | -------------- | ------ | - |  | - | ------ | -
|                                                                           |  | March 31, 2004 |        |   | December 31, 2003 |   |        | September 30, 2003 |  |   | June 30, 2003 |   |  | March 31, 2003 |       
|(Dollars in Thousands)                                                     |  |                |        |   |                  
|Non-accrual loans:                                                         |  |                |        |   |                   |   |        |                    |  |   |               |   |  |                |        |   |  |   |        |  
|Commercial loans                                                           |  | $              | 14,964 |   |                   | $ | 11,186 |                    |  | $ | 27,570        |   |  | $              | 30,267 |   |  | $ | 30,078 |  
|Residential real estate loans                                              |  |                | 861    |   |                   |   | 622    |                    |  |   | 680           |   |  |                | 743    |   |  |   | 787    |  
|Commercial real estate loans                                               |  |                | 446    |   |                   |   | 32     |                    |  |   | 67            |   |  |                | 674    |   |  |   | 821    |  
|Consumer loans                                                             |  |                | 104    |   |                   |   | 134    |                    |  |   | 237           |   |  |                | 271    |   |  |   | 198    |  
|Troubled debt restructured loans                                           |  |                |       |   |                   |   | 1,126  |                    |  |   | 2,005         |   |  |                | 6,379  |   |  |   | 12,143 |  
|                                                                           |  |                |        |   |                   |   |        |                    |  |   |               |   |  |                |        |   |  |   |        |  
|Total non-accrual loans                                                    |  |                | 16,375 |   |                   |   | 13,100 |                    |  |   | 30,559        |   |  |                | 38,334 |   |  |   | 44,027 |  
|Accruing loans with principal or interest payments 90 days or more overdue |  |                | 278    |   |                   |   | 109    |                    |  |   | 141           |   |  |                | 111    |   |  |   | 190    |  
|                                                                           |  |                |        |   |                   |   |        |                    |  |   |               |   |  |                |        |   |  |   |        |  
|Total non-performing loans                                                 |  |                | 16,653 |   |                   |   | 13,209 |                    |  |   | 30,700        |   |  |                | 38,445 |   |  |   | 44,217 |  
|                                                                           |  |                |        |   |                   |   |        |                    |  |   |               |   |  |                |        |   |  |   |        |  
|Other real estate owned and repossessed assets                             |  |                | 833    |   |                   |   | 1,231  |                    |  |   | 1,696         |   |  |                | 2,601  |   |  |   | 3,668  |  
|                                                                           |  |                |        |   |                   |   |        |                    |  |   |               |   |  |                |        |   |  |   |        |  
|Total non-performing assets                                                |  | $              | 17,486 |   |                   | $ | 14,440 |                    |  | $ | 32,396        |   |  | $              | 41,046 |   |  | $ | 47,885 |  
|                                                                           |  |                |        |   |                   |   |        |                    |  |   |               |   |  |                |        |   |  |   |        |  
|Total non-performing loans to total loans                                  |  |                | 1.17   | % |                   |   | 0.91   | %                  |  |   | 2.11          | % |  |                | 2.70   | % |  |   | 3.16   | %
|                                                                           |  |                |        |   |                   |   |        |                    |  |   |               |   |  |                |        |   |  |   |        |  
|Total non-performing assets to total assets                                |  |                | 0.79   | % |                   |   | 0.65   | %                  |  |   | 1.49          | % |  |                | 1.90   | % |  |   | 2.33   | %
|                                                                           |  |                |        |   |                   |   |        |                    |  |   |               |   |  |                |        |   |  |   |        |  



In addition to the
non-accruing troubled debt restructured loans shown above, the Company also had accruing loans classified as troubled debt restructured loans totaling $17.2 million, $13.8 million, $8.4 million, $8.1 million and $3.6 million at March 31, 2004,
December 31, September 30, June 30, and March 31, 2003, respectively. The Company does not consider these loans to be non-performing.



Commercial loans and troubled debt restructured loans that are in non-accrual status increased to $15.0 million at March 31, 2004 from $12.3 million at
December 31, 2003. The single largest factor in the increase was one relationship (4 loans) totaling approximately $3.9 million that went into non-performing status during the quarter. Charge-offs of commercial loans and non-accruing troubled debt
restructured loans amounted to $2.2 million that reduced non-performing loans in the first quarter of 2004. New non-performing commercial loans and non-accruing troubled debt restructured loans of $6.6 million were added in first quarter 2004,
partially offset by $1.7 million of pay-downs or pay-offs in these loan categories for the same period.



15



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Item 2 - continued



A loan is considered impaired, based on current information and events, if it is probable that the
Company will be unable to collect the scheduled payments of principal or interest when due under the contractual terms of the loan agreement. The measurement of impaired loans may be based upon the present value of expected future cash flows
discounted at the contractual interest rate, or for loans that have become collateral dependent are based on the fair value of the collateral. At March 31, 2004, the Companys recorded investment in loans for which impairment has been
recognized in accordance with SFAS No. 114 totaled $31.9 million with an impairment allowance aggregating $10.5 million. At March 31, 2003, loans considered to be impaired in accordance with SFAS No. 114 totaled $46.7 million, of which $4.5 million
related to loans with no allocated allowance because the loans have been partially written down through charge-offs and the related collateral coverage is considered sufficient. The $42.2 million remainder related to loans with a corresponding
allocated allowance of $19.6 million. For the year ended December 31, 2003, the average recorded investment in impaired loans was approximately $39.0 million and decreased to $29.0 million for the quarter ended March 31, 2004. The Company
recognized, on a cash basis, $599,000 of interest in 2003 and $301,000 to date in 2004 on impaired loans during the portion of the year they were impaired.



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



The allowance for loan losses was $48.1 million or 3.38% of total loans
outstanding at March 31, 2004, providing coverage for non-performing loans of 288.72%. The coverage of non-performing loans was 359.01% at December 31, 2003, and the allowance for loan losses was $47.4 million or 3.27% of total loans outstanding.
The coverage ratio for non-performing loans is consistent with managements priority to strategically balance the mix of the Companys loan portfolio and recognize the influence of general economic and business conditions, especially those
influencing our regional businesses. Managements assessment of the adequacy of the allowance for loan losses incorporates an evaluation of the Companys overall loan portfolio, based on both general economic factors and specific factors
influencing loans covered by the risk-rating system described above.



16



---

Item 2 - continued



Performing loans past due 30-89 days decreased to $5.1 million at March 31, 2004 from $6.9 million at
December 31, 2003 and $4.0 million at March 31, 2003. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related borrowers causes management to have serious doubt as to
the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as non-performing at some time in the future. Performing substandard loans decreased to $44.7 million ($4.4 million of
which are accruing troubled debt restructured loans) at March 31, 2004 compared to $53.4 million ($0.8 million of which are accruing troubled debt restructured loans) at December 31, 2003. Potential problem loans at March 31, 2004 and December 31,
2003 primarily consisted of commercial and industrial loans.



The allowance for loan losses required an aggregate provision for loan losses of $1.6 million in the first quarter of 2004, compared to $260,000 in the fourth quarter of 2003, and $4.0 million in the first quarter of 2003. The higher
provision for loan losses compared to the fourth quarter of 2003 primarily reflects weakened credit quality ratings for two larger commercial credit relationships.



Net charge-offs were $1.0 million, $14.2 million and $1.3 million for the first quarter of 2004, the fourth quarter of 2003
and the first quarter of 2003, respectively. Net charge-offs for the current quarter were less than the current provision for loan losses, which is a change from recent quarters when net charge-offs exceeded the provision for loan losses for the
same period. The provision in excess of net charge-offs reflects managements continuing assessment of the related asset quality. During the fourth quarter of 2003, the Company sold certain large, under-performing loans with an aggregate
carrying value of $36.7 million. The proceeds from the sale of these loans, net of estimated transaction costs, was $27.2 million. The $9.5 million difference between the carrying value and the net proceeds from the sale of these loans generally
reflects the Companys previously established loan loss reserves and was charged-off against the allowance for loan losses. They had no impact on the Companys income statement. Prior to the decision to sell, these loans were either
non-performing or performing loans classified as substandard. As a result of the sale, non-performing loans decreased $14.5 million and substandard performing loans declined $22.2 million.



Commercial loan charge-offs decreased to $2.2 million in the first quarter of
2004 from $17.9 million in the fourth quarter of 2004 and $1.1 million in the first quarter of 2003. Management continually reviews the adequacy of the allowance for loan losses. At March 31, 2004, the allowance was considered adequate by
management.



17



---

Item 2 - continued



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



|                                             |  |                |           |   |                   |   |           |                    |  |   |               |   |  |                |           |   |  |   |           |  
|-------------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | ------------------ |  | - | ------------- | - |  | -------------- | --------- | - |  | - | --------- | -
|                                             |  | March 31, 2004 |           |   | December 31, 2003 |   |           | September 30, 2003 |  |   | June 30, 2003 |   |  | March 31, 2003 |          
|(Dollars in Thousands)                       |  |                |           |   |                  
|Average gross loans outstanding              |  | $              | 1,433,936 |   |                   | $ | 1,448,377 |                    |  | $ | 1,425,579     |   |  | $              | 1,399,913 |   |  | $ | 1,363,637 |  
|Allowance at beginning of period             |  | $              | 47,421    |   |                   | $ | 61,382    |                    |  | $ | 62,607        |   |  | $              | 65,944    |   |  | $ | 63,250    |  
|                                             |  |                |           |   |                   |   |           |                    |  |   |               |   |  |                |           |   |  |   |           |  
|Charge-offs:                                 |  |                |           |   |                   |   |           |                    |  |   |               |   |  |                |           |   |  |   |           |  
|Commercial loans                             |  |                | 2,181     |   |                   |   | 17,868    |                    |  |   | 7,065         |   |  |                | 6,490     |   |  |   | 1,102     |  
|Consumer loans                               |  |                | 796       |   |                   |   | 1,135     |                    |  |   | 987           |   |  |                | 990       |   |  |   | 977       |  
|Residential real estate loans                |  |                | 53        |   |                   |   | 26        |                    |  |   | 25            |   |  |                | 12        |   |  |   | 30        |  
|Commercial real estate loans                 |  |                | 339       |   |                   |   | 106       |                    |  |   | 496           |   |  |                | 82        |   |  |   | 208       |  
|                                             |  |                |           |   |                   |   |           |                    |  |   |               |   |  |                |           |   |  |   |           |  
|Total loan charge-offs                       |  |                | 3,369     |   |                   |   | 19,135    |                    |  |   | 8,573         |   |  |                | 7,574     |   |  |   | 2,317     |  
|Recoveries                                   |  |                | 2,408     |   |                   |   | 4,914     |                    |  |   | 4,468         |   |  |                | 1,257     |   |  |   | 1,043     |  
|                                             |  |                |           |   |                   |   |           |                    |  |   |               |   |  |                |           |   |  |   |           |  
|Net charge-offs                              |  |                | 961       |   |                   |   | 14,221    |                    |  |   | 4,105         |   |  |                | 6,317     |   |  |   | 1,274     |  
|                                             |  |                |           |   |                   |   |           |                    |  |   |               |   |  |                |           |   |  |   |           |  
|Provision for loan losses                    |  |                | 1,620     |   |                   |   | 260       |                    |  |   | 2,880         |   |  |                | 2,980     |   |  |   | 3,968     |  
|                                             |  |                |           |   |                   |   |           |                    |  |   |               |   |  |                |           |   |  |   |           |  
|Allowance at end of period                   |  | $              | 48,080    |   |                   | $ | 47,421    |                    |  | $ | 61,382        |   |  | $              | 62,607    |   |  | $ | 65,944    |  
|                                             |  |                |           |   |                   |   |           |                    |  |   |               |   |  |                |           |   |  |   |           |  
|Ratio of net charge-offs to:                 |  |                |           |   |                   |   |           |                    |  |   |               |   |  |                |           |   |  |   |           |  
|Average gross loans outstanding (annualized) |  |                | 0.27      | % |                   |   | 3.93      | %                  |  |   | 1.15          | % |  |                | 1.80      | % |  |   | 0.37      | %
|Ratio of allowance to:                       |  |                |           |   |                   |   |           |                    |  |   |               |   |  |                |           |   |  |   |           |  
|Non-performing loans                         |  |                | 288.72    | % |                   |   | 359.01    | %                  |  |   | 199.94        | % |  |                | 162.85    | % |  |   | 149.14    | %
|Period-end loans outstanding                 |  |                | 3.38      | % |                   |   | 3.27      | %                  |  |   | 4.23          | % |  |                | 4.40      | % |  |   | 4.72      | %



Other real estate
owned (ORE) and repossessed assets include property acquired by foreclosure, by deed in lieu of foreclosure or by repossession. At March 31, 2004, total ORE and repossessed assets totaled $832,000, representing a decrease of $399,000
compared to $1.2 million at December 31, 2003. Activity in ORE for the three-month period includes the transfer of approximately $39,000 in loans, principally commercial, offset by sales and recoveries of $374,000 for the period. Repossessed assets
totaled $102,000 at March 31, 2004 and December 31, 2003. Consumer loan repossessions include vehicles and mobile home units that represented 82.0% and 100.0% of the respective balances at March 31, 2004 and December 31, 2003.



18



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Item 2 - continued



RESULTS OF OPERATIONS



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



Comparison of Operating Results for the Three Months Ended March 31, 2004 and 2003



General



For the three months ended March 31, 2004, the Company reported net income of $4.1 million compared to $3.9 million for the three months ended March 31,
2003. Basic and diluted earnings per share were $0.44 and $0.43, respectively, for the three months ended March 31, 2004, compared to basic and diluted earnings per share of $0.42 and $0.41 for the three months ended March 31, 2003. In 2004, the
comparative earnings per share is impacted by the higher Company stock price creating a larger dilutive effect on unexercised options. The comparative earnings per share for the first quarter of 2003 was impacted by a higher level of average shares
outstanding prior to the Companys stock repurchase program under which more than 300,000 shares were acquired in the later part of such quarter. The weighted average common shares outstanding were 9,329,022 for the quarter ended March 31,
2004, up 0.22% or 20,020 shares from the first quarter of 2003. Return on average assets for the quarter ended March 31, 2004 was 0.75% and 0.77% for the quarter ended March 31, 2003. The return on average equity was 10.94% for the quarter ended
March 31, 2004 compared to 10.53% for the comparable quarter in 2003.



Average interest-earning assets increased $159.2 million or 8.16% to $2,111.3 million for the quarter ended March 31, 2004 compared to the same quarter ended March 31, 2003. Changes in average earning assets generally follow the trends
discussed earlier under Financial Condition.



19



---

Item 2 - continued



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



|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|---------------------------------------------------------------- |  | ------------------ | --------- | - | -------- | - | ---------- |  | ----- | ------------------ |  | - | --------- | - | ---------- | - | ------ |  | ----- | -
|Three Months Ended March 31, (Dollars in
Thousands)              |  | 2004AverageBalance |           |   | Interest |   | Yield/Rate |  |       | 2003AverageBalance |  |   | Interest  |   | Yield/Rate |  
|Interest-earning assets:                                         |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Commercial loans                                                 |  | $                  | 309,655   |   |          | $ | 4,619      |  | 5.97  | %                  |  | $ | 477,316   |   |            | $ | 7,650  |  | 6.41  | %
|Consumer loans:                                                  |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Personal-direct                                                  |  |                    | 70,342    |   |          |   | 1,105      |  | 6.28  |                    |  |   | 66,660    |   |            |   | 1,203  |  | 7.22  |  
|Personal-indirect                                                |  |                    | 243,165   |   |          |   | 3,672      |  | 6.04  |                    |  |   | 264,554   |   |            |   | 4,759  |  | 7.20  |  
|Other(1)                                                         |  |                    | 48,189    |   |          |   | 517        |  | 4.29  |                    |  |   | 43,539    |   |            |   | 518    |  | 4.76  |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Total consumer loans                                             |  |                    | 361,696   |   |          |   | 5,294      |  | 5.85  |                    |  |   | 374,753   |   |            |   | 6,480  |  | 6.92  |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Real estate loans:                                               |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Residential-fixed                                                |  |                    | 508,077   |   |          |   | 6,686      |  | 5.26  |                    |  |   | 297,029   |   |            |   | 4,488  |  | 6.04  |  
|Commercial-fixed                                                 |  |                    | 35,821    |   |          |   | 577        |  | 6.44  |                    |  |   | 38,169    |   |            |   | 674    |  | 7.06  |  
|Residential-adjustable                                           |  |                    | 60,897    |   |          |   | 731        |  | 4.80  |                    |  |   | 67,119    |   |            |   | 935    |  | 5.57  |  
|Commercial-adjustable                                            |  |                    | 160,781   |   |          |   | 2,505      |  | 6.23  |                    |  |   | 111,222   |   |            |   | 1,968  |  | 7.08  |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Total real estate loans                                          |  |                    | 765,576   |   |          |   | 10,499     |  | 5.49  |                    |  |   | 513,539   |   |            |   | 8,065  |  | 6.28  |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Investment securities(2)                                         |  |                    | 635,956   |   |          |   | 7,060      |  | 4.44  |                    |  |   | 563,025   |   |            |   | 7,089  |  | 5.04  |  
|Loans held for sale                                              |  |                    | 1,494     |   |          |   | 22         |  | 5.89  |                    |  |   | 1,993     |   |            |   | 26     |  | 5.22  |  
|Federal funds sold                                               |  |                    | 36,943    |   |          |   | 93         |  | 1.01  |                    |  |   | 21,468    |   |            |   | 66     |  | 1.23  |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Total interest-earning assets                                    |  |                    | 2,111,320 |   |          | $ | 27,587     |  | 5.23  | %                  |  |   | 1,952,094 |   |            | $ | 29,376 |  | 6.02  | %
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Allowance for loan losses                                        |  |                    | (47,004   | ) |          |   |            |  |       |                    |  |   | (65,036   | ) |            |   |        |  |       |  
|Non-interest-earning assets                                      |  |                    | 140,630   |   |          |   |            |  |       |                    |  |   | 133,003   |   |            |   |        |  |       |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Total assets                                                     |  | $                  | 2,204,946 |   |          |   |            |  |       |                    |  | $ | 2,020,061 |   |            |   |        |  |       |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Interest-bearing liabilities:                                    |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Deposits:                                                        |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Savings                                                          |  | $                  | 178,581   |   |          | $ | 273        |  | 0.61  | %                  |  | $ | 176,044   |   |            | $ | 416    |  | 0.95  | %
|Money market                                                     |  |                    | 434,624   |   |          |   | 1,279      |  | 1.18  |                    |  |   | 349,150   |   |            |   | 1,092  |  | 1.25  |  
|Time deposits                                                    |  |                    | 681,547   |   |          |   | 4,438      |  | 2.60  |                    |  |   | 641,785   |   |            |   | 5,104  |  | 3.18  |  
|NOW                                                              |  |                    | 128,654   |   |          |   | 71         |  | 0.22  |                    |  |   | 121,243   |   |            |   | 82     |  | 0.27  |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Total deposits                                                   |  |                    | 1,423,406 |   |          |   | 6,061      |  | 1.70  |                    |  |   | 1,288,222 |   |            |   | 6,694  |  | 2.08  |  
|Borrowings                                                       |  |                    | 416,543   |   |          |   | 3,558      |  | 3.42  |                    |  |   | 376,997   |   |            |   | 3,424  |  | 3.63  |  
|Junior subordinated obligations                                  |  |                    | 48,202    |   |          |   | 738        |  | 6.12  |                    |  |   |          |   |            |   |       |  |      |  
|Trust preferred securities(3)                                    |  |                    |          |   |          |   |           |  |      |                    |  |   | 48,000    |   |            |   | 778    |  | 6.48  |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Total interest-bearing liabilities                               |  |                    | 1,888,151 |   |          | $ | 10,357     |  | 2.19  | %                  |  |   | 1,713,219 |   |            | $ | 10,896 |  | 2.54  | %
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Non-interest-bearing liabilities                                 |  |                    | 17,041    |   |          |   |            |  |       |                    |  |   | 16,975    |   |            |   |        |  |       |  
|Commercial checking                                              |  |                    | 149,162   |   |          |   |            |  |       |                    |  |   | 142,588   |   |            |   |        |  |       |  
|Shareholders equity                                             |  |                    | 150,592   |   |          |   |            |  |       |                    |  |   | 147,279   |   |            |   |        |  |       |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Total liabilities and shareholders equity                       |  | $                  | 2,204,946 |   |          |   |            |  |       |                    |  | $ | 2,020,061 |   |            |   |        |  |       |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Net interest income                                              |  |                    |           |   |          | $ | 17,230     |  |       |                    |  |   |           |   |            | $ | 18,480 |  |       |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Net earning assets                                               |  | $                  | 223,169   |   |          |   |            |  |       |                    |  | $ | 238,875   |   |            |   |        |  |       |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Net interest rate spread                                         |  |                    |           |   |          |   |            |  | 3.04  | %                  |  |   |           |   |            |   |        |  | 3.48  | %
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Net interest rate margin                                         |  |                    |           |   |          |   |            |  | 3.26  | %                  |  |   |           |   |            |   |        |  | 3.79  | %
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  
|Ratio of interest-earning assets to interest-bearing liabilities |  |                    |           |   |          |   |            |  | 1.12X |                    |  |   |           |   |            |   |        |  | 1.14X |  
|                                                                 |  |                    |           |   |          |   |            |  |       |                    |  |   |           |   |            |   |        |  |       |  



|(1) | Other loans include passbook, overdraft, checkcard reserve and student loans.
|--- | -----------------------------------------------------------------------------



|(2) | At amortized cost and include securities available for sale, securities held to maturity
(2003 only) and Federal Home Loan Bank of New York stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Reflects the full three months average for trust preferred securities since FASB
Interpretation No. 46 R was implemented on last day of 2003. The related junior subordinated obligations are reported separately in 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

Item 2 - continued



Rate/Volume Analysis



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



|                                                  |  |                                                                        |        |   |      |   |        |     |  |   |        |  
|------------------------------------------------- |  | ---------------------------------------------------------------------- | ------ | - | ---- | - | ------ | --- |  | - | ------ | -
|                                                  |  | Three Months Ended March 31, 2004 Compared to 2003 Increase (Decrease) |       
|(Dollars in Thousands)                            |  | Volume                                                                 |        |   | Rate |   |        | Net | 
|Interest income on interest-earning assets:       |  |                                                                        |        |   |      |   |        |     |  |   |        |  
|Commercial loans                                  |  | $                                                                      | (2,532 | ) |      | $ | (499   | )   |  | $ | (3,031 | )
|Consumer loans                                    |  |                                                                        | (220   | ) |      |   | (966   | )   |  |   | (1,186 | )
|Real estate loans                                 |  |                                                                        | 3,559  |   |      |   | (1,125 | )   |  |   | 2,434  |  
|Investment securities                             |  |                                                                        | 862    |   |      |   | (891   | )   |  |   | (29    | )
|Loans held for sale                               |  |                                                                        | (7     | ) |      |   | 3      |     |  |   | (4     | )
|Federal funds sold                                |  |                                                                        | 41     |   |      |   | (14    | )   |  |   | 27     |  
|                                                  |  |                                                                        |        |   |      |   |        |     |  |   |        |  
|Total                                             |  | $                                                                      | 1,703  |   |      | $ | (3,492 | )   |  | $ | (1,789 | )
|                                                  |  |                                                                        |        |   |      |   |        |     |  |   |        |  
|Interest expense on interest-bearing liabilities: |  |                                                                        |        |   |      |   |        |     |  |   |        |  
|Savings                                           |  | $                                                                      | 6      |   |      | $ | (149   | )   |  | $ | (143   | )
|Money market                                      |  |                                                                        | 255    |   |      |   | (68    | )   |  |   | 187    |  
|Time deposits                                     |  |                                                                        | 301    |   |      |   | (967   | )   |  |   | (666   | )
|NOW                                               |  |                                                                        | 5      |   |      |   | (16    | )   |  |   | (11    | )
|                                                  |  |                                                                        |        |   |      |   |        |     |  |   |        |  
|Total                                             |  |                                                                        | 567    |   |      |   | (1,200 | )   |  |   | (633   | )
|                                                  |  |                                                                        |        |   |      |   |        |     |  |   |        |  
|Borrowings                                        |  |                                                                        | 346    |   |      |   | (212   | )   |  |   | 134    |  
|Junior subordinated obligations                   |  |                                                                        | 571    |   |      |   | 167    |     |  |   | 738    |  
|Trust preferred securities                        |  |                                                                        | (778   | ) |      |   |       |     |  |   | (778   | )
|                                                  |  |                                                                        |        |   |      |   |        |     |  |   |        |  
|Total                                             |  |                                                                        | 706    |   |      |   | (1,245 | )   |  |   | (539   | )
|                                                  |  |                                                                        |        |   |      |   |        |     |  |   |        |  
|Net interest income                               |  | $                                                                      | 997    |   |      | $ | (2,247 | )   |  | $ | (1,250 | )
|                                                  |  |                                                                        |        |   |      |   |        |     |  |   |        |  



Interest on Commercial Loans



Commercial loans, which represent 21.5% of total
loans at March 31, 2004, tend to increase the interest rate sensitivity of the overall loan portfolio, because interest rates on such loans are generally tied to the Companys Prime Rate. In the last half of 2003 and the first quarter of 2004,
general interest rates, including the Companys commercial loan Prime Rate, stabilized at historically lower levels following a steady decrease that commenced during 2001.



Commercial loans have been a primary focus and concern of management over the last three years due to the negative impact of
national interest rate trends and regional economic conditions on both their interest rate risk and loan quality. Thus, as the Company continues to reallocate its asset balances, the average balance of commercial loans has declined each year since
2001. Lower commercial loan balances were a primary factor in the overall lower levels of interest income. The average balance of commercial loans decreased by $167.7 million to $309.7 million for the first quarter 2004 from the first quarter 2003.
In addition, the average yield on commercial loans decreased to 5.97% compared to 6.41% for the respective periods. Also, non-accrual loans, which are primarily commercial loans, impact the overall yield.



21



---

Item 2 - continued



Interest on Consumer Loans



The consumer loan portfolio includes principally fixed-rate loans with short terms. Though consumer loan rates had limited
changes during 2004 due to the historically low interest rate environment, the average yield on the aggregate consumer loan portfolio decreased to 5.85% for the first quarter of 2004 compared to 6.92% for the first quarter of 2003. The average
balance of all consumer loans decreased $13.1 million to $361.7 million for the first quarter of 2004 from $374.8 million in the first quarter of 2003. Changes in the mix of the consumer loan portfolio also contributed to the decrease in yield from
the first quarter of 2003 to the first quarter of 2004. In 2004, the Company has shifted to lower risk home equity lines of credit during a period of very competitive conditions in the auto loan market, especially for new auto loans. Since 2002, the
Company has de-emphasized the origination of mobile home loans, which generally have higher yields than other consumer loan types, but also have increased credit risk.



Interest on Real Estate Loans



Interest income from total real estate loans increased $2.4 million or 30.2% to $10.5 million in the first quarter of 2004 from $8.1 million in the first
quarter of 2003. The strategic shift to real estate loans, especially in the residential category, provided the most significant positive impact on net interest income for 2004 compared to 2003.



The record setting level of residential originations, discussed earlier, is
reflected in the growth of average residential mortgage balances. Fixed-rate residential mortgages increased 71.1% to average balances of $508.1 million in the first quarter of 2004 from $297.0 million in the first quarter of 2003. Though the
average balance of adjustable-rate residential mortgages decreased in 2004 from 2003, first quarter activity was higher than normal as both regional and national market trends showed some reversal in rates, especially for extended term loans. As a
result, residential loans provided approximately $2.0 million or 81.9% of the overall increase in income from all real estate loans. The yield on fixed rate residential mortgages declined from 6.04% at March 31, 2003 to 5.26% at March 31, 2004 as
borrowers refinanced higher rate mortgages during 2003 and the first quarter of 2004.



In the commercial real estate category, interest income increased $440,000 or 16.7% to $3.1 million for the first quarter of 2004 compared to the first quarter of 2003. The most significant increase in interest income
was attributed to the growth in adjustable-rate commercial real estate loans, discussed earlier, which provided average balances that represented all of the increases in volume and in related interest income.



Interest on Investment Securities



Income from investment securities was substantially unchanged at $7.1
million in both the first quarter of 2004 and 2003, though yields declined to 4.44% for the first quarter of 2004 compared to 5.04% for the first quarter of 2003. During the first quarter of 2004, the average balance of investment securities was
$636.0 million, an increase of $72.9 million over the average balance of $563.0 million for the first quarter of 2003. Such results for 2004 reflect the continued heavy turnover of investment securities to facilitate the Companys
redistribution of assets. As the commercial loan portfolio declined, cash flow was reinvested mainly in government bonds to provide readily available liquidity primarily, for short-term corporate requirements. The relative yields were also
influenced by the amortization of any premiums incurred to acquire such investment securities, especially mortgage-backed securities.



Interest on Deposits



Interest expense on deposits for the quarter ended March 31, 2004 was $6.1 million, a decrease of $633,000 or 9.46% from $6.7 million in the first quarter
of 2003. The average cost of interest-bearing deposits declined to 1.70% in the first quarter of 2004 from 2.08% in the first quarter of 2003. National and regional trends of the interest rate environment, as well as competition in the
Companys primary markets, are the most significant factors that influenced the cost of such funds in 2004 and 2003. Time deposits represent the most influential category of interest-bearing deposits, in terms of both volume and rate, impacting
the Companys quarterly cost for all interest-bearing deposits. The Company continues to monitor the cost and the availability of deposits against the cost and levels of borrowings to determine the best funding sources for the Companys
assets.



22



---

Item 2 - continued



The average balance outstanding for all time deposits was $681.5 million for the first quarter of
2004, a decrease of $39.8 million or 6.2% from $641.8 million for the first quarter of 2003. The cost of funds for all time deposits decreased to $4.4 million in the first quarter of 2004 with an average rate of 2.60%, compared to $5.1 million in
the first quarter of 2003 with an average rate of 3.18%. However, in the first quarter of 2004, the average balance of higher-costing brokered time deposits was $174.2 million, as compared to the average balance in the first quarter of 2003 of $99.3
million.



Interest on Borrowings and Trust Preferred Securities



Borrowed funds are used to supplement retail and
commercial deposits as needed to fund asset growth, lengthen liabilities and lower the cost of funds, when possible. In general, borrowings remove the volatility that can occur with moneydesk deposits and enhances planning for liquidity needs, yet
the cost of such funds can approximate the cost of wholesale funds. The average balance of borrowings during the first quarter of 2004 increased to $416.5 million, with 95.5% of such borrowings being FHLB advances. The average interest rate paid on
borrowings in the first quarter of 2003 decreased to 3.42% from 3.63% in the first quarter of 2003. The impact of the additional borrowings, though partially offset by the declining rates, resulted in an increase of $134,000 in interest expense in
the first quarter of 2004 to $3.6 million compared to $3.4 million in the first quarter of 2003.



Interest expense on junior subordinated obligations and trust preferred securities decreased $40,000 to $738,000 in the first quarter of 2004 from
$778,000 in the first quarter of 2003. The Companys adoption of FASB Interpretation No. 46 R (FIN 46 R), effective December 31, 2003, had no impact on the cost of funds for 2003. See Recent Accounting Pronouncements for
a discussion of FIN 46 R.



Provision for Loan Losses



The provision for loan losses in the first quarter of 2004 was $1.6
million compared to $4.0 million in the first quarter of 2003. The lower provision for loan losses in the first quarter of 2004 as compared to the first quarter of 2003 is primarily due to the significant reduction in net loan charge-offs, the
increase in recoveries during 2003, as well as both the reduction in non-performing loans and the changing mix of the overall loan portfolio. As discussed under the allowance for loan losses, the provision for loan losses reflects managements
assessment of the estimated losses inherent in the loan portfolio. Loans charged-off can fluctuate from period to period and the current level of charge-offs should not be considered an indicator of future levels. The November 2003 sale of certain
large, under-performing commercial loans had no impact on the current provision for loan losses; however, the sale eliminated the exposure to any potential future deterioration in the value of such loans. See Asset Quality for a
discussion of the allowance for loan losses and related analysis. See Overview for additional information on the commercial loan sale.



Non-interest Income



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



|                                                |  |      |       |      |   |          |  |   |          |   |  |       |   
|----------------------------------------------- |  | ---- | ----- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|(Dollars in Thousands) Quarters ended March
31, |  | 2004 |       | 2003 |   | $ Change |  |   | % Change |  
|Service charges on deposit accounts             |  | $    | 1,162 |      | $ | 1,250    |  | $ | (88      | ) |  | (7.0  | )%
|Checkcard interchange fees                      |  |      | 330   |      |   | 359      |  |   | (29      | ) |  | (8.1  | )%
|Mortgage servicing fees                         |  |      | 171   |      |   | 145      |  |   | 26       |   |  | 17.9  | % 
|Fees and commissions-brokerage services         |  |      | 183   |      |   | 222      |  |   | (39      | ) |  | (17.6 | )%
|Trust fees                                      |  |      | 326   |      |   | 278      |  |   | 48       |   |  | 17.3  | % 
|Income from bank owned life insurance           |  |      | 468   |      |   | 247      |  |   | 221      |   |  | 89.5  | % 
|Gain on sale of securities, net                 |  |      | 34    |      |   | 329      |  |   | (295     | ) |  | (89.7 | )%
|Other income                                    |  |      | 554   |      |   | 528      |  |   | 26       |   |  | 4.9   | % 
|                                                |  |      |       |      |   |          |  |   |          |   |  |       |   
|                                                |  | $    | 3,228 |      | $ | 3,358    |  | $ | (130     | ) |  | (3.9  | )%
|                                                |  |      |       |      |   |          |  |   |          |   |  |       |   



Non-interest income
was $3.2 million for the quarter ended March 31, 2004, a decrease of $130,000 or 3.87% from the quarter ended March 31, 2003. The most significant changes in the quarter-to-quarter comparison relate to the decrease of $295,000 in the net gain on the
sale of securities partially offset by the $221,000 increase in income from bank owned life insurance.



23



---

Item 2 - continued



Bank owned life insurance (BOLI) provided income of $468,000 for the first quarter in
2004 which reflects the impact of the additional $20 million BOLI investment in December 2003 with a comparable rate of return but dependent on the current market for such securities.



Operating Expense



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



|                                                            |  |      |        |      |   |          |  |   |          |   |  |       |   
|----------------------------------------------------------- |  | ---- | ------ | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|(Dollars in Thousands) Quarters ended March
31,             |  | 2004 |        | 2003 |   | $ Change |  |   | % Change |  
|Salaries, pensions and employee benefits                    |  | $    | 7,098  |      | $ | 6,503    |  | $ | 595      |   |  | 9.1   | % 
|Building occupancy                                          |  |      | 1,223  |      |   | 1,107    |  |   | 116      |   |  | 10.5  | % 
|Advertising and promotion                                   |  |      | 450    |      |   | 334      |  |   | 116      |   |  | 34.7  | % 
|Professional fees                                           |  |      | 434    |      |   | 736      |  |   | (302     | ) |  | (41.0 | )%
|Data processing costs                                       |  |      | 1,090  |      |   | 1,244    |  |   | (154     | ) |  | (12.4 | )%
|Services                                                    |  |      | 717    |      |   | 752      |  |   | (35      | ) |  | (4.7  | )%
|Merger related expenses                                     |  |      | 172    |      |   |         |  |   | 172      |   |  | 100.0 | % 
|Other real estate owned and repossessed asset expenses, net |  |      | 119    |      |   | 159      |  |   | (40      | ) |  | (25.2 | )%
|Other expenses                                              |  |      | 1,387  |      |   | 1,228    |  |   | 159      |   |  | 12.9  | % 
|                                                            |  |      |        |      |   |          |  |   |          |   |  |       |   
|                                                            |  | $    | 12,690 |      | $ | 12,063   |  | $ | 627      |   |  | 5.2   | % 
|                                                            |  |      |        |      |   |          |  |   |          |   |  |       |   



Operating expense
totaled $12.7 million for the quarter ended March 31, 2004 compared to $12.1 million for the first quarter 2003, a decrease of $0.6 million or 5.2%. The most significant factor relates to salaries, pensions and other employee benefits which
decreased $595,000 or 9.1% in the first quarter of 2004 compared to the first quarter of 2003. Salary costs increased in the first quarter of 2004 compared to the first quarter of 2003 by approximately $370,000 associated with additional salary
costs paid in connection with the Companys change to payroll paid in arrears, as well as $71,000 for salaries related to the Companys new item processing center, discussed below. Benefit costs, principally for health insurance and
pension costs, represent a $207,000 increase in personnel-related costs for the comparative quarters. Defined benefit plan pension costs increased $104,000 and reflect the expected increase in the net periodic pension costs. Retirement benefits also
include a $65,000 charge to operations in 2004 for costs associated with certain target benefit plans executed in October 2003. The increased health insurance and pension costs continue the current trend started in 2003 and is expected to continue
throughout 2004.



In May 2003, the Company opened a new
in-house item processing center primarily to facilitate direct control over the technology and operational processing of transactions with the Federal Reserve. Prior to such date, these processing costs were included primarily under the data
processing category. First quarter 2004 operating expenses for the item processing center totaled $420,000, including $80,000 for salaries and related benefits. In 2003, such operating expenses were included primarily in data processing costs which
declined $154,000 for the comparative quarters.



Professional
fees associated with loan collections, as well as other real estate owned and repossessed asset expenses, decreased in the first quarter of 2004 versus the first quarter 2003, consistent with the reductions of non-performing assets, as described
under Asset Quality.



In the first quarter 2004,
the Company incurred merger related costs of $172,000 associated with the pending merger with Partners Trust Financial Group, Inc. discussed earlier with no similar costs in the first quarter 2003. Such costs are generally not tax deductible.
Additional merger related costs for the pending merger will be incurred until the expected merger date.



Since a substantial portion of operating expense relates directly to income generation, an effective measurement of the control over operating expense is
the efficiency ratio, which consists of operating expenses divided by revenues (net interest income and non-interest income) on a pre-tax basis. The efficiency ratio for the Company was 62.03% and 55.24% for the first quarters of 2004 and 2003,
respectively. The Companys ratio of operating expense to average assets was 2.30% in the first quarter 2004 and 2.39% in the first quarter 2003. The efficiency ratio for the 2004 quarter was impacted negatively to a greater extent by the
decline in yield on earning assets consistent with market trends than by the increases in operating expense, which include merger related costs. The reduction in the



24



---

Item 2 - continued



ratio of operating expense to average assets reflects a positive level of control over such costs during a period of substantial change in assets accompanied
by lower yields as discussed earlier.



Income Tax Expense



The provision for income taxes for the first quarter
2004 was $2.0 million with an effective rate of 33.0%. For the comparable period in 2003, an income tax expense of $1.9 million was recorded for an effective rate of 33.2%. The levels of income tax expense generally fluctuate with the respective
levels of income before taxes, as well as the ratio of tax-exempt income to income before taxes.



Liquidity and Capital Resources



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



The Companys primary sources of liquidity,
on a consolidated basis, are deposits, payments of principal and interest from its loan and securities portfolios and the ability to use its loan and securities portfolios as collateral for secured borrowings. The Bank is a member of the FHLB of New
York. At March 31, 2004, outstanding FHLB advances totaled $400.8 million. In addition, the Company, through various facilities, has unused capacity to access up to $400.0 million of brokered deposits per Board approved policy limits, of which
$170.0 million was outstanding at March 31, 2004.



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



Operating activities provided net cash of $12.4 million for the three months
ended March 31, 2004 compared to $15.0 million for the same period in 2003. The comparative impact of net income on operating cash flow for the respective quarters was $4.1 million in 2004 and $3.9 million in 2003. The most significant difference
between net income and net cash provided by operating activities was the provision for loan losses of $1.6 million and $4.0 million for the first quarters of 2004 and 2003, respectively. The proceeds from the sale of loans held for sale was $6.1
million in 2004 compared to $5.8 million in 2003 which is consistent with, and fluctuates, based on the level and turnover of the portfolio. Based on the Companys assessment of future interest rate fluctuations, loan risk and market conditions
during each period, the Company will modify its decisions to sell or accumulate loans originated by its banking operations within its market area.



Investing activities provided net cash of $11.5 million for the three months ended March 31, 2004 compared to the use of $37.3 million for the same period
in 2003. During the first quarter of 2004, repayments of loans exceeded new loans, especially in the C&I and commercial real estate portfolios, to provide $23.6 million for investing activities. Net investing activities in securities available
for sale used $11.9 million as a deployment of the net cash available for both the 2004 and 2003 periods. For the comparable period in 2003, loans to customers exceeded loan repayments by $50.1 million and reflects the record volume increase in
residential mortgages experienced for the period.



25



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Item 2 - continued



Financing activities provided net cash of $2.2 million in 2004 compared to $19.5 million during the
first three months of 2003. Long-term borrowings, primarily from FHLB term advances, were utilized to provide for financing activities with proceeds exceeding repayments by $10.0 million in both 2004 and 2003. In 2004, the Company also obtained $3.3
million from the exercise of stock options which is partially attributed to the announcement of the pending merger discussed elsewhere. The Company also required approximately $8.5 million to pay for the net reduction in deposits, especially in the
commercial customer sector. By comparison in 2003, net deposits increased $6.1 million and $7.0 million was used for the purchase of treasury stock under a program that ended in March 2003. Currently, no additional stock repurchase program has been
authorized.



The Companys main sources of liquidity, as a
holding company, are dividends from the Bank, investment income and net proceeds from borrowings and capital securities offerings. The main uses of liquidity are the payment of dividends to shareholders, repurchases of the Companys common
stock, and the payment of interest to holders of trust preferred securities. The ability of the Bank to pay dividends is subject to various regulatory limitations. Due to net operating losses in 2002, coupled with dividends previously paid, the Bank
exceeded its dividend limitations for 2002. However, in October 2002, the Bank received regulatory approval for and paid a special dividend of $30.0 million to the Company. As a result of this special dividend, and based on regulatory limitations
noted above, the Company does not anticipate receiving additional dividends from the Bank until late in 2004.



At March 31, 2004, BSB Bancorp, Inc., on an unconsolidated basis, had immediately available funds totaling $17.1 million. Management believes current
levels of cash are adequate to meet the Companys anticipated ordinary obligations in 2004, and to pay customary cash dividends on the Companys common stock for the next twelve months, if so declared. Management anticipates that the Bank
will be able to resume the payment of cash dividends to the Company, without regulatory approval, in 2004. However, circumstances, including stock repurchases or other unanticipated cash obligations, may require the Company to seek additional
sources of funding or require the Bank to seek regulatory approval for another special cash dividend to the Company, should the Bank be otherwise unable to make such cash dividend payments.



At March 31, 2004, the Banks Tier I leverage ratio, as defined by
regulatory guidelines, was 8.07%, up from 7.93% at December 31, 2003, and above the minimum regulatory requirements for the Bank. The Banks total capital-to-risk-weighted assets ratio, calculated under the regulatory risk-based capital
requirements, was 13.20%, up from 12.64% at December 31, 2003, and in excess of the regulatory requirements. The improvement in these ratios is primarily attributed to the Companys shift to higher levels of residential mortgages with lower
risk ratings, as well as generating net income in the respective periods.



The Companys book value per share was $16.39 at March 31, 2004 compared to $15.82 at December 31, 2003 and $15.63 at March 31, 2003.



Impact of Inflation and Changing Prices



The consolidated financial statements and related data presented herein have been prepared in accordance with accounting
principles generally accepted in the United States which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to
inflation.



Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institutions performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the price of goods and services.



26



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Item 2 - continued



Market Prices and Related Shareholder Matters



The stock of the Company is listed on The NASDAQ Stock Markets
National Market System under the symbol BSBN. As of March 31, 2004, the Company had 2,002 shareholders of record and 9,374,643 shares of common stock outstanding. The number of shareholders does not reflect persons or entities who hold their stock
in nominee or street name through various brokerage firms. The following table sets forth the market price information as reported by The NASDAQ Stock Market for the common stock.



|               |  |             |       |      |   |           |  |   |      
|-------------- |  | ----------- | ----- | ---- | - | --------- |  | - | -----
|               |  | Price Range |       | Cash
|2003           |  | High        |       | Low  |   | Dividends
|First Quarter  |  | $           | 23.10 |      | $ | 20.50     |  | $ | 0.25 
|Second Quarter |  | $           | 28.20 |      | $ | 21.15     |  | $ | 0.25 
|Third Quarter  |  | $           | 27.72 |      | $ | 24.25     |  | $ | 0.25 
|Fourth Quarter |  | $           | 40.65 |      | $ | 27.55     |  | $ | 0.25 
|2004           |  |             |       |      |   |          
|First Quarter  |  | $           | 39.90 |      | $ | 38.00     |  |   | $0.25





27



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|Item 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------ | ----------------------------------------------------------



The Companys consolidated results of operations depend to a large extent on the level of its net interest income, which is the difference between
interest income from interest-earnings assets (such as loans and investments) and interest expense on interest-bearing liabilities (such as deposits and borrowings). If interest rate fluctuations cause the Companys cost of funds to increase
faster than the yield on its interest-earning assets, net interest income will decrease. In addition, the market values of most of its financial assets are sensitive to fluctuations in market interest rates. The Company measures and manages its
interest rate risk by focusing on the Companys gap, which is the measure of the mismatch between the dollar amount of the Companys interest-earning assets and interest-bearing liabilities which mature or reprice within
certain time frames.



Based on the Companys latest
analysis of asset/liability mix at March 31, 2004, managements simulation analysis of the effects of changing interest rates on a static balance sheet projected that an immediate 100 basis point parallel increase in interest rates would
increase net interest income by 10.48% or less over a 12-month horizon. For an immediate 200 basis point parallel increase in the level of interest rates, the estimated change in net interest income would be an increase of 14.52% over a 12-month
horizon. The estimated change in net interest income from a 100 basis point parallel decrease in the level of interest rates (presentation is limited to a 100 basis point decline in rates due to the current historically low interest rate
environment) would be an increase of 1.16%. The magnitude of the effects of the declining rate scenario are impacted by the absolute level of rates, and the inability of the Company to reduce its core deposit funding costs by the entire amount of
the change assumed. The simulation analysis is based on a number of assumptions and there can be no assurance that if interest rates did move as assumed that the Companys results of operations would be impacted as estimated. These estimates
and assumptions assume that management takes no action to mitigate any negative effects from changing interest rates. Although the Company uses various techniques to monitor interest rate risk, the Company is unable to predict future fluctuations in
interest rates or the specific related impact.



Changes in
interest rates can also affect the amount of loans the Company originates, as well as the value of its loans and other interest-earning assets and its ability to realize gains on the sale of such assets and liabilities. Prevailing interest rates
also affect the extent to which borrowers prepay loans owned by the Company. When interest rates increase, borrowers are less likely to prepay their loans, and when interest rates decrease, borrowers are more likely to prepay loans. Funds generated
by prepayments might be invested at less favorable interest rates. Prepayments may adversely affect the value of mortgage loans, the levels of such assets that are retained in the Companys portfolio, net interest income, and loan servicing
income. Similarly, prepayments on mortgage-backed securities can adversely affect the value of such securities and the interest income generated by them.



Increases in interest rates might cause depositors to shift funds from accounts that have a comparatively lower cost (such as regular savings accounts) to
accounts with a higher cost (such as certificates of deposits). If the cost of deposits increases at a rate greater than yields on interest-earning assets increase, the interest rate spread will be negatively affected. Changes in the asset and
liability mix also affect the Companys interest rate risk.



The Company faces substantial competition for deposits and loans throughout its market area both from local financial institutions and from out-of-state financial institutions that either solicit deposits or maintain loan production offices
in the Companys market area. The Company competes for deposits and loans primarily with other financial service providers such as savings institutions, commercial banks, credit unions, money market funds, and other investment alternatives. The
Company believes that its ability to compete effectively depends largely on its ability to compete with regard to interest rates, as well as service fees, personalized services, quality and range of financial products and services offered,
convenience of office hours and locations, and automated services.



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|Item 4 | CONTROLS AND PROCEDURES
|------ | -----------------------



(a) The Companys management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the Exchange Act) as of the end of the period covered by this report. Based upon that
evaluation, the Companys management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Companys disclosure controls and procedures are effective in timely alerting them to any material information
relating to the Company and its subsidiaries required to be included in the Companys Exchange Act filings.



(b) There were no changes made in the Companys internal controls over financial reporting or in other factors that could materially affect these internal controls
that occurred during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.



29



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|Item 4 | 
|------ | 



Part II



Item 1 - Legal Proceedings



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



Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



Not applicable



Item 3 - Defaults upon Senior Securities



Not applicable



Item 4 - Submission of Matters to a Vote of Security Holders



Not applicable



Item 5 - Other Information



Not applicable



Item 6  Exhibits and Reports on Form 8-K



| | (a) | Exhibits
| | --- | --------



Exhibit 31.1  Section 302 Certification of Chief Executive Officer



Exhibit 31.2  Section 302 Certification of Chief Financial Officer



Exhibit 32.1  Section 906 Certification of Chief Executive Officer



Exhibit 32.2  Section 906 Certification of Chief Financial Officer



| | (b) | Reports on Form 8-K
| | --- | -------------------



Current Report on Form 8-K filed with the Securities and Exchange Commission (the SEC) on April 28, 2004 announcing earnings for the quarter
ended March 31, 2004.



30



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|      |  |              |  |                   |  |     |  |                                                      
|----- |  | ------------ |  | ----------------- |  | --- |  | -----------------------------------------------------
|      |  |              |  | BSB Bancorp, Inc.
|      |  |              |  |                  
|Date: |  | May 10, 2004 |  |                   |  | By: |  | /s/ Howard W. Sharp                                  
|      |  |              |  |                   |  |     |  |                                                      
|      |  |              |  |                   |  |     |  | HOWARD W. SHARP President and Chief Executive Officer



|      |  |              |  |  |  |     |  |                                                                    
|----- |  | ------------ |  |  |  | --- |  | -------------------------------------------------------------------
|      |  |              |  | 
|Date: |  | May 10, 2004 |  |  |  | By: |  | /s/ Rexford C. Decker                                              
|      |  |              |  |  |  |     |  |                                                                    
|      |  |              |  |  |  |     |  | REXFORD C. DECKER Senior Vice President and Chief Financial Officer



31