##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



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



For the quarterly period ended March 31, 2003



OR



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



For the transition period from
 to



Commission File Number: 0-17177



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BSB Bancorp, Inc.

(Exact name of registrant as specified in its charter)



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|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



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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, 2003: 9,152,736 shares of common stock, $0.01 par value.

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##### Table of Contents



INDEX



|                              |  | PAGE                                                                                 
|----------------------------- |  | -------------------------------------------------------------------------------------
|PART I. FINANCIAL INFORMATION |  |                                                                                      
|                             
|Item 1:                       |  | Interim Financial Statements (unaudited)                                             
|                             
|                              |  |                                                                                      
|                             
|                              |  |                                                                                      
|                             
|                              |  |                                                                                      
|                             
|                              |  |                                                                                      
|                             
|                              |  |                                                                                      
|                             
|                              |  |                                                                                      
|                             
|Item 2:                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             
|Item 3:                       |  | Quantitative and Qualitative Disclosures About Market Risk                           
|                             
|Item 4:                       |  | Controls and Procedures                                                              
|                             
|PART II.
OTHER INFORMATION    |  |                                                                                      
|                             
|                              |  |                                                                                      
|                             
|                              |  |                                                                                      
|                             
|                              |  |                                                                                      
|                             
|                              |  |                                                                                      



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##### Table of Contents



Item 1



BSB BANCORP, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CONDITION (unaudited)



|                                                                                                                                                                           |  | March 31, 2003                                  |           |   | December 31, 2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | --------- | - | ----------------- | -
|                                                                                                                                                                           |  | (In Thousands, Except Share and Per Share Data) |          
|ASSETS                                                                                                                                                                     |  |                                                 |           |   |                   |  
|Cash and due from banks                                                                                                                                                    |  | $                                               | 44,108    |   |                   | $
|Investment securities available for sale, at fair value                                                                                                                    |  |                                                 | 578,607   |   |                   |  
|Investment securities held to maturity (estimated fair value of $0 and $56,093,
respectively)                                                                              |  |                                                 |          |   |                   |  
|Federal Home Loan Bank of New York stock                                                                                                                                   |  |                                                 | 18,293    |   |                   |  
|Loans held for sale                                                                                                                                                        |  |                                                 | 2,783     |   |                   |  
|Loans:                                                                                                                                                                     |  |                                                 |           |   |                   |  
|Commercial                                                                                                                                                                 |  |                                                 | 478,833   |   |                   |  
|Residential real estate                                                                                                                                                    |  |                                                 | 392,579   |   |                   |  
|Consumer                                                                                                                                                                   |  |                                                 | 368,689   |   |                   |  
|Commercial real estate                                                                                                                                                     |  |                                                 | 157,000   |   |                   |  
|                                                                                                                                                                           |  |                                                 |           |   |                   |  
|Total loans                                                                                                                                                                |  |                                                 | 1,397,101 |   |                   |  
|Net deferred costs                                                                                                                                                         |  |                                                 | 2,062     |   |                   |  
|Allowance for loan losses                                                                                                                                                  |  |                                                 | (65,944   | ) |                   |  
|                                                                                                                                                                           |  |                                                 |           |   |                   |  
|Net loans                                                                                                                                                                  |  |                                                 | 1,333,219 |   |                   |  
|                                                                                                                                                                           |  |                                                 |           |   |                   |  
|Bank premises and equipment, net                                                                                                                                           |  |                                                 | 15,097    |   |                   |  
|Accrued interest receivable                                                                                                                                                |  |                                                 | 9,363     |   |                   |  
|Other real estate owned and repossessed assets                                                                                                                             |  |                                                 | 3,668     |   |                   |  
|Bank owned life insurance                                                                                                                                                  |  |                                                 | 20,279    |   |                   |  
|Other assets                                                                                                                                                               |  |                                                 | 30,834    |   |                   |  
|                                                                                                                                                                           |  |                                                 |           |   |                   |  
|Total assets                                                                                                                                                               |  | $                                               | 2,056,251 |   |                   | $
|                                                                                                                                                                           |  |                                                 |           |   |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                       |  |                                                 |           |   |                   |  
|Deposits                                                                                                                                                                   |  | $                                               | 1,448,879 |   |                   | $
|Borrowings                                                                                                                                                                 |  |                                                 | 400,524   |   |                   |  
|Other liabilities                                                                                                                                                          |  |                                                 | 15,902    |   |                   |  
|Company obligated mandatorily redeemable preferred securities of subsidiaries, holding
solely junior subordinated debentures of the Company (Trust preferred securities) |  |                                                 | 48,000    |   |                   |  
|                                                                                                                                                                           |  |                                                 |           |   |                   |  
|Total liabilities                                                                                                                                                          |  |                                                 | 1,913,305 |   |                   |  
|                                                                                                                                                                           |  |                                                 |           |   |                   |  
|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; 11,683,399 and
11,660,726 shares issued                                                             |  |                                                 | 117       |   |                   |  
|Additional paid-in capital                                                                                                                                                 |  |                                                 | 41,992    |   |                   |  
|Retained earnings                                                                                                                                                          |  |                                                 | 136,496   |   |                   |  
|Accumulated other comprehensive income                                                                                                                                     |  |                                                 | 8,107     |   |                   |  
|Treasury stock, at cost: 2,539,538 and 2,223,430 shares                                                                                                                    |  |                                                 | (43,766   | ) |                   |  
|                                                                                                                                                                           |  |                                                 |           |   |                   |  
|Total shareholders equity                                                                                                                                                 |  |                                                 | 142,946   |   |                   |  
|                                                                                                                                                                           |  |                                                 |           |   |                   |  
|Total liabilities and shareholders equity                                                                                                                                 |  | $                                               | 2,056,251 |   |                   | $
|                                                                                                                                                                           |  |                                                 |           |   |                   |  



See
accompanying notes to unaudited interim consolidated financial statements.



1



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##### Table of Contents

Item 1continued



BSB BANCORP, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME (unaudited)



|                                                            |  | Three Months Ended March 31,         
|----------------------------------------------------------- |  | -------------------------------------
|                                                            |  | 2003                                 
|                                                            |  | (In Thousands, Except Per Share Data)
|Interest income:                                            |  |                                      
|Interest and fees on loans                                  |  | $                                    
|Interest on federal funds sold                              |  |                                      
|Interest on investment securities                           |  |                                      
|Interest on loans held for sale                             |  |                                      
|                                                            |  |                                      
|Total interest income                                       |  |                                      
|                                                            |  |                                      
|Interest expense:                                           |  |                                      
|Interest on savings deposits                                |  |                                      
|Interest on time deposits                                   |  |                                      
|Interest on money market deposit accounts                   |  |                                      
|Interest on NOW accounts                                    |  |                                      
|Interest on borrowings                                      |  |                                      
|Interest on trust preferred securities                      |  |                                      
|                                                            |  |                                      
|Total interest expense                                      |  |                                      
|                                                            |  |                                      
|Net interest income                                         |  |                                      
|Provision for loan losses                                   |  |                                      
|                                                            |  |                                      
|Net interest income after provision for loan losses         |  |                                      
|                                                            |  |                                      
|Non-interest income:                                        |  |                                      
|Service charges on deposit accounts                         |  |                                      
|Checkcard interchange fees                                  |  |                                      
|Mortgage servicing fees                                     |  |                                      
|Fees and commissions-brokerage services                     |  |                                      
|Trust fees                                                  |  |                                      
|Income from bank owned life insurance                       |  |                                      
|Gain on sale of securities, net                             |  |                                      
|Gain on sale of credit card portfolio, net                  |  |                                      
|Other income                                                |  |                                      
|                                                            |  |                                      
|Total non-interest income                                   |  |                                      
|                                                            |  |                                      
|Operating expense:                                          |  |                                      
|Salaries, pensions and other employee benefits              |  |                                      
|Building occupancy                                          |  |                                      
|Advertising and promotion                                   |  |                                      
|Professional fees                                           |  |                                      
|Data processing costs                                       |  |                                      
|Services                                                    |  |                                      
|Other real estate owned and repossessed asset expenses, net |  |                                      
|Other expenses                                              |  |                                      
|                                                            |  |                                      
|Total operating expense                                     |  |                                      
|                                                            |  |                                      
|Income before income taxes                                  |  |                                      
|Income tax expense                                          |  |                                      
|                                                            |  |                                      
|Net Income                                                  |  | $                                    
|                                                            |  |                                      
|Earnings per share:                                         |  |                                      
|Basic                                                       |  | $                                    
|Diluted                                                     |  | $                                    
|                                                            |  |                                      



See
accompanying notes to unaudited interim consolidated financial statements.



2



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Item 1continued



BSB BANCORP, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)



|                                                                                           |  | Three Months Ended March 31, |       
|------------------------------------------------------------------------------------------ |  | ---------------------------- | ------
|                                                                                           |  | 2003                         |       
|                                                                                           |  | (Dollars in Thousands)       |       
|Net income                                                                                 |  | $                            | 3,877 
|Other comprehensive loss:                                                                  |  |                              |       
|Net unrealized holding losses on securities available for sale                             |  |                              | (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                  |  |                              | (329  
|                                                                                           |  |                              |       
|Other comprehensive loss, before income tax benefit                                        |  |                              | (1,443
|Income tax benefit on other comprehensive loss                                             |  |                              | 580   
|                                                                                           |  |                              |       
|Other comprehensive loss, net of tax                                                       |  |                              | (863  
|                                                                                           |  |                              |       
|Comprehensive income                                                                       |  | $                            | 3,014 
|                                                                                           |  |                              |       



See
accompanying notes to unaudited interim consolidated financial statements.



3



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Item 1continued



BSB BANCORP, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (unaudited)

(In Thousands, Except
Share and Per Share Data)



|                                                     |  | Three Months Ended March 31, 2002 | 
|---------------------------------------------------- |  | --------------------------------- | 
|                                                     |  | Number of Shares Issued           | 
|Balance at December 31, 2001                         |  | 11,535,500                        | 
|Net income                                           |  |                                   | 
|Other comprehensive loss                             |  |                                   | 
|                                                     |  |                                   | 
|Comprehensive income                                 |  |                                   | 
|                                                     |  |                                   | 
|Stock options exercised                              |  | 72,527                            | 
|Cash dividend paid on common stock ($0.25 per share) |  |                                   | 
|Treasury stock purchased (68,426 shares)             |  |                                   | 
|                                                     |  |                                   | 
|Balance at March 31, 2002                            |  | 11,608,027                        | 
|                                                     |  |                                   | 
|                                                    
|                                                     |  | Three Months Ended March 31, 2003 | 
|Balance at December 31, 2002                         |  | 11,660,726                        | 
|Net income                                           |  |                                   | 
|Other comprehensive loss                             |  |                                   | 
|                                                     |  |                                   | 
|Comprehensive income                                 |  |                                   | 
|                                                     |  |                                   | 
|Stock options exercised                              |  | 22,673                            | 
|Cash dividend paid on common stock ($0.25 per share) |  |                                   | 
|Treasury stock purchased (316,108 shares)            |  |                                   | 
|                                                     |  |                                   | 
|Balance at March 31, 2003                            |  | 11,683,399                        | 
|                                                     |  |                                   | 



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 EndedMarch 31, |         
|--------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --------
|                                                                                                                      |  | 2003                        |         
|                                                                                                                      |  | (In Thousands)              |         
|Operating activities:                                                                                                 |  |                             |         
|Net income                                                                                                            |  | $                           | 3,877   
|Provision for loan losses                                                                                             |  |                             | 3,968   
|Gain on sale of securities, net                                                                                       |  |                             | (329    
|Gain on sale of credit card portfolio, net                                                                            |  |                             |        
|Gain on sale of loans held for sale, bank premises and equipment, other real estate
owned and repossessed assets, net |  |                             | (96     
|Depreciation and amortization                                                                                         |  |                             | 503     
|Net amortization of premiums and discounts on investment securities                                                   |  |                             | 425     
|Proceeds from sale of loans held for sale                                                                             |  |                             | 5,755   
|Loans originated and held for sale                                                                                    |  |                             | (4,462  
|Income from bank owned life insurance                                                                                 |  |                             | (247    
|Writedowns of other real estate owned and repossessed assets                                                          |  |                             | 6       
|Net change in other assets and liabilities                                                                            |  |                             | 5,573   
|                                                                                                                      |  |                             |         
|Net cash provided by operating activities                                                                             |  |                             | 14,973  
|                                                                                                                      |  |                             |         
|Investing activities:                                                                                                 |  |                             |         
|Proceeds from sales of held to maturity investment securities                                                         |  |                             | 9,266   
|Proceeds from calls of held to maturity investment securities                                                         |  |                             |        
|Purchases of held to maturity investment securities                                                                   |  |                             | (1,317  
|Principal collected on held to maturity investment securities                                                         |  |                             | 889     
|Proceeds from sale of available for sale investment securities                                                        |  |                             | 35,396  
|Purchases of available for sale investment securities                                                                 |  |                             | (100,926
|Principal collected on available for sale investment securities                                                       |  |                             | 68,633  
|Purchases of Federal Home Loan Bank (FHLB) stock                                                                    |  |                             | (1,000  
|Redemptions of FHLB stock                                                                                             |  |                             | 2,641   
|Proceeds from sale of credit card portfolio                                                                           |  |                             |        
|Net loans (made to) repaid by customers                                                                               |  |                             | (50,137 
|Proceeds from sale of other real estate owned and repossessed assets                                                  |  |                             | 281     
|Purchases of bank premises and equipment                                                                              |  |                             | (1,038  
|                                                                                                                      |  |                             |         
|Net cash (used in) provided by investing activities                                                                   |  |                             | (37,312 
|                                                                                                                      |  |                             |         
|Financing activities:                                                                                                 |  |                             |         
|Net increase in deposits                                                                                              |  |                             | 6,123   
|Net increase (decrease) in repurchase agreements and FHLB line of credit
advances                                     |  |                             | 12,418  
|Proceeds from FHLB term advances                                                                                      |  |                             | 15,000  
|Repayments of FHLB term advances                                                                                      |  |                             | (5,012  
|Proceeds from exercise of stock options                                                                               |  |                             | 288     
|Purchases of treasury stock                                                                                           |  |                             | (6,998  
|Dividends paid                                                                                                        |  |                             | (2,284  
|                                                                                                                      |  |                             |         
|Net cash provided by (used in) financing activities                                                                   |  |                             | 19,535  
|                                                                                                                      |  |                             |         
|Net (decrease) increase in cash and cash equivalents                                                                  |  |                             | (2,804  
|Cash and cash equivalents at beginning of period                                                                      |  |                             | 46,912  
|                                                                                                                      |  |                             |         
|Cash and cash equivalents at end of period                                                                            |  | $                           | 44,108  
|                                                                                                                      |  |                             |         
|Supplemental information:                                                                                             |  |                             |         
|Cash paid during the period for:                                                                                      |  |                             |         
|Interest on deposits and borrowings                                                                                   |  | $                           | 11,456  
|Income taxes                                                                                                          |  | $                           |        
|                                                                                                                      |  |                             |         
|Non-cash investing activity:                                                                                          |  |                             |         
|Transfers from loans to other real estate owned and repossessed assets                                                |  | $                           | 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                                      |  | $                           | (863    
|                                                                                                                      |  |                             |         



See
accompanying notes to unaudited interim consolidated financial statements.



5



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Item 1continued



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003



|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 statement 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, 2002 Consolidated Statement of Condition is derived from the audited consolidated financial statements included in the Companys 2002 Annual Report to
Shareholders. 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 2002 Annual Report
to Shareholders. The results of operations for the March 31, 2003 interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year ended December 31, 2003, 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 weight-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, 2003 and 2002, respectively.





|                                 |  | Quarters ended March 31,
|-------------------------------- |  | ------------------------
|                                 |  | Net Income              
|2003                             |  |                         
|Basic earnings per share         |  | $                       
|Dilutive effect of stock options |  |                         
|                                 |  |                         
|Diluted earnings per share       |  | $                       
|                                 |  |                         
|Anti-dilutive stock options      |  |                         
|                                 |  |                         
|2002                             |  |                         
|Basic earnings per share         |  | $                       
|Dilutive effect of stock options |  |                         
|                                 |  |                         
|Diluted earnings per share       |  | $                       
|                                 |  |                         
|Anti-dilutive stock options      |  |                         
|                                 |  |                         



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



The Company has a wholly owned 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 securities at a net gain of approximately $726,000.



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Item 1continued



During 2002, two new subsidiaries were formed for the purpose of
issuing additional trust preferred securities which are non-voting and guaranteed by the Company. BSB Capital Trust II (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 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 securities pay interest at the three-month LIBOR plus 335 basis points. The entire net proceeds from Trust II and Trust III were invested in junior subordinated obligations of the Company, which are the sole assets
of the respective trusts. The proceeds from each of these trusts were used for general corporate purposes.



|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 to maturity. As a result, in March 2003, the Company reclassified its entire held to maturity portfolio to available for sale and recognized the
unrealized gain of $312,000 on the transferred securities as a credit to other comprehensive income as of the transfer date. The aggregate amortized cost value of the held to maturity portfolio was $44.9 million, with a fair value of $45.2 million
at the time of the transfer. In addition, as a result of the sale and transfer, the Company is precluded from classifying any newly purchased securities as held to maturity for the foreseeable future.



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



The Company has two stock-based compensation plans which are described more fully in Note 15 to the Consolidated Financial Statements in
the Companys 2002 Annual Report to Shareholders. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No
stock-based compensation cost has been reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on
net income and earnings per share as if the Company had applied the fair value recognition provision of FASB Statement No. 123, Accounting for Stock-Based Compensation, to its stock-based compensation plans.



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



7



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Item 1continued



During the first quarter of 2003, the Company granted 246,116 options
at exercise prices ranging from $20.82 to $21.18 under the stock-based compensation plans in effect. During the first quarter of 2002, the Company granted 235,310 options at exercise prices ranging from $26.05 to $26.93. The weighted average fair
value of options granted during the first quarter of 2003 and 2002 was $4.48 and $6.88, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2003 and 2002, respectively: dividend yield of 4.8% and 3.8%; expected volatility of 32.5% and 31.1%; risk-free interest rate of 3.33% and 4.71%; and expected life of 7.4 years in each year.



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



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



The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby
letters of credit. Standby and other letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing
arrangements, including bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Typically, these instruments have terms of
from 3 months to four years or less and expire unused; therefore, the total 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 certain letter of credit agreements, the Company has pledged as collateral mortgage-backed securities having a
fair value of approximately $3.8 million at March 31, 2003 and $3.3 million at December 31, 2002.



|7. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------



In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which
amends Statement No. 123, Accounting for Stock-Based Compensation. Statement No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In
addition, Statement No. 148 amends the disclosure requirements of Statement No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The Company adopted the new disclosure
requirements of Statement No. 148 as of December 31, 2002, and has provided such disclosures in Note 5 to the Unaudited Interim Consolidated Financial Statements presented above. The Company does not expect that Statement No. 148 will have a
material impact on its results of operations, as the Company does not currently intend on changing its method of accounting for stock-based compensation.



In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others; an Interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN No. 45 requires certain new
disclosures and potential liability-recognition for the fair value at issuance of guarantees that fall within its scope. Under FIN No. 45, the Company does not issue any guarantees that would require liability-recognition or disclosure, other than
its standby letters of credit. The Company has included disclosures related to its standby letters of credit in Note 6 to the Unaudited Interim Consolidated Financial Statements above.



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In January 2003, the FASB issued Interpretation No. 46 (FIN No.
46), Consolidation of Variable Interest Entities. The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities,
noncontrolling interests and results of operations of a VIE need to be included in a companys consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the companys
interest in the VIE is such that the company will absorb a majority of the VIEs expected losses and/or receive a majority of the entitys expected residual returns, if they occur. FIN No. 46 also requires additional disclosures by primary
beneficiaries and other significant variable interest holders. The provisions of this interpretation became effective upon issuance. Management has determined that FIN No. 46 has no material impact on the Companys consolidated financial
position, results of operations or liquidity.



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Item 2



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



General



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, 2003 of $3.9 million or $0.41 per diluted share, compared to net income of $4.0 million or $0.41 per diluted share for the fourth quarter of 2002 and $5.0 million or $0.51 per diluted share for the
first quarter of 2002.



On April 28, 2003, the
Board of Directors declared a quarterly cash dividend of $0.25 per share payable on June 10, 2003 to shareholders of record at the close of business on May 23, 2003.



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, 2003 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, has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Though management has concluded that the current evaluation of
collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Companys allowance for loan losses policy would also require making additional provisions for loan losses. All accounting
policies are important and the reader of the financial statements should review these policies, described in Note 1 to the Consolidated Financial Statements included in the Companys 2002 Annual Report to Shareholders, to gain a greater
understanding of how the Companys financial performance is reported.



Forward-Looking Statements



Certain statements in this quarterly report, 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.



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Item 2continued



Financial Condition



Total assets of the Company increased to $2,056.3 million at
March 31, 2003 from $2,034.7 million at December 31, 2002. In 2003, the Company continues its strategy to improve asset quality and minimize credit risk. To provide flexibility for execution of the Companys strategy, the Company continues to
shift and change the composition of its assets in order to improve the mix of the loan portfolio and to reduce credit risk.



The Companys total loan portfolio increased to $1.4 billion at March 31, 2003 from $1.3 billion at December 31, 2002 with the
primary changes related to increases in real estate loans. Real estate loans increased to $549.6 million at March 31, 2003 from $477.3 million at December 31, 2002. The most significant growth has been in residential mortgages with an increase of
$62.2 million, which represents more than 86% of the overall growth in real estate loans.



In 2003, the Company continued to actively pursue opportunities to be a leader of the residential mortgage business in its primary markets. Residential mortgage loan originations for the first quarter
of 2003 continued to increase with $86.9 million originated compared to $47.2 million in the first quarter of 2002. While there continues to be high demand for residential mortgages within the current historically low interest rate environment, the
Company continued to actively market a fixed-rate, bi-weekly mortgage product, which contributed significantly to the increased origination volume. As a result, the residential loan portfolio increased in categories with shorter durations,
specifically increases of $65.2 million in 10- and 15-year loans, of which $53.6 million were bi-weekly fixed-rate loans. In 2003, to maintain flexibility within the real estate portfolio, the Company continued to sell most residential real estate
loans originated with extended maturities. Sales of residential real estate loans amounted to $5.8 million in first quarter of 2003 compared to $17.5 million for the comparative period in 2002.



The commercial real estate loan portfolio increased to $157.0
million at March 31, 2003 compared to $147.0 million at December 31, 2002. Commercial real estate loan originations were $16.8 million in the first quarter of 2003 compared to $2.0 million for the same period in 2002.



The Company continued to reduce its commercial and industrial
(C&I) loans to focus on improving credit quality by changing the composition of its assets and to reduce credit risk. During the first three months of 2003, the C&I loan portfolio had a net decrease of $13.3 million to $478.8
million at March 31, 2003 from $492.2 million at December 31, 2002. Approximately $1.1 million of this reduction relates to loan charge-offs (see Non-performing Assets), with the remainder of the reduction in commercial loans primarily
attributed to principal reductions and loan pay-offs. During the three-month period ended March 31, 2003, the Company originated $17.9 million of commercial loans compared to $30.8 million for the same period in 2002.



Consumer loans decreased to $368.7 million at March 31, 2003
from $378.0 million at December 31, 2002. An important component of a balanced loan mix, consumer loans help us meet the credit needs of our customers, and the short term nature of these loans shortens the duration of the entire loan portfolio. The
decrease in consumer loans is consistent with the seasonal decline in new and used auto originations during this portion of the year. As a result, the consumer loan portfolio declined principally due to normal pay-downs of the related loans. In
March 2003, new and used auto loan originations improved and exceeded normal loan reductions for the period, especially for used vehicles. New auto loans lagged due to heavy competition in the new car market from auto manufacturers incentives
provided to market their products. Overall consumer loan originations increased to $36.8 million for the first three months of 2003 from $32.9 million for the comparable period in 2002.



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The Companys investment portfolio activity follows the overall objective to meet
the liquidity demands associated with fluctuations in loan demand, as well as fulfilling the regulatory and operational liquidity demands of day-to-day business activities. Investment securities decreased to $596.9 million at March 31, 2003 from
$613.9 million at December 31, 2002. At both dates, mortgage-backed securities, including collateralized mortgage obligations (CMOs), represent approximately 70% of the aggregate portfolio. 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. During the first quarter, continued high levels of prepayments on mortgage-backed
securities impacted the investment portfolio. As a result, the Company maintained sufficient liquidity to provide funding for the increased levels of real estate loans previously described.



In March 2003, the Company sold its entire holdings of certain
corporate securities based upon an internal analysis that anticipated downgrades associated with deteriorating fundamentals of the issuer. These corporate securities 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 increased to $3.7 million at March 31, 2003, primarily due to the addition of one commercial property with a carrying amount of $464,000. Repossessed assets, as a component of this
total, remained constant at $1.6 million at December 31, 2002 as well as March 31, 2003, due to aggressive efforts to reduce the Companys holding period for such assets. Retail market repossession additions, including autos and mobile home
units, for the three months ended March 31, 2003, offset all sales of such repossessed assets for the same period.



Other assets decreased to $30.8 million at March 31, 2003 from $36.3 million at December 31, 2002. The primary factor accounting for the
decrease in other assets is the refund of $5.4 million of federal income taxes.



Total deposits increased to $1,448.9 million at March 31, 2003 compared to $1,442.8 million at December 31, 2002. In response to 2003 marketing efforts, the Company has increased municipal deposits for
the period by $28.9 million. Core deposits, generally deposit accounts other than time deposits, remained relatively stable. With decreased pressure on funding sources, the Company continued to reduce the levels of higher-cost funds with a decrease
in brokered certificates of deposit of $5.0 million from December 31, 2002 to March 31, 2003.



The Companys borrowings increased to $400.5 million at March 31, 2003 from $378.1 million at December 31, 2002. Borrowings at March 31, 2003 included $345.8 million of Federal Home Loan Bank
(FHLB) advances compared to $335.9 million at December 31, 2002. Other borrowings at March 31, 2003 were primarily comprised of $32.6 million of securities sold under agreements to repurchase and use of a $20.0 million FHLB line of
credit. These borrowings, along with deposits, are used to fund the Companys lending and investment activities.



Total shareholders equity decreased by $6.0 million in the first three months of 2003 primarily due to treasury stock purchases of
316,108 shares for $7.0 million. The treasury stock purchases were part of a stock repurchase program authorized by the Companys Board of Directors in October 2002. Shares were repurchased during the period in open market and unsolicited,
negotiated transactions that were subject to availability and prices which were acceptable to the Company. Currently, no additional stock repurchase program has been authorized. Other decreases are attributed to cash dividends paid of $2.3 million
and $0.9 million of other comprehensive losses. These decreases were partially offset by net income for the period of $3.9 million and $288,000 of proceeds from the exercise of stock options.



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Item 2continued



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 loans based on their respective
risks. The system assists management in assessing the adequacy of the allowance for loan losses. Loan ratings are continually reviewed to determine the integrity of the respective ratings.



Total non-performing assets were $47.9 million or 2.33% of total assets at March 31, 2003, compared to $53.7
million or 2.64% of total assets at December 31, 2002, and $59.1 million or 2.87% of total assets at March 31, 2002. Loans are placed on a non-accrual status when, in the judgment of management, the probability of collection of principal or interest
is deemed to be insufficient to warrant further accrual. When a loan is placed in a non-accrual status, previously accrued but unpaid interest is deducted from interest income. Other than with respect to consumer loans, the Company does not accrue
interest on loans greater than 90 days past due unless the estimated fair value of the collateral and active collection efforts are believed to be adequate to result in full recovery.



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, 2003         |        |   | December 31, 2002 |   |        | September 30, 2002 |  |   | June 30,  2002 |   |  | March 31, 2002 |       
|-------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ----------------- | - | ------ | ------------------ |  | - | -------------- | - |  | -------------- | ------
|                                                                           |  | (Dollars in Thousands) |       
|Non-accrual loans:                                                         |  |                        |        |   |                   |   |        |                    |  |   |                |   |  |                |       
|Commercial loans                                                           |  | $                      | 30,078 |   |                   | $ | 34,614 |                    |  | $ | 40,447         |   |  | $              | 39,420
|Residential real estate loans                                              |  |                        | 787    |   |                   |   | 616    |                    |  |   | 755            |   |  |                | 722   
|Commercial real estate loans                                               |  |                        | 821    |   |                   |   | 2,647  |                    |  |   | 4,080          |   |  |                | 1,219 
|Consumer loans                                                             |  |                        | 198    |   |                   |   | 288    |                    |  |   | 365            |   |  |                | 438   
|Troubled debt restructured loans                                           |  |                        | 12,143 |   |                   |   | 12,172 |                    |  |   | 6,219          |   |  |                | 11,915
|                                                                           |  |                        |        |   |                   |   |        |                    |  |   |                |   |  |                |       
|Total non-accrual loans                                                    |  |                        | 44,027 |   |                   |   | 50,337 |                    |  |   | 51,866         |   |  |                | 53,714
|Accruing loans with principal or interest payments 90 days or more
overdue |  |                        | 190    |   |                   |   | 278    |                    |  |   | 357            |   |  |                | 374   
|                                                                           |  |                        |        |   |                   |   |        |                    |  |   |                |   |  |                |       
|Total non-performing loans                                                 |  |                        | 44,217 |   |                   |   | 50,615 |                    |  |   | 52,223         |   |  |                | 54,088
|                                                                           |  |                        |        |   |                   |   |        |                    |  |   |                |   |  |                |       
|Other real estate owned and repossessed assets                             |  |                        | 3,668  |   |                   |   | 3,109  |                    |  |   | 4,980          |   |  |                | 4,872 
|                                                                           |  |                        |        |   |                   |   |        |                    |  |   |                |   |  |                |       
|Total non-performing assets                                                |  | $                      | 47,885 |   |                   | $ | 53,724 |                    |  | $ | 57,203         |   |  | $              | 58,960
|                                                                           |  |                        |        |   |                   |   |        |                    |  |   |                |   |  |                |       
|Total non-performing loans to total loans                                  |  |                        | 3.16   | % |                   |   | 3.76   | %                  |  |   | 3.98           | % |  |                | 4.10  
|                                                                           |  |                        |        |   |                   |   |        |                    |  |   |                |   |  |                |       
|Total non-performing assets to total assets                                |  |                        | 2.33   | % |                   |   | 2.64   | %                  |  |   | 2.77           | % |  |                | 2.86  
|                                                                           |  |                        |        |   |                   |   |        |                    |  |   |                |   |  |                |       



In
addition to the non-accruing troubled debt restructured loans shown in the above schedule, the Company also had accruing loans classified as troubled debt restructured loans totaling $3.6 million, $13.8 million, $5.1 million, $4.9 million and $7.6
million at March 31, 2003, December 31, 2002, September 30, 2002, June 30, 2002, and March 31, 2002, respectively. The Company does not consider these loans to be non-performing.



At March 31, 2003, non-performing commercial real estate loans totaled $821,000 for 3 loans that ranged from
$156,000 to $495,000. At December 31, 2002, non-performing commercial real estate loans were $2.6 million which consisted primarily of loans from one customer relationship of $1.2 million with no other loans in excess of $495,000. During the first
quarter 2003, the $1.2 million non-performing commercial real estate loan was sold for approximately $1.0 million and the balance was charged-off.



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Commercial loans that are in non-accrual status and have not been restructured in a
troubled debt restructuring totaled $30.1 million at March 31, 2003, represents the lowest level for such loans during the periods shown and consisted of 113 loans ranging in size from less than $2,000 to $3.6 million. Non-accrual commercial loans
that have not been restructured in a troubled debt restructuring at December 31, 2002 totaled $34.6 million and consisted of 111 individual loans ranging in size from less than $1,000 to $3.6 million. The level of commercial loans classified as
non-performing reflects the continued economic sluggishness and uncertainty for businesses within the Companys primary markets. All non-performing loans have been internally risk-rated as an integral part of the Companys risk management
and asset quality assessment. Charge-offs of commercial loans amounted to $1.1 million during the quarter ended March 31, 2003 and reduced non-performing loans. In addition, pay-downs or pay-offs of non-accrual commercial loans totaled $8.6 million
during the quarter. New loans of approximately $5.2 million were added to non-accrual to bring the total of commercial and industrial loans in non-accruing status to $30.1 million at March 31, 2003. The three largest relationships entering
non-accrual during the quarter totaled $2.3 million, with the largest single relationship totaling $876,000.



Restructured loans which are also in the non-accrual status (primarily commercial-related loans) at March 31, 2003 were $12.1 million and
consisted of 14 individual loans ranging in size from $2,000 to $3.7 million. At December 31, 2002, restructured loans, which also were in the non-accrual status, totaled $12.2 million and consisted of 14 individual loans ranging in size from
$15,000 to $3.7 million.



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 is generally based upon the present value of expected future cash flows discounted at the historical effective interest rate, except that all loans that have become collateral dependent are measured for impairment based on the fair value of
the collateral. 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. At December 31, 2002, the Companys recorded investment in loans
for which impairment has been recognized in accordance with Statement No. 114 totaled $63.2 million with an impairment allowance aggregating $15.2 million.



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 $65.9 million or 4.72% of
total loans outstanding at March 31, 2003 providing coverage for non-performing loans of 149.14% compared to $63.3 million or 4.69% of total loans at December 31, 2002 with coverage of 124.96%. At March 31, 2002, the coverage of non-performing loans
was 92.39%, as the allowance for loan losses was $52.8 million or 3.83% of total loans outstanding. The improved coverage ratio for non-performing loans is consistent with managements priority to strategically balance the mix of the
Companys loan portfolio and recognize the influence of general economic and business conditions, especially those influencing our regional businesses. Managements assessment of the adequacy of the allowance for loan losses incorporates
an evaluation of the Companys overall loan portfolio, based on both general economic factors and specific factors influencing loans covered by the risk-rating system described above.



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Other asset quality ratios improved as well, with performing loans past due 30-89 days
declining to $4.0 million at March 31, 2003 from $6.1 million at December 31, 2002 and from $14.4 million at March 31, 2002. As noted above, the Company continues to focus on establishing consistent and more conservative underwriting standards, as
well as identifying and managing non-performing assets. The Company has defined potential problem loans to include all accruing loans classified as substandard. By identifying these loans under the Companys current rating system, management is
focused on addressing problems associated with loans before they become non-performing. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related borrowers causes
management to have serious doubt as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as non-performing at some time in the future. Performing substandard loans were
$81.3 million ($3.6 million of which were accruing troubled debt restructured loans) at March 31, 2003, compared to $78.2 million ($12.2 million of which were accruing troubled debt restructured loans) at December 31, 2002 and $99.6 million ($7.6
million of which were accruing troubled debt restructured loans) at March 31, 2002. Potential problem loans at March 31, 2003 primarily consisted of commercial and industrial loans.



The allowance for loan losses required a quarterly provision for loan losses of $4.0 million in the first
quarter of 2003, compared to $9.8 million for the fourth quarter of 2002 and a $5.2 million provision in the first quarter of 2002. Net charge-offs were $1.3 million and $11.2 million for the first quarters of 2003 and 2002, respectively. The lower
provision in the first quarter of 2003 as compared to the first quarter of 2002 was due primarily to lower levels of non-performing loans and net charge-offs.



Commercial loan charge-offs have decreased significantly to $1.1 million from $7.3 million in the fourth quarter of 2002 and $10.3 million
in the first quarter of 2002. While commercial loan charge-offs are significantly down in the first quarter of 2003 compared to prior quarters of 2002, and given the continued level of non-performing loans, management expects that net charge-offs in
the next few quarters could be higher than net charge-offs in the first quarter of 2003. Management continually reviews the adequacy of the allowance for loan losses. At March 31, 2003, the allowance was considered adequate by management.



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



|                                             |  | Quarters Ended         |          
|-------------------------------------------- |  | ---------------------- | ---------
|                                             |  | March 31, 2003         |          
|                                             |  | (Dollars in Thousands) |          
|Average total loans outstanding              |  | $                      | 1,363,637
|                                             |  |                        |          
|Allowance at beginning of period             |  | $                      | 63,250   
|Charge-offs:                                 |  |                        |          
|Commercial loans                             |  |                        | 1,102    
|Consumer loans                               |  |                        | 977      
|Residential real estate loans                |  |                        | 30       
|Commercial real estate loans                 |  |                        | 208      
|                                             |  |                        |          
|Total loans charged-off                      |  |                        | 2,317    
|                                             |  |                        |          
|Recoveries                                   |  |                        | 1,043    
|                                             |  |                        |          
|Net charge-offs                              |  |                        | 1,274    
|                                             |  |                        |          
|Provision for loan losses                    |  |                        | 3,968    
|                                             |  |                        |          
|Allowance at end of period                   |  | $                      | 65,944   
|                                             |  |                        |          
|                                            
|Ratio of net charge-offs to:                 |  |                        |          
|Average total loans outstanding (annualized) |  |                        | 0.37     
|Ratio of allowance to:                       |  |                        |          
|Non-performing loans                         |  |                        | 149.14   
|Period-end loans outstanding                 |  |                        | 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, 2003, total ORE and repossessed assets totaled $3.7 million compared to $3.1 million
at December 31, 2002. The largest factor in the increase was the addition of 2 commercial properties totaling $495,000. Other repossessed assets primarily totaled commercial equipment representing former collateral on certain commercial loans, as
well as consumer loan collateral including vehicles and mobile home units. Other repossessed assets totaled $1.6 million at both March 31, 2003 and December 31, 2002. Consumer loan repossessions represent 26.9% and 23.9% of the respective balances.
One commercial repossession represents $1.2 million of the total balance at both March 31, 2003 and December 31, 2002.



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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, the level of other income, including gains or losses on sale of loans and securities, and other fees.



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



|                                                                  |  | Three Months Ended March 31, |          
|----------------------------------------------------------------- |  | ---------------------------- | ---------
|                                                                  |  | 2003 Average Balance         |          
|                                                                  |  |                              |          
|                                                                  |  | (Dollars in Thousands)       |          
|Interest-earning assets:                                          |  |                              |          
|Commercial loans                                                  |  | $                            | 477,316  
|Consumer loans:                                                   |  |                              |          
|Personal-direct                                                   |  |                              | 66,660   
|Personal-indirect                                                 |  |                              | 264,554  
|Other(1)                                                          |  |                              | 43,539   
|                                                                  |  |                              |          
|Total consumer loans                                              |  |                              | 374,753  
|                                                                  |  |                              |          
|Real estate loans:                                                |  |                              |          
|Residential-fixed                                                 |  |                              | 297,029  
|Commercial-fixed                                                  |  |                              | 38,169   
|Residential-adjustable                                            |  |                              | 67,119   
|Commercial-adjustable                                             |  |                              | 111,222  
|                                                                  |  |                              |          
|Total real estate loans                                           |  |                              | 513,539  
|                                                                  |  |                              |          
|Investment securities(2)                                          |  |                              | 563,025  
|Loans held for sale                                               |  |                              | 1,993    
|Federal funds sold                                                |  |                              | 21,468   
|                                                                  |  |                              |          
|Total interest-earning assets                                     |  |                              | 1,952,094
|                                                                  |  |                              |          
|Allowance for loan losses                                         |  |                              | (65,036  
|Non-interest-earning assets                                       |  |                              | 133,003  
|                                                                  |  |                              |          
|Total assets                                                      |  | $                            | 2,020,061
|                                                                  |  |                              |          
|Interest-bearing liabilities:                                     |  |                              |          
|Deposits:                                                         |  |                              |          
|Savings                                                           |  | $                            | 176,044  
|Money market                                                      |  |                              | 349,150  
|Time deposits                                                     |  |                              | 641,785  
|NOW                                                               |  |                              | 121,243  
|                                                                  |  |                              |          
|Total deposits                                                    |  |                              | 1,288,222
|Borrowings                                                        |  |                              | 376,997  
|Trust preferred securities                                        |  |                              | 48,000   
|                                                                  |  |                              |          
|Total interest-bearing liabilities                                |  |                              | 1,713,219
|                                                                  |  |                              |          
|Non-interest-bearing liabilities                                  |  |                              | 16,975   
|Commercial checking                                               |  |                              | 142,588  
|Shareholders equity                                              |  |                              | 147,279  
|                                                                  |  |                              |          
|Total liabilities and shareholders equity                        |  | $                            | 2,020,061
|                                                                  |  |                              |          
|Net interest income                                               |  |                              |          
|                                                                  |  |                              |          
|Net earning assets                                                |  | $                            | 238,875  
|                                                                  |  |                              |          
|Net interest rate spread                                          |  |                              |          
|                                                                  |  |                              |          
|Net interest rate margin                                          |  |                              |          
|                                                                  |  |                              |          
|Ratio of interest-earnings assets to interest-bearing liabilities |  |                              |          
|                                                                  |  |                              |          

---

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

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



No tax equivalent adjustments were made.



17



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##### Table of Contents

Item 2continued



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, 2003 Compared to 2002 Increase
(Decrease) |       
|------------------------------------------------- |  | ---------------------------------------------------------------------- | ------
|                                                  |  | Volume                                                                 |       
|                                                  |  | (Dollars in Thousands)                                                 |       
|Interest income on interest-earning assets:       |  |                                                                        |       
|Commercial loans                                  |  | $                                                                      | (3,744
|Consumer loans                                    |  |                                                                        | 115   
|Real estate loans                                 |  |                                                                        | 2,575 
|Investment securities                             |  |                                                                        | 724   
|Loans held for sale                               |  |                                                                        | (96   
|Federal funds sold                                |  |                                                                        | (15   
|                                                  |  |                                                                        |       
|Total                                             |  | $                                                                      | (441  
|                                                  |  |                                                                        |       
|Interest expense on interest-bearing liabilities: |  |                                                                        |       
|Savings                                           |  | $                                                                      | 29    
|Money market                                      |  |                                                                        | (81   
|Time deposits                                     |  |                                                                        | (542  
|NOW                                               |  |                                                                        | (3    
|                                                  |  |                                                                        |       
|Total                                             |  |                                                                        | (597  
|                                                  |  |                                                                        |       
|Borrowings                                        |  |                                                                        | 547   
|Trust preferred securities                        |  |                                                                        | 310   
|                                                  |  |                                                                        |       
|Total                                             |  |                                                                        | 260   
|                                                  |  |                                                                        |       
|Net interest income                               |  | $                                                                      | (701  
|                                                  |  |                                                                        |       



Interest Income



The
Companys interest income on interest-earning assets decreased to $29.4 million for the quarter ended March 31, 2003 from $33.7 million for the same period in 2002. Quarterly interest income decreased primarily as the result of the decline in
the average yield on interest-earning assets to 6.02% from 6.81% for the quarters ended March 31, 2003 and 2002, respectively. In the current quarter, the impact of declining yields was accompanied by an overall decrease in the average balance of
interest-earning assets, principally attributed to decreases in the Companys commercial loan portfolio consistent with the Companys current strategy to reduce credit risk and to improve credit quality. As noted earlier, increases in real
estate loans have been a key element of the overall strategy to stabilize Company earnings. Similarly, increases in the investment securities portfolio have provided the Company flexibility to meet the requirements necessary to redistribute risk
within the Companys loan portfolio.



General interest rates continued at low levels into the first quarter of 2003 producing overall lower yields for all elements of the Companys earning assets. The Companys strategy of improving credit quality and reducing
overall credit risk also generally contributes to declining yields in periods with declining interest margins. Though aggregate average balances for the three-month period ended March 31, 2003 declined from the same period in 2002, the most dramatic
decline occurred within the commercial loan portfolio. The average balance of C&I loans decreased $233.1 million from the first quarter of 2002 to $477.3 million for the first quarter of 2003. In addition, the average yield on commercial loans
decreased to 6.41% for the first quarter of 2003 from 6.59% for the first quarter of 2002.



18



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##### Table of Contents

Item 2continued



The Company continued to modify the mix of its overall loan portfolio with an increase
in the average balance of its overall real estate loan portfolio to $513.5 million for the first quarter of 2003, up $156.4 million from the same quarter in 2002. The increase in average balance for the comparative quarters more than offset the
decrease in the average yield to 6.28% from 7.44% for the comparable quarter in 2002, and interest income from these loans increased $1.4 million to $8.1 million for the first quarter compared to the same period last year. The most significant
increase in the real estate loan portfolio is associated with the fixed-rate residential loans. In this category, the average balance increased 32.8% to $297.0 million from the same period in the previous year. The Companys bi-weekly and
15-year mortgage products have been well received within the Companys primary markets supporting efforts to meet the demands for such loans within a broad-based refinancing market associated with the current historically low interest rate
environment. The Company continues to originate residential mortgage loans, principally with fixed rates, and currently retains all current production of the residential mortgages with maturities of 20 years or less. In addition, the Company retains
all 30-year, bi-weekly fixed-rate loans.



Interest income earned from the consumer loan portfolio, which includes principally fixed-rate loans with short terms, continued to be adversely impacted by declines in interest rates for the quarter ended March 31, 2003 when
compared to the same period in 2002. Despite the high competition for consumer loans throughout 2002 and into 2003, the Company was able to maintain or increase the average balances for most consumer loan products, especially indirect used car
loans. The average balances for all consumer loans increased $5.5 million to $374.8 million for the quarter ended March 31, 2003 from $369.3 million for the quarter ended March 31, 2002. The average yield on all consumer loans decreased to 6.94% in
comparison to 8.63% for the same quarter in 2002. The average yield and volume for the comparative quarter in 2002 included the credit card portfolio which was sold in March 2002.



During the past year, investment securities, principally mortgage-backed securities, have been utilized to
provide flexibility for the Company to redistribute liquidity within the loan portfolio. The average balance of investment securities increased to $563.0 million for the first quarter of 2003 from $508.5 million for the first quarter of 2002.
However, the decrease in yields on investment securities offset the increase from the higher average balances. The relative yields were also influenced by the amortization of any premiums incurred to acquire such investment securities, especially
mortgage-backed securities. As prepayments have increased due to the low rate environment, the Company is required to accelerate the premium amortization, which decreases the overall yields. The yield on investment securities decreased to 5.04% from
5.60% for the quarters ended March 31, 2003 and 2002, respectively. The cumulative impact on interest income from investment securities was minimal as interest income decreased by $30,000 to $7.1 million for the respective periods.



Interest income on loans held for sale decreased to $26,000
from $149,000 for the comparative quarters principally due to the Companys strategy for most of the interim period to retain the majority of current real estate loan production within its portfolio. Interest income from federal funds sold
declined to $66,000 in the first quarter of 2003 compared to $113,000 in 2002 primarily due to the decline in the average yield to 1.23% from 1.79% for the same periods.



Interest Expense



Total interest expense decreased by $2.6 million to $10.9 million for the quarter ended March 31, 2003
compared to the same period in 2002. The average balance of all interest-bearing liabilities increased to $1,713.2 million for the quarter ended March 31, 2003 from $1,704.8 million for the same quarter in 2002. During the respective periods, the
average rate paid on all interest-bearing liabilities decreased to 2.54% from 3.16%. The average balance of deposits decreased to $1,288.2 million during the three months ended March 31, 2003 from $1,357.3 million during the same period in 2002. The
primary elements of change within the deposit liabilities category relate to the decreases attributed to time deposits and money market accounts. The time deposits category reflected a net decrease in average balances to $641.8 million from $695.8
million for the respective quarters ended March 31, 2003 and 2002, respectively, with the related interest expense decreasing by $2.3 million or 31.2% to $5.1 million. Time deposits, by their nature, are longer term and generally have comparatively
higher rates than other deposit types. Shifts to or increases in lower interest core deposits provide improvement to the Companys interest margin. In addition, money market accounts, which are tied to short-term money-market indices, decreased
in average balance to $349.2 million from $370.5 million for the comparative quarters, and the related interest expense declined 26.4% to $1.1 million. Some benefit from lower interest rates will continue to be felt over future periods as time
deposits mature and are repriced. The future benefit related to the repricing will not be as significant due to the lower volume of such deposits, and the fact that rates may not be able to be reduced much further from current levels.



19



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##### Table of Contents

Item 2continued



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. Though the cost of such funds can approximate the costs of wholesale funds, there is less volatility in comparison and such funds facilitate planning for liquidity needs.
The average balance of borrowings increased to $377.0 million for the quarter ended March 31, 2003 compared to $317.5 million for the same quarter in 2002. The cost of the increased average balances was partially offset by the decrease in the rate
paid on borrowings to 3.63% from 3.83% during the respective quarters. Interest expense associated with trust preferred securities increased to $778,000 for the period primarily due to the increased amounts outstanding associated with new issues for
Trust II and Trust III subsequent to March 31, 2002.



Net Interest Income



Net interest income declined to $18.5 million from $20.2 million for the three months ended March 31, 2003 and 2002, respectively. Such decline is consistent with the steady overall decline in general interest rates discussed above,
as well as the impact of the Companys current strategy to shift the overall mix of the loan portfolio to lower yielding but higher quality or lower risk loans. For the near term, continued pressure on net interest income is expected as the
ability to reduce core funding costs becomes more difficult.



The Companys net interest margin decreased 30 basis points to 3.79% for the first quarter of 2003 compared to the margin of 4.09% for the first quarter of 2002. For the respective quarters, the decline reflects the inability to
lower the cost of funds as rapidly as asset yields declined.



Provision for Loan Losses



The first quarter 2003 provision for loan losses was $4.0 million compared to $9.8 million for the fourth quarter of 2002 and $5.2 million for the first quarter of 2002. Based on the general economic
sluggishness and uncertainty of the economy within the Companys primary market area, as well as the continued high level of non-performing loans, management expects that the provision for loan losses will remain at the current level or may
increase in the near-term. The allowance for loan losses increased to $65.9 million as of March 31, 2003 compared to $63.3 million as of December 31, 2002 and $52.8 million at March 31, 2002. See Non-performing Assets.



Management maintains the allowance for loan losses at an
amount sufficient to cover the level of estimated losses inherent in the loan portfolio. The risk of loss in the loan portfolio is estimated based on a periodic review of the loan portfolio and its specific problem loans, historic loss experience
and other factors that management believes are pertinent to the determination of the allowance. These factors include the risks inherent in specific types of loans, an analysis of the collateral associated with certain loans and the economic
conditions impacting the loan portfolio.



The
Company continues its progress in reducing delinquent loans with loans 30-89 days past due at March 31, 2003 totaling $4.0 million or 0.30% of total gross loans outstanding. Comparative amounts were $6.1 million or 0.50% of total gross loans
outstanding at December 31, 2002, and $14.4 million or 1.04% of total gross loans outstanding at March 31, 2002.



For first quarter 2003, gross loan charge-offs were $2.3 million compared to fourth quarter 2002 gross loan charge-offs of $8.3 million
and $12.0 million in the first quarter 2002. Recoveries were $1.0 million for the first quarter 2003, compared to $2.0 million in the fourth quarter 2002 and $761,000 in the first quarter 2002. Though net charge-offs are down, given the continued
high level of non-performing loans, management expects that net charge-offs for the next few quarters could be higher than net charge-offs in the first quarter of 2003. The coverage ratio of the allowance for loan losses to non-performing loans was
149.14% at March 31, 2003, compared to 124.96% at December 31, 2002 and 92.39% at March 31, 2002. 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. The allowance for loan losses and net charge-offs were shown earlier in this report in a table that summarizes activity in allowance for
loan losses. The allowance for loan losses at March 31, 2003 reflects managements best estimate of probable loan losses.



20



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##### Table of Contents

Item 2continued



Non-interest Income



Non-interest income decreased to $3.3 million for the quarter
ended March 31, 2003 compared to $4.8 million for the quarter ended March 31, 2002. The primary factor impacting the overall decrease in non-interest income was the $1.8 million net gain on the sale of the Companys credit card portfolio in the
first quarter of 2002. Excluding such gain, non-interest income would have increased $290,000 in the first quarter 2003 in comparison to the same quarter of 2002. The first quarter 2003 includes $247,000 of income on bank owned life insurance,
initially acquired in December 2002. Net gains on the sale of securities were $329,000 for the first quarter of 2003 compared to gains of $81,000 for the same quarter of 2002. Such gains were substantially offset by decreases of $75,000 in trust
fees, $67,000 in mortgage servicing fees, and $30,000 in brokerage services fees and commissions.



Operating Expense



Operating expense increased to $12.1 million for the quarter ended March 31, 2003 compared to $11.8 million for the quarter ended March
31, 2002. Significant increases in operating expense for the comparative first quarters related to professional fees, as well as advertising and promotion fees. Professional fees, which increased $227,000, were associated with legal costs associated
with the level of problematic credits. Advertising and promotion costs increased by $160,000 for the comparative quarters, associated with extended media promotions for specific loan products and checking and other deposit accounts.



Total salaries, pensions and other employee benefits cost
increased approximately $117,000 for the first quarter 2003 compared to first quarter 2002. The primary increase in employee benefits relates to increases in pension costs that are expected to continue through 2003.



The decline in data processing cost of $186,000 in the first
quarter 2003 versus the first quarter 2002 is related to the conversion to Proof of Deposit (POD) processing, as this system enabled the Bank to realize operational benefits that include efficiencies at the teller line,
consistency in float management and a more efficient, centralized fee monitoring and assessment system.



The efficiency ratio for a bank is generally the ratio of total operating expenses to the aggregate total of net interest income plus
total non-interest income. Certain non-recurring income, such as the gain on the sale of the credit card portfolio in 2002, has been excluded from the comparative ratio calculation. The Companys efficiency ratio for the first quarter of 2003
was 55.24%, compared to 50.86% for the three months ended March 31, 2002. The increase in the efficiency ratio was due to the reductions in net interest income, as well as the increases in costs as detailed above.



Income tax expense reflects a substantial decrease in the
projected annual effective tax rate to 33.2% for the year-to-date March 31, 2003 compared to 37.4% for the same period in the previous year. The decrease in the effective tax rate is primarily attributed to comparable levels of tax exempt income in
both periods, as well as the benefit of significant new state income tax credits recognized for 2002 and 2003 on substantially lower levels of projected pre-tax income.



Liquidity and Capital Resources



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



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, 2003, outstanding FHLB advances totaled
$345.9 million. In addition, the Company through various facilities, has unused capacity to access per Board approved policy limits, up to $400.0 million of brokered deposits of which $95.0 million was outstanding at March 31, 2003.



Factors that affect the Companys liquidity position
include loan origination volumes, loan prepayment rates, maturity structure of existing loans, core deposit growth levels, certificate of deposit maturity structure and retention,



21



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##### Table of Contents

Item - continued



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 $15.0 million for the three months ended March 31, 2003 compared to $9.2 million for the same
period in 2002. The comparative impact of net income on operating cash flow was $3.9 million in 2003, and $5.0 million in 2002. Changes in the provision for loan losses was generally the most significant operating source of funds providing $4.0
million in the three months ended March 31, 2003 compared to $5.0 million in the same period in 2002. The sale proceeds of loans held for sale provided operating funds consistent with, and fluctuating based on the level and turnover of the
portfolio. Based on the Companys assessment of future interest rate fluctuations, loan risk and market conditions during each period, the Company will sell or accumulate loans originated by its banking operations within its market area.



Investing activities used net cash of $37.3
million for the three months ended March 31, 2003, whereas investing activities provided operating cash of $19.6 million for the same period in 2002. The change in investing activities as a source of funds reflects the Companys shift in
emphasis between securities investments and additional loan activities, especially for the growth in the residential loan portfolio which started in the later part of 2002. Proceeds from the 2002 sale of the Companys credit card portfolio
provided $12.7 million of cash flow.



Financing
activities provided net cash of $19.5 million during the first quarter of 2003. Short-term borrowings increased by $12.4 million during the period. Long-term borrowings were utilized to provide cash for financing activities with proceeds exceeding
repayments by $10.0 million in 2003. In 2002, the Company had a net use of funds from financing activities of $2.5 million, mainly for repayment of repurchase agreements and FHLB line of credit advances, particularly brokered time deposits, which
was offset by the net increase in long-term borrowings of $35.0 million.



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 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 2004.



The Company issued a total of $25.0 million of trust preferred securities during 2002. A portion of the net
proceeds was used to repurchase shares of the Companys common stock, and the remainder was utilized for liquidity and general corporate purposes. In the first quarter of 2003, the Company acquired an additional 316,108 shares of common stock
at a total cost of $7.0 million. The common shares were repurchased under authorized and announced Stock Repurchase Programs, the most recent of which was announced during the fourth quarter of 2002 and has been completed. Currently, no additional
stock repurchase program has been authorized.



At
March 31, 2003, BSB Bancorp, Inc., on an unconsolidated basis, had immediately available funds totaling $27.5 million. Management believes current levels of cash are adequate to meet the Companys anticipated ordinary obligations in 2003, to
pay customary cash dividends on the Companys common stock in 2003, 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.



22



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##### Table of Contents



At March 31,
2003, the Banks Tier I leverage ratio, as defined by regulatory guidelines, was 7.72%, up from 7.31% at December 31, 2002, and still 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 12.26%, up from 11.90% at December 31, 2002, and still in excess of the regulatory requirements. The change in these ratios is primarily the result of the net income in the
first quarter of 2003.



The Companys book
value per share was $15.63 at March 31, 2003 compared to $15.78 at December 31, 2002 and $16.18 at March 31, 2002. The principal reason for the decline in the book value per share relates to the repurchase of treasury stock, discussed above, at
market prices in excess of book value.



Impact of Inflation and Changing Prices



The 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.



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, 2003, the Company had 2,203 shareholders of record and 9,143,861 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 Dividends
|-------------- |  | ----------- | ----- | --------------
|2002           |  | High        |       | Low           
|First Quarter  |  | $           | 30.24 |               
|Second Quarter |  | $           | 32.80 |               
|Third Quarter  |  | $           | 26.70 |               
|Fourth Quarter |  | $           | 23.39 |               
|              
|2003           |  |             |       |               
|First Quarter  |  | $           | 23.10 |               



23



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##### Table of Contents



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, 2003, managements simulation analysis of the effects of changing interest rates on a static balance sheet projected that an immediate 100 basis point increase in interest rates would increase net interest
income by 1.92% 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 3.28% over a 12-month horizon. The estimated
change in net interest income for a 100 basis point 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 a decrease of 4.21%.
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 impact thereof.



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.



24



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##### Table of Contents



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
Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) (the Exchange Act) as of a date (the Evaluation Date) within 90 days prior to the filing date of this report. Based upon that evaluation, the
Companys management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures were 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 significant changes made in the Companys internal controls or in other factors that could significantly affect
these internal controls subsequent to the date of the evaluation performed by the Companys Chief Executive Officer and Chief Financial Officer.



25



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##### Table of Contents



Part II.
OTHER INFORMATION



Item 1Legal Proceedings



Not applicable



Item 2Changes in Securities and Use of Proceeds



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
|  
|  
|  
|  
|  
|(b
|  
|  
|  
|  



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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 15, 2003 |  |  |  | By:              
|                    |  |  |  |                  
|                    |  |  |  |                  
|                   
|Date:  May 15, 2003 |  |  |  | By:              
|                    |  |  |  |                  



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##### Table of Contents

CERTIFICATION



I, Howard W. Sharp, certify
that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of BSB Bancorp, Inc.;
| | -- |  | ------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date:  May 15, 2003



|   
|---
|By:
|   



28



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##### Table of Contents



CERTIFICATION



I, Rexford C. Decker, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of BSB Bancorp, Inc.;
| | -- |  | ------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date:  May 15, 2003



|   
|---
|By:
|   



29