---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended September 30, 2003



OR



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



For the transition period from
 to



Commission File Number: 0-17177



BSB Bancorp, Inc.

(Exact name of
registrant as specified in its charter)



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



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



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



n/a

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



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



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



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. As of November 5, 2003: 9,186,995 shares of common stock, $0.01 par value.



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INDEX



|         |  |                                                                                                                              |  | PAGE 
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | -----
|         |  |                                                                                                                             
|PART I.  |  | FINANCIAL INFORMATION                                                                                                        |  |      
|         |  |                                                                                                                             
|Item 1:  |  | Interim Financial Statements (unaudited)                                                                                     |  |      
|         |  |                                                                                                                             
|         |  | Consolidated Statements of Condition September 30, 2003 and December 31, 2002                                                |  | 1    
|         |  |                                                                                                                             
|         |  | Consolidated Statements of Operations Three Months and Nine Months Ended September 30, 2003 and September 30, 2002           |  | 2    
|         |  |                                                                                                                             
|         |  | Consolidated Statements of Comprehensive Income Three Months and Nine Months Ended September 30, 2003 and September 30,
2002 |  | 3    
|         |  |                                                                                                                             
|         |  | Consolidated Statements of Changes in Shareholders Equity Nine Months Ended September 30, 2003 and September 30,
2002       |  | 4    
|         |  |                                                                                                                             
|         |  | Consolidated Statements of Cash Flows Nine Months Ended September 30, 2003 and September 30, 2002                            |  | 5    
|         |  |                                                                                                                             
|         |  | Notes to Unaudited Interim Consolidated Financial Statements                                                                 |  | 6-9  
|         |  |                                                                                                                             
|Item 2:  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                        |  | 10-28
|         |  |                                                                                                                             
|Item 3:  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                   |  | 29   
|         |  |                                                                                                                             
|Item 4:  |  | Controls and Procedures                                                                                                      |  | 30   
|         |  |                                                                                                                             
|PART II. |  | OTHER INFORMATION                                                                                                            |  |      
|         |  |                                                                                                                             
|Item 1:  |  | Legal Proceedings                                                                                                            |  | 31   
|         |  |                                                                                                                             
|Item 2:  |  | Changes in Securities and Use of Proceeds                                                                                    |  | 31   
|         |  |                                                                                                                             
|Item 3:  |  | Defaults Upon Senior Securities                                                                                              |  | 31   
|         |  |                                                                                                                             
|Item 4:  |  | Submission of Matters to a Vote of Security Holders                                                                          |  | 31   
|         |  |                                                                                                                             
|Item 5:  |  | Other Information                                                                                                            |  | 31   
|         |  |                                                                                                                             
|Item 6:  |  | Exhibits and Reports on Form 8-K                                                                                             |  | 31   
|         |  |                                                                                                                             
|         |  | Signatures                                                                                                                   |  | 32   



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Item 1



BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)



|(In Thousands, Except Share and Per Share Data)                                                                   |  | September 30, 2003 |           |   | December 31, 2002 |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ----------------- | -
|                                                                                                                  |  |                   
|ASSETS                                                                                                            |  |                    |           |   |                   |  
|Cash and due from banks                                                                                           |  | $                  | 46,206    |   |                   | $
|Investment securities available for sale, at fair value                                                           |  |                    | 616,235   |   |                   |  
|Investment securities held to maturity (estimated fair value of $56,093 at December 31, 2002)                     |  |                    |          |   |                   |  
|Federal Home Loan Bank of New York stock                                                                          |  |                    | 23,327    |   |                   |  
|Loans held for sale                                                                                               |  |                    | 11,862    |   |                   |  
|                                                                                                                  |  |                   
|Loans:                                                                                                            |  |                    |           |   |                   |  
|Commercial                                                                                                        |  |                    | 390,996   |   |                   |  
|Residential real estate                                                                                           |  |                    | 513,039   |   |                   |  
|Consumer                                                                                                          |  |                    | 374,164   |   |                   |  
|Commercial real estate                                                                                            |  |                    | 174,589   |   |                   |  
|                                                                                                                  |  |                    |           |   |                   |  
|Total loans                                                                                                       |  |                    | 1,452,788 |   |                   |  
|Net deferred costs                                                                                                |  |                    | 3,074     |   |                   |  
|Allowance for loan losses                                                                                         |  |                    | (61,382   | ) |                   |  
|                                                                                                                  |  |                    |           |   |                   |  
|Net loans                                                                                                         |  |                    | 1,394,480 |   |                   |  
|                                                                                                                  |  |                    |           |   |                   |  
|                                                                                                                  |  |                   
|Bank premises and equipment, net                                                                                  |  |                    | 15,441    |   |                   |  
|Accrued interest receivable                                                                                       |  |                    | 8,394     |   |                   |  
|Other real estate owned and repossessed assets                                                                    |  |                    | 1,696     |   |                   |  
|Bank owned life insurance                                                                                         |  |                    | 20,784    |   |                   |  
|Other assets                                                                                                      |  |                    | 34,679    |   |                   |  
|                                                                                                                  |  |                    |           |   |                   |  
|Total assets                                                                                                      |  | $                  | 2,173,104 |   |                   | $
|                                                                                                                  |  |                    |           |   |                   |  
|                                                                                                                  |  |                   
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                              |  |                    |           |   |                   |  
|Deposits                                                                                                          |  | $                  | 1,484,254 |   |                   | $
|Borrowings                                                                                                        |  |                    | 479,948   |   |                   |  
|Other liabilities                                                                                                 |  |                    | 18,481    |   |                   |  
|Company obligated mandatorily redeemable preferred securities of subsidiary trusts (Trust preferred
securities) |  |                    | 46,500    |   |                   |  
|                                                                                                                  |  |                    |           |   |                   |  
|Total liabilities                                                                                                 |  |                    | 2,029,183 |   |                   |  
|                                                                                                                  |  |                    |           |   |                   |  
|                                                                                                                  |  |                   
|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; 11,714,297 and 11,660,726 shares issued    |  |                    | 117       |   |                   |  
|Additional paid-in capital                                                                                        |  |                    | 42,572    |   |                   |  
|Retained earnings                                                                                                 |  |                    | 140,108   |   |                   |  
|Accumulated other comprehensive income                                                                            |  |                    | 4,890     |   |                   |  
|Treasury stock, at cost: 2,539,538 and 2,223,430 shares                                                           |  |                    | (43,766   | ) |                   |  
|                                                                                                                  |  |                    |           |   |                   |  
|Total shareholders equity                                                                                        |  |                    | 143,921   |   |                   |  
|                                                                                                                  |  |                    |           |   |                   |  
|Total liabilities and shareholders equity                                                                        |  | $                  | 2,173,104 |   |                   | $
|                                                                                                                  |  |                    |           |   |                   |  



See accompanying notes
to unaudited interim consolidated financial statements.



1



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|Item 1  continued |  | 
|------------------ |  | 



BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)



|                                                            |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30, |  
|----------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | -
|(In Thousands, Except Per Share Data)                       |  | 2003                            |        | 2002                           |  
|Interest income:                                            |  |                                 |        |                                |  
|Interest and fees on loans                                  |  | $                               | 21,708 |                                | $
|Interest on federal funds sold                              |  |                                 | 1      |                                |  
|Interest on investment securities                           |  |                                 | 6,269  |                                |  
|Interest on loans held for sale                             |  |                                 | 175    |                                |  
|                                                            |  |                                 |        |                                |  
|Total interest income                                       |  |                                 | 28,153 |                                |  
|                                                            |  |                                 |        |                                |  
|Interest expense:                                           |  |                                 |        |                                |  
|Interest on savings deposits                                |  |                                 | 306    |                                |  
|Interest on time deposits                                   |  |                                 | 4,368  |                                |  
|Interest on money market deposit accounts                   |  |                                 | 1,177  |                                |  
|Interest on NOW accounts                                    |  |                                 | 51     |                                |  
|Interest on borrowings                                      |  |                                 | 3,893  |                                |  
|Interest on trust preferred securities                      |  |                                 | 748    |                                |  
|                                                            |  |                                 |        |                                |  
|Total interest expense                                      |  |                                 | 10,543 |                                |  
|                                                            |  |                                 |        |                                |  
|Net interest income                                         |  |                                 | 17,610 |                                |  
|Provision for loan losses                                   |  |                                 | 2,880  |                                |  
|                                                            |  |                                 |        |                                |  
|Net interest income after provision for loan losses         |  |                                 | 14,730 |                                |  
|Non-interest income:                                        |  |                                 |        |                                |  
|Service charges on deposit accounts                         |  |                                 | 1,330  |                                |  
|Checkcard interchange fees                                  |  |                                 | 334    |                                |  
|Mortgage servicing fees, net                                |  |                                 | 315    |                                |  
|Fees and commissions-brokerage services                     |  |                                 | 217    |                                |  
|Trust fees                                                  |  |                                 | 269    |                                |  
|Income from bank owned life insurance                       |  |                                 | 255    |                                |  
|Gain on sale of securities, net                             |  |                                 | 391    |                                |  
|Gain on sale of credit card portfolio, net                  |  |                                 |       |                                |  
|Other income                                                |  |                                 | 499    |                                |  
|                                                            |  |                                 |        |                                |  
|Total non-interest income                                   |  |                                 | 3,610  |                                |  
|                                                            |  |                                 |        |                                |  
|Operating expense:                                          |  |                                 |        |                                |  
|Salaries, pensions and other employee benefits              |  |                                 | 6,418  |                                |  
|Building occupancy                                          |  |                                 | 1,110  |                                |  
|Advertising and promotion                                   |  |                                 | 291    |                                |  
|Professional fees                                           |  |                                 | 538    |                                |  
|Data processing costs                                       |  |                                 | 1,139  |                                |  
|Services                                                    |  |                                 | 792    |                                |  
|Conversion expense                                          |  |                                 |       |                                |  
|Other real estate owned and repossessed asset expenses, net |  |                                 | 128    |                                |  
|Other expenses                                              |  |                                 | 1,613  |                                |  
|                                                            |  |                                 |        |                                |  
|Total operating expense                                     |  |                                 | 12,029 |                                |  
|                                                            |  |                                 |        |                                |  
|Income (loss) before income taxes                           |  |                                 | 6,311  |                                |  
|Income tax expense (benefit)                                |  |                                 | 2,066  |                                |  
|                                                            |  |                                 |        |                                |  
|Net Income (Loss)                                           |  | $                               | 4,245  |                                | $
|                                                            |  |                                 |        |                                |  
|                                                            |  |                                 |        |                               
|Earnings (loss) per share:                                  |  |                                 |        |                                |  
|Basic                                                       |  | $                               | 0.46   |                                | $
|Diluted                                                     |  | $                               | 0.45   |                                | $
|                                                            |  |                                 |        |                                |  



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 September 30, |        |   | Nine Months Ended September 30, |  
|------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | -
|(Dollars in Thousands)                                                                     |  | 2003                             |        |   | 2002                            |  
|Net income (loss)                                                                          |  | $                                | 4,245  |   |                                 | $
|                                                                                           |  |                                  |        |  
|Other comprehensive (loss) income:                                                         |  |                                  |        |   |                                 |  
|Net unrealized holding (losses) gains on securities available for sale                     |  |                                  | (4,685 | ) |                                 |  
|Net unrealized gains on securities transferred from held to maturity to available for sale |  |                                  |       |   |                                 |  
|Reclassification adjustment for net realized gains included in net income                  |  |                                  | (391   | ) |                                 |  
|                                                                                           |  |                                  |        |   |                                 |  
|Other comprehensive (loss) income, before income tax benefit (expense)                     |  |                                  | (5,076 | ) |                                 |  
|                                                                                           |  |                                  |        |   |                                 |  
|Income tax benefit (expense) on other comprehensive (loss) income                          |  |                                  | 2,041  |   |                                 |  
|                                                                                           |  |                                  |        |   |                                 |  
|Other comprehensive (loss) income, net of tax                                              |  |                                  | (3,035 | ) |                                 |  
|                                                                                           |  |                                  |        |   |                                 |  
|                                                                                           |  |                                  |        |  
|Comprehensive income                                                                       |  | $                                | 1,210  |   |                                 | $
|                                                                                           |  |                                  |        |   |                                 |  



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)



|Nine Months EndedSeptember 30, 2002                  |  | Number ofSharesIssued |  | CommonStock |     | AdditionalPaid-InCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   |  | TreasuryStock |        |   | Total |  
|---------------------------------------------------- |  | --------------------- |  | ----------- | --- | ------------------------ | - | ---------------- |  | - | ----------------------------------- | - |  | ------------- | ------ | - | ----- | -
|Balance at December 31, 2001                         |  | 11,535,500            |  | $           | 115 |                          | $ | 39,331           |  | $ | 142,748                             |   |  | $             | 2,520  |   |       | $
|                                                     |  |                       |  |             |     |                          |  
|Net loss                                             |  |                       |  |             |     |                          |   |                  |  |   | (2,187                              | ) |  |               |        |   |       |  
|Other comprehensive income                           |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               | 7,341  |   |       |  
|                                                     |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|Comprehensive income                                 |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|                                                     |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|Stock options exercised, net                         |  | 106,801               |  |             | 1   |                          |   | 1,782            |  |   |                                     |   |  |               |        |   |       |  
|Cash dividend paid on common stock ($0.75 per share) |  |                       |  |             |     |                          |   |                  |  |   | (7,224                              | ) |  |               |        |   |       |  
|Treasury stock purchased (148,426 shares)            |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|                                                     |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|Balance at September 30, 2002                        |  | 11,642,301            |  | $           | 116 |                          | $ | 41,113           |  | $ | 133,337                             |   |  | $             | 9,861  |   |       | $
|                                                     |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|                                                     |  |                       |  |             |     |                          |  
|Nine Months EndedSeptember 30, 2003                  |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|Balance at December 31, 2002                         |  | 11,660,726            |  | $           | 117 |                          | $ | 41,704           |  | $ | 134,903                             |   |  | $             | 8,970  |   |       | $
|                                                     |  |                       |  |             |     |                          |  
|Net income                                           |  |                       |  |             |     |                          |   |                  |  |   | 12,075                              |   |  |               |        |   |       |  
|Other comprehensive loss                             |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               | (4,080 | ) |       |  
|                                                     |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|Comprehensive income                                 |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|                                                     |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|Stock options exercised, net                         |  | 53,571                |  |             |     |                          |   | 868              |  |   |                                     |   |  |               |        |   |       |  
|Cash dividend paid on common stock ($0.75 per share) |  |                       |  |             |     |                          |   |                  |  |   | (6,870                              | ) |  |               |        |   |       |  
|Treasury stock purchased (316,108 shares)            |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|                                                     |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  
|Balance at September 30, 2003                        |  | 11,714,297            |  | $           | 117 |                          | $ | 42,572           |  | $ | 140,108                             |   |  | $             | 4,890  |   |       | $
|                                                     |  |                       |  |             |     |                          |   |                  |  |   |                                     |   |  |               |        |   |       |  



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)



|                                                                                                                             |  | Nine Months EndedSeptember 30, |         
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | --------
|(In Thousands)                                                                                                               |  | 2003                           |         
|Operating activities:                                                                                                        |  |                                |         
|Net income (loss)                                                                                                            |  | $                              | 12,075  
|Provision for loan losses                                                                                                    |  |                                | 9,828   
|Gain on sale of securities, net                                                                                              |  |                                | (1,026  
|Gain on repurchase of trust preferred securities, net                                                                        |  |                                | (6      
|Gain on sale of credit card portfolio, net                                                                                   |  |                                |        
|Loss (gain) on sale of loans held for sale, bank premises and equipment, other real estate owned and repossessed assets,
net |  |                                | 63      
|Depreciation and amortization                                                                                                |  |                                | 1,572   
|Net amortization of premiums and discounts on investment securities                                                          |  |                                | 2,275   
|Proceeds from sales of loans held for sale                                                                                   |  |                                | 33,980  
|Loans originated and held for sale                                                                                           |  |                                | (41,858 
|Income from bank owned life insurance                                                                                        |  |                                | (753    
|Writedowns of other real estate owned and repossessed assets                                                                 |  |                                | 73      
|Net change in other assets and liabilities                                                                                   |  |                                | 7,423   
|                                                                                                                             |  |                                |         
|Net cash provided by operating activities                                                                                    |  |                                | 23,646  
|                                                                                                                             |  |                                |         
|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                                                               |  |                                | 153,624 
|Purchases of available for sale investment securities                                                                        |  |                                | (442,641
|Principal collected on available for sale investment securities                                                              |  |                                | 249,790 
|Purchases of Federal Home Loan Bank (FHLB) stock                                                                           |  |                                | (7,514  
|Redemptions of FHLB stock                                                                                                    |  |                                | 4,121   
|Proceeds from sale of credit card portfolio                                                                                  |  |                                |        
|Net loans (made to) repaid by customers                                                                                      |  |                                | (120,603
|Proceeds from sale of other real estate owned and repossessed assets                                                         |  |                                | 3,679   
|Purchases of bank premises and equipment                                                                                     |  |                                | (2,468  
|                                                                                                                             |  |                                |         
|Net cash used in investing activities                                                                                        |  |                                | (153,174
|                                                                                                                             |  |                                |         
|Financing activities:                                                                                                        |  |                                |         
|Net increase (decrease) in deposits                                                                                          |  |                                | 41,498  
|Net increase (decrease) in repurchase agreements and FHLB line of credit advances                                            |  |                                | 12,754  
|Proceeds from FHLB term advances                                                                                             |  |                                | 95,000  
|Repayments of FHLB term advances                                                                                             |  |                                | (5,924  
|Issuance of trust preferred securities                                                                                       |  |                                |        
|Repurchase of trust preferred securities                                                                                     |  |                                | (1,506  
|Proceeds from exercises of stock options                                                                                     |  |                                | 868     
|Purchases of treasury stock                                                                                                  |  |                                | (6,998  
|Dividends paid                                                                                                               |  |                                | (6,870  
|                                                                                                                             |  |                                |         
|Net cash provided by financing activities                                                                                    |  |                                | 128,822 
|                                                                                                                             |  |                                |         
|Net decrease in cash and cash equivalents                                                                                    |  |                                | (706    
|Cash and cash equivalents at beginning of period                                                                             |  |                                | 46,912  
|                                                                                                                             |  |                                |         
|Cash and cash equivalents at end of period                                                                                   |  | $                              | 46,206  
|                                                                                                                             |  |                                |         
|Supplemental information:                                                                                                    |  |                                |         
|Cash paid during the period for:                                                                                             |  |                                |         
|Interest on deposits, borrowings and trust preferred securities                                                              |  | $                              | 31,891  
|Income taxes                                                                                                                 |  | $                              | 4,507   
|                                                                                                                             |  |                                |         
|Non-cash investing activity:                                                                                                 |  |                                |         
|Transfers from loans to other real estate owned and repossessed assets                                                       |  | $                              | 2,339   
|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                                             |  | $                              | (4,080  
|                                                                                                                             |  |                                |         



See accompanying notes
to unaudited interim consolidated financial statements.



5



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|Item 1  continued |  | 
|------------------ |  | 



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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
presentation of the results for the interim periods presented. All intercompany transactions have been eliminated in consolidation. Amounts in the prior periods financial statements are reclassified whenever necessary to conform to the current
periods presentation. The December 31, 2002 Consolidated Statement of Condition is derived from the audited consolidated financial statements included in the Companys 2002 Annual Report on Form 10-K. The accompanying unaudited interim
consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes included in the Companys 2002 Annual Report on Form 10-K. The results of operations for the
September 30, 2003 interim periods 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 weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as stock
options) were issued during the reporting period, computed using the treasury stock method. The following table provides information on the calculation of basic earnings per share and diluted earnings per share for the quarters and nine months ended
September 30, 2003 and 2002, respectively.



|(In Thousands, Except Share and Per Share Data)Quarters ended September 30, |  | Net Income       |        |   | WeightedAverage Shares |           | EarningsPer Share       |  
|--------------------------------------------------------------------------- |  | ---------------- | ------ | - | ---------------------- | --------- | ----------------------- | -
|2003                                                                        |  |                  |        |   |                        |           |                         |  
|Basic earnings per share                                                    |  | $                | 4,245  |   |                        | 9,171,132 |                         | $
|Dilutive effect of stock options                                            |  |                  |       |   |                        | 171,477   |                         |  
|                                                                            |  |                  |        |   |                        |           |                         |  
|Diluted earnings per share                                                  |  | $                | 4,245  |   |                        | 9,342,609 |                         | $
|                                                                            |  |                  |        |   |                        |           |                         |  
|Anti-dilutive stock options                                                 |  |                  |        |   |                        | 16,523    |                         |  
|                                                                            |  |                  |        |   |                        |           |                         |  
|                                                                            |  |                  |       
|2002                                                                        |  |                  |        |   |                        |           |                         |  
|Basic earnings per share                                                    |  | $                | 3,926  |   |                        | 9,584,896 |                         | $
|Dilutive effect of stock options                                            |  |                  |       |   |                        | 107,762   |                         |  
|                                                                            |  |                  |        |   |                        |           |                         |  
|Diluted earnings per share                                                  |  | $                | 3,926  |   |                        | 9,692,658 |                         | $
|                                                                            |  |                  |        |   |                        |           |                         |  
|Anti-dilutive stock options                                                 |  |                  |        |   |                        | 102,833   |                         |  
|                                                                            |  |                  |        |   |                        |           |                         |  
|                                                                            |  |                  |       
|Nine months ended September 30,                                             |  | Net Income(Loss) |        |   | WeightedAverage Shares |           | Earnings(Loss)Per Share |  
|2003                                                                        |  |                  |        |   |                        |           |                         |  
|Basic earnings per share                                                    |  | $                | 12,075 |   |                        | 9,212,935 |                         | $
|Dilutive effect of stock options                                            |  |                  |       |   |                        | 141,784   |                         |  
|                                                                            |  |                  |        |   |                        |           |                         |  
|Diluted earnings per share                                                  |  | $                | 12,075 |   |                        | 9,354,719 |                         | $
|                                                                            |  |                  |        |   |                        |           |                         |  
|Anti-dilutive stock options                                                 |  |                  |        |   |                        | 47,493    |                         |  
|                                                                            |  |                  |        |   |                        |           |                         |  
|                                                                            |  |                  |       
|2002                                                                        |  |                  |        |   |                        |           |                         |  
|Basic loss per share                                                        |  | $                | (2,187 | ) |                        | 9,614,444 |                         | $
|Dilutive effect of stock options                                            |  |                  |       |   |                        |          |                         |  
|                                                                            |  |                  |        |   |                        |           |                         |  
|Diluted loss per share                                                      |  | $                | (2,187 | ) |                        | 9,614,444 |                         | $
|                                                                            |  |                  |        |   |                        |           |                         |  
|Anti-dilutive stock options                                                 |  |                  |        |   |                        | 1,022,905 |                         |  
|                                                                            |  |                  |        |   |                        |           |                         |  



6



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



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



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



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



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



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



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



The Company has two stock-based compensation plans that are described more fully in Note 15 to the Consolidated Financial Statements in the Companys 2002 Annual
Report on Form 10-K. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based compensation cost has
been reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the grant date.



7



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|Item 1  continued |  | 
|------------------ |  | 



The following table illustrates the effect on net income and earnings per share as if the Company had
applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to its stock-based compensation plans.



|                                                                                                                           |  | Three MonthsEnded September 30, |       |   | Nine MonthsEnded September 30, |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | -
|(Dollars in Thousands, Except Per Share Data)                                                                              |  | 2003                            |       |   | 2002                           |  
|Net income (loss), as reported                                                                                             |  | $                               | 4,245 |   |                                | $
|Deduct:                                                                                                                    |  |                                 |       |   |                                |  
|Total stock-based compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                 | (147  | ) |                                |  
|                                                                                                                           |  |                                 |       |   |                                |  
|Pro forma net income (loss)                                                                                                |  | $                               | 4,098 |   |                                | $
|                                                                                                                           |  |                                 |       |   |                                |  
|                                                                                                                           |  |                                 |       |  
|Earnings (loss) per share:                                                                                                 |  |                                 |       |   |                                |  
|Basic  as reported                                                                                                        |  | $                               | 0.46  |   |                                | $
|Basic  pro forma                                                                                                          |  | $                               | 0.45  |   |                                | $
|Diluted  as reported                                                                                                      |  | $                               | 0.45  |   |                                | $
|Diluted  pro forma                                                                                                        |  | $                               | 0.44  |   |                                | $



For the year to date
in 2003, the Company granted 246,116 options, in the first quarter, at exercise prices ranging from $20.82 to $21.18 under the stock-based compensation plans in effect. During the first nine months of 2002, the Company granted 256,660 options at
exercise prices ranging from $26.05 to $30.41. The weighted average fair value of options granted during the first nine months 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.



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 and nine months
ended September 30, 2003 and 2002 may not be representative of the pro forma effects on reported net income and earnings per share for future periods.



|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. Such guarantees are primarily issued to support public and private borrowing arrangements. 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 from 3 months to four years or less and most often expire undrawn; 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 a letter of credit agreement for one commercial
relationship, the Company has $280,000 in a pledged deposit account at a commercial bank with no corporate securities pledged at September 30, 2003. By comparison, the Company pledged as collateral corporate securities having a fair value of
approximately $1.5 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.



8



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|Item 1  continued |  | 
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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.



In January 2003, the FASB issued Interpretation No. 46 (FIN No.
46), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, which establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE entity is the entity that absorbs a majority of the VIEs expected losses, receives a majority of the VIEs expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or other business relationship with a VIE. Prior to the implementation of FIN No. 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial
interest through ownership of a majority of voting interest in the entity. The provisions of FIN No. 46 were effective immediately for all arrangements entered into after January 31, 2003, and are otherwise effective at the beginning of the first
interim period ending after December 15, 2003, based on FASB Staff Position 46-6 dated October 8, 2003.



In its current form, FIN No. 46 may require the Company to re-characterize its investment in its three wholly owned subsidiary business trusts (Trust I,
Trust II and Trust III) in future financial statements. The impact on the balance sheet would be to rename the caption from trust preferred securities to junior subordinated debentures; however, the balance would remain the same. In July 2003, the
Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to
the contrary. The Federal Reserve intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will
continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. As of September 30, 2003, if the Company was not allowed to include $46.3 million of its $46.5 million in trust preferred
securities issued by Trust I, Trust II or Trust III within Tier I capital, then the Company would still exceed the regulatory required minimums for capital adequacy purposes.



In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. In particular, the Statement clarifies under what
circumstances a contract with an initial net investment meets the characteristic of a derivative, and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. The Statement has been generally
effective for contracts entered into or modified after June 30, 2003 and has not had a material impact on the Companys financial statements.



In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity which establishes standards for an issuer to classify and measure such instruments. The Statement requires an issuer to classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) whereas
many instruments were previously classified as equity. The disclosure requirements of Statement No. 150 are effective for interim periods beginning after June 15, 2003. Management has adopted the provisions of this Statement with no material impact
on the Companys consolidated financial position, results of operations or liquidity.



9



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|Item  2 |  | 
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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 September 30, 2003 of $4.2 million or $0.45 per diluted share, compared to net income of $4.0 million or $0.42 per diluted share for the second
quarter of 2003 and $3.9 million or $0.41 per diluted share for the third quarter of 2002. Net income for the nine months ended September 30, 2003 was $12.1 million or $1.29 per diluted share, compared to a net loss of $2.2 million or $0.23 per
diluted share for the nine months ended September 30, 2002.



On
October 27, 2003, the Board of Directors declared a quarterly cash dividend of $0.25 per share payable on December 10, 2003 to shareholders of record at the close of business on November 25, 2003.



RECENT DEVELOPMENTS



In November 2003, the Company sold certain large, under-performing
commercial loans with an aggregate carrying value of $36.7 million. The proceeds from the sale of these loans, net of estimated transaction costs, is $26.6 million. The $10.1 million difference between the carrying value and the net proceeds from
the sale of these loans generally reflects the Companys previously established loan loss reserves and will be charged off against the allowance for loan losses. The sale will have no impact on the Companys income statement. Prior to the
decision to sell, these loans were either non-performing or performing loans classified as substandard. As a result of the sale, non-performing loans will decrease $14.5 million and substandard performing loans will decline $22.2 million.



CRITICAL ACCOUNTING POLICIES



In the course of the Companys normal business activity,
management must select and apply many accounting policies and methodologies that lead to the financial results presented in the consolidated financial statements of the Company. Some of these policies are more critical than others. Management
considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of allowance needed to cover probable credit losses within the
loan portfolio and the material effect that these estimates can have on the Companys results of operations. While managements evaluation of the allowance for loan losses as of September 30, 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, have a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Though management has concluded that the current evaluation of
collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Companys allowance for loan losses policy would also require making additional provisions for loan losses. All accounting
policies are important and the reader of the financial statements should review these policies, described in Note 1 to the Consolidated Financial Statements included in the Companys 2002 Annual Report on Form 10-K, 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, 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



10



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|Item 2  continued |  | 
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(iii) the level of demand for new and existing products. Should one or more of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those described in the forward-looking statements. Except as required by applicable law, the Company does not intend, and specifically disclaims any obligation, to update forward-looking
statements.



FINANCIAL CONDITION



Total assets of the Company increased to $2,173.1 million at
September 30, 2003 from $2,034.7 million at December 31, 2002. Throughout 2003, the Company has continued 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 $105.4 million or 7.8% to $1,452.8 million at September 30, 2003 from $1,347.4 million at December 31,
2002. The primary changes related to increases in real estate loans offset by a decrease in the commercial and industrial loan portfolio. Real estate loans increased by $210.3 million since December 31, 2002 to $687.6 million at September 30, 2003.
The most significant growth has been in residential mortgage loans with an increase of $182.7 million, which represents 86.9% of the year-to-date growth in overall real estate loans.



Throughout 2003, the Company has continued to actively pursue opportunities to be a leader of the residential mortgage
business in its primary markets. For the third quarter of 2003, residential mortgage loan originations increased to $122.7 million with year-to-date originations of $305.0 million in 2003, as compared to $102.8 million in the entire first nine
months of 2002. Demand continued to be high for residential mortgage loans due to a historically low interest rate environment. In response, the Company actively marketed a fixed-rate, bi-weekly mortgage loan product, which contributed significantly
to the increased origination volume. For the first nine months of 2003, bi-weekly mortgage loan originations were $208.4 million or 68.3% of the aggregate originations for the same period. Also, 83.1% of all bi-weekly originations were 10- and
15-year loans, therefore, the residential loan portfolio increased in categories with substantially shorter durations. The bi-weekly mortgage loan products promoted by the Company also require payment by automatic debit to a checking account with
the Company. Such deposit account relationships have contributed directly to the Companys growth in checking accounts, discussed later, since they tend to retain higher than average deposit balances. In 2003, the Company also continued to sell
most residential real estate loans originated with extended maturities of 20 years or longer in order to maintain flexibility within the real estate portfolio. Sales of residential real estate loans amounted to $34.0 million for the nine months of
2003 compared to $23.8 million for the comparative period in 2002.



The commercial real estate loan portfolio increased 18.8% to $174.6 million at September 30, 2003 compared to $147.0 million at December 31, 2002. Growth in the commercial real estate portfolio continues as a strategic initiative for the
Company despite some hindrance by overall slow economic growth of moderate-sized commercial organizations within our principal market areas. As a result, recent growth of this portfolio generally has been from projects within geographic regions of
New York outside our primary market area, yet familiar to our loan officers. Commercial real estate loan originations were $35.9 million for the first nine months of 2003 compared to $6.2 million for the comparative period in 2002.



During the first nine months of 2003, the commercial and industrial
(C&I) loan portfolio had a net decrease of $101.2 million to $391.0 million at September 30, 2003 from $492.2 million at December 31, 2002. Approximately $14.7 million of this reduction relates to loan charge-offs (see Asset
Quality), with the remainder of the reduction in commercial loans primarily attributed to principal reductions and loan pay-offs. During the nine-month period ended September 30, 2003, the Company originated $34.9 million of commercial loans
compared to $72.4 million for the same period in 2002. Also, see Recent Developments.



11



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|Item 2  continued |  | 
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Consumer loans decreased to $374.2 million at September 30, 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 was
consistent with the comparative decline in overall consumer loan originations, which were $133.2 million and $137.7 million for the nine months of 2003 and 2002, respectively. The most significant declines in year-to-date consumer loan originations
have been in new and used auto originations. New auto loans continued to lag due to heavy competition in the new car market from auto manufacturers incentives provided to market their products. During 2003, the Company has emphasized growth in
certain used car loans financed for customers with higher than average FICO scores. In addition, equity lines of credit have increased $4.1 million for the nine months ended September 30, 2003 to reduce impact of the decline in overall consumer
originations. Equity line of credit originations increased to 14.8% of all 2003 consumer originations and tend to have longer repayment terms than the remainder of this portfolio.



The Companys investment portfolio activity continues to follow 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. Despite the continued rapid amortization and calls of securities related to the low interest rate
environment, the Company maintained investment securities at $639.6 million at September 30, 2003 compared to $613.9 million at December 31, 2002. Mortgage-backed securities, including collateralized mortgage obligations (CMOs),
represented approximately 65% of the aggregate portfolio at December 31, 2002 and 61% at September 30, 2003. Other securities consist of United States Treasury securities, United States Government agency securities, as well as obligations of state
and local governments and corporate debt and equity securities. Continued high levels of prepayments on mortgage-backed securities impacted the current year-to-date yield of the investment portfolio; however, they provide sufficient liquidity to
fund 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 decreased to $1.7 million at September 30, 2003 compared to $3.1 million at December 31, 2002. Other real
estate owned, as a component of such total, included $1.3 million at September 30, 2003 compared to $1.4 million at December 31, 2002. Activity for the period included the transfer of approximately $1.5 million in loans, principally commercial,
offset by sales and recoveries of $1.7 million for the period. Repossessed assets declined to $0.4 million at September 30, 2003 compared to $1.6 million at December 31, 2002. The entire decrease in repossessed assets was primarily attributed to the
disposition of the collateral repossessed on one commercial account.



Other assets decreased to $34.7 million at September 30, 2003 from $36.3 million at December 31, 2002. The most significant factor accounting for the decrease in other assets is the receipt of $5.4 million of refundable federal income
taxes. Prepaid expenses, including pension costs and taxes, increased $3.8 million during the period.



Total deposits increased to $1,484.3 million at September 30, 2003 compared to $1,442.8 million at December 31, 2002. Core deposits are generally
considered deposit accounts other than time deposits. As discussed earlier, the successful bi-weekly residential mortgage loan program requires automatic debits to a checking account with the Company. The growth of approximately $10.4 million in
such core deposit areas as personal checking accounts and savings deposits is primarily attributed to this program. Money market deposits increased by $59.6 million during the nine months year to date, primarily related to the $65.7 million increase
in municipal accounts, which tend to be cyclical consistent with the related government activities. Time deposits decreased $14.3 million at September 30, 2003 compared to December 31, 2002. Retail time deposits, principally maturities of six months
to less than two years, declined $29.3 million. Municipal time deposits provided a partial offset with an increase of $9.2 million for the same period.



12



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|Item 2  continued |  | 
|------------------ |  | 



The following table shows the detail composition at both dates:



|                                     |  | September 30, 2003 |           |         | December 31, 2002 |  
|------------------------------------ |  | ------------------ | --------- | ------- | ----------------- | -
|(Dollars in Thousands)               |  | Amount             |           | Percent |                   |  
|Savings deposit accounts             |  | $                  | 179,272   |         | 12.08             | %
|Money market deposit accounts        |  |                    | 398,785   |         | 26.87             | %
|Time deposit accounts                |  |                    | 627,303   |         | 42.26             | %
|NOW accounts                         |  |                    | 120,968   |         | 8.15              | %
|Non-interest-bearing demand accounts |  |                    | 157,926   |         | 10.64             | %
|                                     |  |                    |           |         |                   |  
|Total deposits                       |  | $                  | 1,484,254 |         | 100.00            | %
|                                     |  |                    |           |         |                   |  



The Companys
borrowings increased to $479.9 million at September 30, 2003 from $378.1 million at December 31, 2002. The primary source of borrowings is Federal Home Loan Bank (FHLB) advances which accounted for $425.8 million and $335.9 million of
aggregate borrowings at September 30, 2003 and December 31, 2002, respectively. New FHLB advances for 2003 have a weighted average term of 1.77 years at September 30, 2003. The comparative weighted average term for all FHLB advances outstanding at
September 30, 2003 was 3.27 years. Other borrowings at September 30, 2003 were primarily comprised of $27.4 million of securities sold under agreements to repurchase and use of $25.5 million of a 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 $5.0 million in the first nine 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, which expired in March 2003. 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 $6.9 million and $4.1 million of other comprehensive
losses. These decreases were partially offset by net income for the period of $12.1 million and $868,000 from the proceeds of the exercise of stock options, including related tax benefits.



ASSET QUALITY



The Company continues its efforts to implement and maintain 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 all of its commercial loans based on their respective risks. Loan ratings are continually reviewed to
determine the integrity of the respective ratings. Retail loan delinquency, default and charge-off trends are closely monitored and the related allowances established accordingly. The system assists management in assessing the adequacy of the
allowance for loan losses.



Total non-performing assets were
$32.4 million or 1.49% of total assets at September 30, 2003, compared to $53.7 million or 2.64% of total assets at December 31, 2002 and $57.2 million or 2.77% of total assets at September 30, 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 retail 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.



13



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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:



|(Dollars in Thousands)                                                     |  | September 30, 2003 |        |   | June 30, 2003 |   |        | March 31, 2003 |  |   | December 31, 2002 |   |  | September 30, 2002 |       
|-------------------------------------------------------------------------- |  | ------------------ | ------ | - | ------------- | - | ------ | -------------- |  | - | ----------------- | - |  | ------------------ | ------
|Non-accrual loans:                                                         |  |                    |        |   |               |   |        |                |  |   |                   |   |  |                    |       
|Commercial loans                                                           |  | $                  | 27,570 |   |               | $ | 30,267 |                |  | $ | 30,078            |   |  | $                  | 34,614
|Residential real estate loans                                              |  |                    | 680    |   |               |   | 743    |                |  |   | 787               |   |  |                    | 616   
|Commercial real estate loans                                               |  |                    | 67     |   |               |   | 674    |                |  |   | 821               |   |  |                    | 2,647 
|Consumer loans                                                             |  |                    | 237    |   |               |   | 271    |                |  |   | 198               |   |  |                    | 288   
|Troubled debt restructured loans                                           |  |                    | 2,005  |   |               |   | 6,379  |                |  |   | 12,143            |   |  |                    | 12,172
|                                                                           |  |                    |        |   |               |   |        |                |  |   |                   |   |  |                    |       
|Total non-accrual loans                                                    |  |                    | 30,559 |   |               |   | 38,334 |                |  |   | 44,027            |   |  |                    | 50,337
|Accruing loans with principal or interest payments 90 days or more overdue |  |                    | 141    |   |               |   | 111    |                |  |   | 190               |   |  |                    | 278   
|                                                                           |  |                    |        |   |               |   |        |                |  |   |                   |   |  |                    |       
|Total non-performing loans                                                 |  |                    | 30,700 |   |               |   | 38,445 |                |  |   | 44,217            |   |  |                    | 50,615
|Other real estate owned and repossessed assets                             |  |                    | 1,696  |   |               |   | 2,601  |                |  |   | 3,668             |   |  |                    | 3,109 
|                                                                           |  |                    |        |   |               |   |        |                |  |   |                   |   |  |                    |       
|Total non-performing assets                                                |  | $                  | 32,396 |   |               | $ | 41,046 |                |  | $ | 47,885            |   |  | $                  | 53,724
|                                                                           |  |                    |        |   |               |   |        |                |  |   |                   |   |  |                    |       
|                                                                           |  |                    |        |   |              
|Total non-performing loans to total loans                                  |  |                    | 2.11   | % |               |   | 2.70   | %              |  |   | 3.16              | % |  |                    | 3.76  
|                                                                           |  |                    |        |   |               |   |        |                |  |   |                   |   |  |                    |       
|                                                                           |  |                    |        |   |              
|Total non-performing assets to total assets                                |  |                    | 1.49   | % |               |   | 1.90   | %              |  |   | 2.33              | % |  |                    | 2.64  
|                                                                           |  |                    |        |   |               |   |        |                |  |   |                   |   |  |                    |       



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 $8.4 million, $8.1 million, $3.6 million, $13.8 million, and $5.1 million at
September 30, June 30, and March 31, 2003, as well as December 31, and September 30, 2002, respectively. The Company does not consider these loans to be non-performing.



Commercial loans that are in non-accrual status and have not been restructured in a troubled debt restructuring totaled
$27.6 million at September 30, 2003 and consisted of 113 loans ranging in size from $1,000 to $3.0 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. 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, excluding troubled debt restructured loans, amounted to $12.4 million during the nine months ended September 30, 2003 and reduced non-performing loans. In addition, pay-downs or pay-offs of non-accrual commercial loans totaled
$13.2 million during the nine months ended September 30, 2003. New loans of approximately $18.6 million were added to non-accrual to bring the total of commercial and industrial loans in non-accruing status to $27.6 million at September 30, 2003.
The three largest relationships entering non-accrual during the quarter totaled $4.4 million, with the largest single relationship totaling $3.0 million. Also, see Recent Developments.



At September 30, 2003, non-performing commercial real estate loans included a
single loan of $67,000. At December 31, 2002, non-performing commercial real estate loans were $2.6 million that consisted primarily of loans from one customer relationship of $1.2 million with no other loans in excess of $495,000. During the first
nine months of 2003, $1.0 million of non-performing commercial real estate loans were sold with a small gain recognized.



Restructured loans that are also in the non-accrual status (primarily commercial-related loans) at September 30, 2003 were $2.0 million and consisted of 5
individual loans ranging in size from $92,000 to $1.2 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.



14



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|Item 2  continued |  | 
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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 September 30, 2003, loans considered to be impaired in
accordance with SFAS No. 114 totaled $38.0 million, of which $2.8 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 $35.2 million remainder related to loans with a corresponding allocated impairment allowance of $13.9 million. At December 31, 2002, the Companys recorded investment in loans for which impairment has been recognized in
accordance with SFAS No. 114 totaled $63.2 million with an allocated impairment allowance aggregating $15.2 million.



The allowance for loan losses represents the amount established 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 $61.4 million or 4.23% of total loans
outstanding at September 30, 2003 providing coverage for non-performing loans of 199.94% compared to $63.3 million or 4.69% of total loans at December 31, 2002 with coverage of 124.96%. At September 30, 2002, the coverage of non-performing loans was
114.42%, based on the allowance for loan losses of $59.8 million or 4.55% of total loans outstanding. The improved coverage ratio for non-performing loans is consistent with managements priority to strategically balance the mix of the
Companys loan portfolio and recognize the influence of general economic and business conditions, especially those influencing our regional businesses. Managements assessment of the adequacy of the allowance for loan losses incorporates
an evaluation of the Companys overall loan portfolio, based on both general economic factors and specific factors influencing loans covered by the risk-rating system described above.



Performing loans past due 30-89 days decreased to $3.4 million at September
30, 2003 from $4.8 million at June 30, 2003 and $8.1 million at September 30, 2002. As previously noted, 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 $81.7 million ($8.4 million of which
were accruing troubled debt restructured loans) at September 30, 2003, compared to $82.0 million ($8.1 million of which were accruing troubled debt restructured loans) at June 30, 2003 and $78.8 million ($5.1 million of which were accruing troubled
debt restructured loans) at September 30, 2002. Potential problem loans at September 30, 2003 primarily consisted of commercial and industrial loans.



The quarterly provision for loan losses was $2.9 million in the third quarter of 2003, compared to $3.0 million for the second quarter of 2003 and a $4.5
million provision in the third quarter of 2002. The lower provision for loan losses in the third quarter of 2003 as compared to recent quarters was primarily due to a reduction in non-performing loans and the continuation of the Companys
strategy to reduce overall credit risk by changing the mix of the loan portfolio with greater emphasis on lower credit risk residential real estate loan products and a reduction in commercial and industrial loans which have greater credit risk. Net
charge-offs were $4.1 million, $6.3 million and $1.7 million for the third quarter of 2003, the second quarter of 2003 and the third quarter of 2002, respectively. Net charge-offs in the third quarter of 2003 exceeded the provision for loan losses
for the same period. An increase in the provision to the level of net charge-offs was not considered necessary as the related loan accounts previously had been adequately reserved. Management expects that prospectively, the provision for loan losses
may continue to be less than net loan charge-offs due to a sufficient level of specific reserves. The lower provision in the third quarter of 2003 as compared to the third quarter of 2002 was due primarily to lower levels of non-performing loans and
the changing mix of the loan portfolio, as noted above.



15



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|Item 2  continued |  | 
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Commercial loan charge-offs increased to $7.1 million in the third quarter of 2003 from $6.5 million
in the second quarter of 2003 and $2.3 million in the third quarter of 2002. While commercial loan charge-offs were significantly down in the first and second quarters of 2003 compared to the first and second quarters of 2002, management expects
that net charge-offs in the next few quarters could continue to be higher than net charge-offs in the first and second quarters of 2003 considering the continued level of non-performing loans. Management continually reviews the adequacy of the
allowance for loan losses. At September 30, 2003, the allowance was considered adequate by management.



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



|                                             |  | Quarters Ended    |          
|-------------------------------------------- |  | ----------------- | ---------
|(Dollars in Thousands)                       |  | September 30,2003 |          
|Average total loans outstanding              |  | $                 | 1,425,579
|Allowance at beginning of period             |  | $                 | 62,607   
|Charge-offs:                                 |  |                   |          
|Commercial loans                             |  |                   | 7,065    
|Consumer loans                               |  |                   | 987      
|Residential real estate loans                |  |                   | 25       
|Commercial real estate loans                 |  |                   | 496      
|                                             |  |                   |          
|Total loans charged-off                      |  |                   | 8,573    
|Recoveries                                   |  |                   | 4,468    
|                                             |  |                   |          
|Net charge-offs                              |  |                   | 4,105    
|                                             |  |                   |          
|Provision for loan losses                    |  |                   | 2,880    
|                                             |  |                   |          
|Allowance at end of period                   |  | $                 | 61,382   
|                                             |  |                   |          
|Ratio of net charge-offs to:                 |  |                   |          
|Average total loans outstanding (annualized) |  |                   | 1.15     
|Ratio of allowance to:                       |  |                   |          
|Non-performing loans                         |  |                   | 199.94   
|Period-end loans outstanding                 |  |                   | 4.23     



Other real estate
owned (ORE) and repossessed assets include property acquired by foreclosure, by deed in lieu of foreclosure or by repossession. At September 30, 2003, total ORE and repossessed assets totaled $1.7 million compared to $3.1 million at
December 31, 2002. Activity in ORE for the nine-month period includes the transfer of approximately $1.5 million in loans, principally commercial, offset by sales and recoveries of $1.7 million for the period. Repossessed assets totaled $352,000 at
September 30, 2003 and $1.6 million at December 31, 2002. The decrease in repossessed assets is primarily attributed to the collections and sale proceeds attributed to one commercial repossession account. Consumer loan repossessions include vehicles
and mobile home units that represented 100.0% and 23.9% of the respective balances at September 30, 2003 and December 31, 2002.



RESULTS OF OPERATIONS



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



COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002



For the three months ended September 30, 2003, the Company reported net
income of $4.2 million compared to $3.9 million for the three months ended September 30, 2002. Basic and diluted earnings per share were $0.46 and $0.45, respectively, for the three months ended September 30, 2003, compared to basic and diluted
earnings per share of



16



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|Item 2  continued |  | 
|------------------ |  | 



$0.41 for the three months ended September 30, 2002. For 2003, the comparative earnings per share is impacted by a decrease in the weighted average shares
attributed to stock repurchase programs throughout 2002 that were extended until March 2003.



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



|                                                                  |  | Three Months Ended September 30, |          
|----------------------------------------------------------------- |  | -------------------------------- | ---------
|                                                                  |  | 2003                             |          
|(Dollars in Thousands)                                            |  | AverageBalance                   |          
|Interest-earning assets:                                          |  |                                  |          
|Commercial loans                                                  |  | $                                | 416,068  
|Consumer loans:                                                   |  |                                  |          
|Personal-direct                                                   |  |                                  | 71,182   
|Personal-indirect                                                 |  |                                  | 259,021  
|Other(1)                                                          |  |                                  | 43,712   
|                                                                  |  |                                  |          
|Total consumer loans                                              |  |                                  | 373,915  
|                                                                  |  |                                  |          
|Real estate loans:                                                |  |                                  |          
|Residential-fixed                                                 |  |                                  | 413,552  
|Commercial-fixed                                                  |  |                                  | 38,282   
|Residential-adjustable                                            |  |                                  | 60,493   
|Commercial-adjustable                                             |  |                                  | 125,982  
|                                                                  |  |                                  |          
|Total real estate loans                                           |  |                                  | 638,309  
|                                                                  |  |                                  |          
|Investment securities(2)                                          |  |                                  | 654,057  
|Loans held for sale                                               |  |                                  | 12,140   
|Federal funds sold                                                |  |                                  | 196      
|                                                                  |  |                                  |          
|Total interest-earning assets                                     |  |                                  | 2,094,685
|                                                                  |  |                                  |          
|Allowance for loan losses                                         |  |                                  | (63,551  
|Non-interest-earning assets                                       |  |                                  | 117,109  
|                                                                  |  |                                  |          
|Total assets                                                      |  | $                                | 2,148,243
|                                                                  |  |                                  |          
|Interest-bearing liabilities:                                     |  |                                  |          
|Deposits:                                                         |  |                                  |          
|Savings                                                           |  | $                                | 186,909  
|Money market                                                      |  |                                  | 394,753  
|Time deposits                                                     |  |                                  | 608,143  
|NOW                                                               |  |                                  | 122,883  
|                                                                  |  |                                  |          
|Total deposits                                                    |  |                                  | 1,312,688
|Borrowings                                                        |  |                                  | 472,414  
|Trust preferred securities                                        |  |                                  | 47,283   
|                                                                  |  |                                  |          
|Total interest-bearing liabilities                                |  |                                  | 1,832,385
|                                                                  |  |                                  |          
|Non-interest-bearing liabilities                                  |  |                                  | 17,217   
|Non-interest-bearing demand accounts                              |  |                                  | 155,965  
|Shareholders equity                                              |  |                                  | 142,676  
|                                                                  |  |                                  |          
|Total liabilities and shareholders equity                        |  | $                                | 2,148,243
|                                                                  |  |                                  |          
|Net interest income                                               |  |                                  |          
|                                                                  |  |                                  |          
|Net earning assets                                                |  | $                                | 262,300  
|                                                                  |  |                                  |          
|Ratio of interest-earnings assets to interest-bearing liabilities |  |                                  | 1.14     
|                                                                  |  |                                  |          
|Net interest rate spread                                          |  |                                  |          
|                                                                  |  |                                  |          
|Net interest rate margin                                          |  |                                  |          
|                                                                  |  |                                  |          



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



|(2) | At amortized cost and include securities available for sale, securities held to maturity (2002 only) and Federal Home Loan Bank of New York stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



17



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|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 September 30,2003 Compared to 2002Increase (Decrease) |       
|------------------------------------------------- |  | ------------------------------------------------------------------------ | ------
|(Dollars in Thousands)                            |  | Volume                                                                   |       
|Interest income on interest-earning assets:       |  |                                                                          |       
|Commercial loans                                  |  | $                                                                        | (2,654
|Consumer loans                                    |  |                                                                          | 342   
|Real estate loans                                 |  |                                                                          | 4,153 
|Investment securities                             |  |                                                                          | (92   
|Loans held for sale                               |  |                                                                          | 161   
|Federal funds sold                                |  |                                                                          | (46   
|                                                  |  |                                                                          |       
|Total                                             |  | $                                                                        | 1,864 
|                                                  |  |                                                                          |       
|Interest expense on interest-bearing liabilities: |  |                                                                          |       
|Deposits:                                         |  |                                                                          |       
|Savings                                           |  | $                                                                        | 18    
|Money market                                      |  |                                                                          | 86    
|Time deposits                                     |  |                                                                          | (581  
|NOW                                               |  |                                                                          | 3     
|                                                  |  |                                                                          |       
|Total                                             |  |                                                                          | (474  
|                                                  |  |                                                                          |       
|Borrowings                                        |  |                                                                          | 1,232 
|Trust preferred securities                        |  |                                                                          | 143   
|                                                  |  |                                                                          |       
|Total                                             |  |                                                                          | 901   
|                                                  |  |                                                                          |       
|Net interest income                               |  | $                                                                        | 963   
|                                                  |  |                                                                          |       



Interest Income



The Companys interest
income on interest-earning assets decreased to $28.2 million for the quarter ended September 30, 2003 from $31.5 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 5.38% from 6.37% for the quarters ended September 30, 2003 and 2002, respectively. In the current quarter, the impact of declining yields was only partially offset by an overall increase in the average balance of
interest-earning assets. The substantial increase in real estate loans reflects the continuing refinancing boom associated with the current low rate environment, as well as the Companys overall strategy to reduce credit risk. The continued
decrease in the Companys commercial loan portfolio provides lower credit risk consistent with the Companys current strategy.



General interest rates continued at low levels throughout the third quarter of 2003 producing overall lower yields for all elements of the Companys
earning assets. The Company has not been able to reduce liability rates enough to avoid the continuing squeeze on interest rate margins. However, the Company is committed to its strategy of improving credit quality and reducing overall credit risk
which contributes directly to declining yields. Aggregate average asset balances for the three-month period ended September 30, 2003 increased compared to the same period in 2002, with the most dramatic increase in real estate loans. Consistent with
the overall corporate strategy, the commercial loan portfolio declined substantially as reflected by the decrease in the average balance of C&I loans to $416.1 million for the third quarter of 2003 from $586.1 million from the third quarter of
2002. In addition, the average yield on commercial loans decreased to 6.14% for the third quarter of 2003 from 6.63% for the third quarter of 2002.



Consistent with both previous quarters of 2003, the Companys most significant shift in the mix of its overall loan
portfolio was in the real estate loan category. The average balance of the overall real estate loan portfolio increased to $638.3 million for the third quarter of 2003, up $271.1 million from the same quarter in 2002. The increase in average
balance, or volume for the comparative quarters was the most significant element in the Companys efforts to respond to the general declining rate environment, and more than offset the decrease in the average yield of real estate loans to 5.91%
from 7.10% for the comparable quarter in 2002. Interest income from real estate loans increased $2.9 million to $9.4 million for the third 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. The average balance of fixed-rate residential loans



18



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|Item 2  continued |  | 
|------------------ |  | 



increased $233.0 million or 129.1% to $413.6 million from the same period in the previous year. As a result, interest income for fixed-rate residential
products increased $2.6 million despite a decrease in yield to 5.55% from 6.93% for the comparative period. The Companys bi-weekly products continue to be well received within its primary markets where customers representing more than 68% of
current originations select these products, and reflect positively on Company efforts to meet the demands of a broad-based refinancing market. Such bi-weekly mortgage products have been particularly attractive in the 10- and 15-year maturity
categories. The Company originates residential mortgage loans, principally with fixed rates, and currently retains all current production of the bi-weekly residential mortgages with maturities of 20 years or less.



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 September 30, 2003 when compared to the same period in 2002. Despite the high competition for consumer loans
throughout 2002 and the first nine months of 2003, the Company has been able to increase the average balances for overall consumer loan products by $18.8 million to $373.9 million for the quarter ended September 30, 2003 from $355.1 million for the
quarter ended September 30, 2002. Originations of all consumer loans were $133.2 million for the first nine months of 2003 compared to $137.7 million for the same period in 2002. However, overall consumer loan originations slowed during the third
quarter with originations of $47.9 million versus $65.0 million for the comparative quarters of 2003 and 2002, respectively. The primary decline has been within the indirect auto loan market with originations of $29.1 million in 2003 compared to
$44.6 million in 2002. Such decline follows the regional slowdown in overall auto sales with the most significant decline of $8.7 million in new auto loans. Though indirect used auto loans declined, such loans continue to represent more than 40% of
all consumer loan originations in both periods. In addition, the Company emphasized growth in such loans for customers with higher than average FICO scores. The average yield on all consumer loans decreased to 6.30% in comparison to 7.60% for the
same quarter in 2002.



During the quarter, investment
securities, principally mortgage-backed securities, continued to provide flexibility for the Company to redistribute its liquidity in anticipation of the prepayment of higher yielding securities. However, the average balance of investment securities
decreased to $654.1 million for the third quarter of 2003 from $661.3 million for the third quarter of 2002, due to rapid principal amortization and calls of securities with higher yields. High prepayments of mortgage-backed securities continued as
well as cashflows of about $110 million from principal reductions. During the last six months of 2003, nearly half of the securities portfolio had to be replaced, generally at lower rates, due to paydowns and sales. The yield on investment
securities decreased to 3.83% from 5.13% for the quarters ended September 30, 2003 and 2002, respectively. As a result, interest income on these securities decreased by $2.2 million to $6.3 million for the quarter ended September 30, 2003. Due to
prepayments, the relative yields were more heavily influenced by the amortization of any premiums incurred to acquire such investment securities, especially mortgage-backed securities. Consistent with the mortgage refinancing trends, prepayments of
mortgage-backed securities have increased based on the low rate environment, which also results in an acceleration of any related premium amortization and a decrease in overall yields. The yields on securities in the third quarter of 2003 were also
impacted by the absence of income on FHLB stock due to the suspension of the quarterly dividend by the FHLB of New York. Based on the level of FHLB stock income recognized in the second quarter of 2003, the impact on yield for investment securities
was a decline of almost 16 basis points in the third quarter. Future earnings will be negatively impacted to the extent the FHLB of New York continues the dividend suspension or reduces the dividend from the rate previously paid.



Interest income on loans held for sale increased to $175,000 from $19,000 for
the comparative quarters principally due to the increased volume of longer-term mortgage loans available for sale as discussed previously. Such strategy is intended to meet customer demands within our primary market area without restricting
investment alternatives. Interest income from federal funds sold declined primarily due to the $9.1 million decline in the average balance from $9.3 million in the third quarter of 2002.



Interest Expense



Total interest expense decreased by $2.1 million to $10.5 million for the quarter ended September 30, 2003 compared to the
same period in 2002. The average balance of all interest-bearing liabilities increased to $1,832.4 million for the quarter ended September 30, 2003 from $1,717.2 million for the same quarter in 2002. During the respective periods, the average rate
paid on all interest-bearing liabilities decreased to 2.30% from 2.95%.



The average balance of deposits decreased to $1,312.7 million for the three months ended September 30, 2003 from $1,347.6 million during the same period in 2002. A significant factor in the decrease of deposits relates to the December 2002
sale of two Elmira, New York area branches with $44.2 million of total deposits at the sale date.



19



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Consistent with the related interest rate trends for such accounts, time deposits continued to decline as reflected by a net decrease in average balances to
$608.1 million for 2003 from $673.7 million for the comparative quarter ended September 30, 2002. The related interest expense decreased by $2.1 million or 32.0% to $4.4 million in 2003. 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. Money market accounts, which are tied to short-term money-market indices,
increased in average balance to $394.8 million from $371.2 million for the comparative quarters, while the related interest expense declined 18.2% to $1.2 million. Increases of $7.2 million in the average balances of NOW accounts and savings
accounts reflected the benefits described earlier, of such accounts established in connection with bi-weekly mortgage originations. Since deposit customers usually tend to reduce time deposit balances as interest rates decline, the continued lower
interest rate environment may result in lower balances 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.



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 deposits, there is less
volatility in comparison and such funds facilitate planning for liquidity needs. The average balance of borrowings increased to $472.4 million for the quarter ended September 30, 2003 compared to $330.6 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 3.30% from 3.95% during the respective quarters. Interest expense associated with trust preferred securities increased for the comparative
quarter primarily due to the increased amounts outstanding associated with new issues for Trust II and Trust III in 2002.



Net Interest Income



Net interest income decreased to $17.6 million from $18.8 million for the three months ended September 30, 2003 and 2002, respectively. Such decline is
consistent with the steady overall decline in general interest rates discussed above, as well as 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 and earning assets continue to reprice downward.



The Companys net interest margin decreased 44 basis points to 3.36% for the third quarter of 2003 compared to the
margin of 3.80% for the third 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 third quarter 2003 provision for loan losses was $2.9 million compared to $3.0 million for the second quarter of 2003
and $4.5 million for the third quarter of 2002. The provision for loan losses in the third quarter of 2003 as compared to the prior quarters of 2003 reflects a reduction in non-performing loans and the continuation of the Companys strategy to
reduce overall credit risk by changing the mix of the loan portfolio with greater emphasis on lower credit risk residential real estate products and a reduction in commercial and industrial loans which have greater credit risk. Net charge-offs for
the quarter were $4.1 million compared to $6.3 million for the second quarter of 2003 and $1.7 million for the third quarter of 2002. Net charge-offs in the third quarter of 2003 exceeded the provision for loan losses for the same period by $1.2
million. An increase in the provision to the level of net charge-offs was not considered necessary as the related loan accounts previously had been adequately reserved. Management expects the provision for loan losses may continue to be less than
net loan charge-offs due to a sufficient level of specific reserves. Loans charged-off can fluctuate from quarter to quarter and the current level of charge-offs should not be considered an indicator of future levels. Based on the general economic
uncertainty within the Companys primary market area and the problematic loans that remain in its portfolio, the provision for loan losses in upcoming quarters may increase rather than decline further. The allowance for loan losses decreased to
$61.4 million as of September 30, 2003 compared to $62.6 million as of June 30, 2003, yet increased from $59.8 million at September 30, 2002. See Asset Quality section also.



The provision for loan losses is determined by management to maintain 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 is estimated based on a periodic review of the loan portfolio and its specific problem loans, historic loss experience as well as consideration of 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.



20



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The Company had performing loans 30-89 days past due at September 30, 2003 totaling $3.4 million or
0.23% of total gross loans outstanding. Comparative amounts were $4.8 million or 0.34% of total gross loans outstanding at June 30, 2003, and $8.1 million or 0.62% of total gross loans outstanding at September 30, 2002.



For third quarter 2003, gross loan charge-offs were $8.6 million compared to
second quarter 2003 gross loan charge-offs of $7.6 million and $3.7 million for the third quarter 2002. Recoveries were $4.5 million for the third quarter 2003, compared to $1.3 million in the second quarter 2003 and $1.9 million in the third
quarter 2002. Third quarter 2003 recoveries include over $3 million from one borrower. The coverage ratio of the allowance for loan losses to non-performing loans was 199.94% at September 30, 2003, compared to 162.85% at June 30, 2003 and 114.42% at
September 30, 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 September 30, 2003 reflects
managements best estimate of probable loan losses.



Non-interest Income



Non-interest income increased to $3.6 million for the quarter ended September 30, 2003 compared to $3.1 million for the quarter ended September 30, 2002. Bank owned life insurance, acquired in December 2002, provided $255,000 of income with
no comparable source in 2002. Net gains on the sale of the securities was $391,000 in the third quarter of 2003 reflecting an increase from $95,000 for the comparable period of 2002.



Operating Expense



Operating expense increased to $12.0 million for the quarter ended September 30, 2003 compared to $11.2 million for the
quarter ended September 30, 2002. For the respective quarters, the most significant change relates to salaries, pensions and other employee benefits. Benefit costs, principally in pension costs and health insurance, represent $277,000 of the
increase in personnel-related costs. Comparative pension expenses were $376,000 in 2003 and $146,000 in 2002. Pension expense increased in 2003 based on actuarial estimates of the net periodic pension costs necessary to amortize unrecognized
investment losses, as well as lower discount rates and lower assumed rates of return on plan assets. The current trend for increased health insurance and pension costs is expected to continue for the remainder of 2003.



Salaries and benefits associated with the Companys new item processing
center, opened in Syracuse in May 2003, represent $85,000 of the quarter to quarter increase in this category. Total operating expenses related to the new item processing center were $479,000 for the third quarter of 2003.



For the comparative third quarters of 2003 and 2002, services expenses
increased $145,000. Operating expenses associated with other real estate owned and repossessed assets increased to $128,000 from $33,000 and were associated with levels of commercial repossessions during the respective quarters.



The efficiency ratio for a bank is the ratio of total operating expenses to
the aggregate total of net interest income plus total non-interest income. The Companys efficiency ratio for the third quarter of 2003 was 56.69%, compared to 51.07% for the three months ended September 30, 2002. The increase in the efficiency
ratio was due to both the increases in costs as detailed above and the decrease in net interest income.



Income Tax Expense (Benefit)



The provision for income taxes for the third quarter 2003 was $2.1 million with an effective rate of 32.7%. For the comparable period in 2002, an income
tax expense of $2.3 million was recorded for an effective rate of 37.1%. The levels of income tax expense generally fluctuate with the respective levels of income before taxes, as well as the ratio of tax-exempt income to income before taxes. For
2003, the Companys effective tax rate reflects the impact of non-taxable bank owned life insurance and the benefits of certain state tax incentive credits.



COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002



For the nine months ended September 30, 2003, the Company recorded net
income of $12.1 million or $1.29 per diluted share, compared to the net loss of $2.2 million or $0.23 per diluted share for the nine-month period ended



21



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|Item 2  continued |  | 
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September 30, 2002. For 2003, the comparative earnings per share is impacted by a decrease in the weighted average shares attributed to stock repurchase
programs throughout 2002 that were extended until March 2003. The most significant individual factor impacting the comparative nine-month results was the provision for loan losses.



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



|                                                                 |  | Nine Months Ended September 30, |          
|---------------------------------------------------------------- |  | ------------------------------- | ---------
|                                                                 |  | 2003                            |          
|(Dollars in Thousands)                                           |  | Average Balance                 |          
|Interest-earning assets:                                         |  |                                 |          
|Commercial loans                                                 |  | $                               | 447,050  
|Consumer loans:                                                  |  |                                 |          
|Personal-direct                                                  |  |                                 | 68,621   
|Personal-indirect                                                |  |                                 | 260,874  
|Other(1)                                                         |  |                                 | 43,284   
|                                                                 |  |                                 |          
|Total consumer loans                                             |  |                                 | 372,779  
|                                                                 |  |                                 |          
|Real estate loans:                                               |  |                                 |          
|Residential-fixed                                                |  |                                 | 356,785  
|Commercial-fixed                                                 |  |                                 | 38,521   
|Residential-adjustable                                           |  |                                 | 64,076   
|Commercial-adjustable                                            |  |                                 | 119,707  
|                                                                 |  |                                 |          
|Total real estate loans                                          |  |                                 | 579,089  
|                                                                 |  |                                 |          
|Investment securities(2)                                         |  |                                 | 617,765  
|Loans held for sale                                              |  |                                 | 7,329    
|Federal funds sold                                               |  |                                 | 7,734    
|                                                                 |  |                                 |          
|Total interest-earning assets                                    |  |                                 | 2,031,746
|                                                                 |  |                                 |          
|Allowance for loan losses                                        |  |                                 | (64,394  
|Non-interest-earning assets                                      |  |                                 | 125,340  
|                                                                 |  |                                 |          
|Total assets                                                     |  | $                               | 2,092,692
|                                                                 |  |                                 |          
|Interest-bearing liabilities:                                    |  |                                 |          
|Deposits:                                                        |  |                                 |          
|Savings                                                          |  | $                               | 182,644  
|Money market                                                     |  |                                 | 374,269  
|Time deposits                                                    |  |                                 | 626,462  
|NOW                                                              |  |                                 | 123,135  
|                                                                 |  |                                 |          
|Total deposits                                                   |  |                                 | 1,306,510
|Borrowings                                                       |  |                                 | 428,566  
|Trust preferred securities                                       |  |                                 | 47,758   
|                                                                 |  |                                 |          
|Total interest-bearing liabilities                               |  |                                 | 1,782,834
|                                                                 |  |                                 |          
|Non-interest-bearing liabilities                                 |  |                                 | 16,981   
|Non-interest-bearing demand accounts                             |  |                                 | 147,831  
|Shareholders equity                                             |  |                                 | 145,046  
|                                                                 |  |                                 |          
|Total liabilities and shareholders equity                       |  | $                               | 2,092,692
|                                                                 |  |                                 |          
|                                                                 |  |                                 |          
|Net interest income                                              |  |                                 |          
|                                                                 |  |                                 |          
|Net earning assets                                               |  | $                               | 248,912  
|                                                                 |  |                                 |          
|Ratio of interest-earning assets to interest-bearing liabilities |  |                                 | 1.14     
|                                                                 |  |                                 |          
|Net interest rate spread                                         |  |                                 |          
|                                                                 |  |                                 |          
|Net interest rate margin                                         |  |                                 |          
|                                                                 |  |                                 |          



|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



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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.



|                                                  |  | Nine Months Ended September 30, 2003 Compared to 2002 Increase (Decrease) |       
|------------------------------------------------- |  | ------------------------------------------------------------------------- | ------
|(Dollars in Thousands)                            |  | Volume                                                                    |       
|Interest income on interest-earning assets:       |  |                                                                           |       
|Commercial loans                                  |  | $                                                                         | (9,551
|Consumer loans                                    |  |                                                                           | 858   
|Real estate loans                                 |  |                                                                           | 10,262
|Investment securities                             |  |                                                                           | 850   
|Loans held for sale                               |  |                                                                           | 152   
|Federal funds sold                                |  |                                                                           | (144  
|                                                  |  |                                                                           |       
|Total                                             |  | $                                                                         | 2,427 
|                                                  |  |                                                                           |       
|                                                  |  |                                                                           |       
|Interest expense on interest-bearing liabilities: |  |                                                                           |       
|Deposits:                                         |  |                                                                           |       
|Savings                                           |  | $                                                                         | 105   
|Money market                                      |  |                                                                           | (74   
|Time deposits                                     |  |                                                                           | (1,820
|NOW                                               |  |                                                                           | 3     
|                                                  |  |                                                                           |       
|Total                                             |  |                                                                           | (1,786
|                                                  |  |                                                                           |       
|Borrowings                                        |  |                                                                           | 2,822 
|Trust preferred securities                        |  |                                                                           | 719   
|                                                  |  |                                                                           |       
|Total                                             |  |                                                                           | 1,755 
|                                                  |  |                                                                           |       
|Net interest income                               |  | $                                                                         | 672   
|                                                  |  |                                                                           |       



Interest Income



The Companys interest
income on interest-earning assets decreased to $86.5 million for the nine months ended September 30, 2003 from $98.4 million for the same period in 2002. Year-to-date interest income decreased primarily due to the decline in the average yield on
interest-earning assets to 5.68% from 6.59% for the nine months ended September 30, 2003 and 2002, respectively. The average balance of total interest-earning assets has increased by $39.9 million or 2.0%, due to the changes in asset mix discussed
below. The substantial increase in real estate loans reflects the continuing refinancing trend that started in the fourth quarter of 2002 associated with the current low rate environment, as well as the Companys overall strategy to increase
real estate loans to reduce credit risk. The decrease in the Companys commercial loan portfolio is consistent with the Companys current long-term strategy to reduce credit risk and to improve credit quality.



General interest rates throughout the nine months of 2003 continued the trend
from 2002 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 contributes directly to declining yields. Though aggregate
average balances for the nine-month period ended September 30, 2003 were substantially unchanged compared to the same period in 2002, the Company experienced a dramatic increase in real estate loans. Consistent with the overall corporate strategy,
the commercial loan portfolio declined substantially as reflected by the decrease in the average balance of C&I loans to $447.1 million for the nine months of 2003 from $648.9 million for the same period in 2002. In addition, the average yield
on commercial loans decreased to 6.26% for the nine months of 2003 from 6.59% for the same period in 2002.



The Companys most significant shift in the mix of its overall loan portfolio continued the 2002 trend within the real estate loan category. The average balance of
the overall real estate loan portfolio increased to $579.1 million for the nine months of 2003, up $215.8 million from the same period in 2002. The increase in average balance, or volume, for the comparative periods more than offset the decrease in
the average yield to 6.07% from 7.29% for the comparable period in 2002. Interest income from such loans increased $6.5 million to $26.4 million for the comparative nine-month periods of 2003 and 2002, respectively. The most significant increase in
the real estate loan portfolio is associated with the fixed-rate residential loans. The average balance of fixed-rate residential loans



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|Item 2  continued |  | 
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increased $187.6 million or 110.9% to $356.8 million from the same period in the previous year. As a result, interest income for fixed-rate residential
products increased $6.5 million despite a decrease in yield to 5.76% from 6.98% for the comparative periods. As noted in the current quarter discussion, the Companys bi-weekly products have been well received within its primary markets
supporting efforts to meet the demands of a broad-based refinancing market.



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 nine months ended
September 30, 2003 when compared to the same period in 2002. Despite the high competition for consumer loans throughout 2002 and early 2003, the Company has been able to increase the average balances for overall consumer loan products by $14.7
million to $372.8 million for the nine months ended September 30, 2003 from $358.1 million for the comparative period in 2002. The improvement in consumer loans is principally attributed to certain used car loan products which tend to have seasonal
originations. In addition, consumer equity lines of credit increased $4.6 million for the comparative periods and reflected the refinancing trends within the residential real estate market. The average yield on all consumer loans decreased to 6.57%
in comparison to 8.08% for the same period in 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 $617.8
million for the nine months of 2003 from $596.2 million for the first nine months of 2002, despite rapid principal amortization and calls of securities with higher yields. For the respective nine-month periods, the most significant impact on the
comparative yields is attributed to high prepayments of mortgage-backed securities and normal principal reductions as discussed previously. In the most recent two quarters of 2003, nearly half of the securities portfolio had to be replaced,
generally at lower rates, due to paydowns and sales of securities. The yield on investment securities decreased to 4.40% from 5.43% for the nine months ended September 30, 2003 and 2002, respectively, and offset the increase from the higher average
balances. As a result, interest income decreased by $3.9 million to $20.4 million for the nine months ended September 30, 2003. The relative yields continue to be influenced by the amortization of any premiums incurred to acquire such investment
securities, similar to the discussions within the quarterly comparisons. The comparative yield on investment securities also reflected the absence of income on FHLB stock for the third quarter of 2003, as previously discussed.



Interest income on loans held for sale and from federal funds sold fluctuated
for the respective periods consistent with short-term fluctuations in such asset categories.



Interest Expense



Total interest expense decreased by $6.9 million to $32.5 million for the nine months ended September 30, 2003 compared to the same period in 2002. The
average balance of all interest-bearing liabilities increased to $1,782.8 million for the nine months ended September 30, 2003 from $1,722.4 million for the same period in 2002. During the respective periods, the average rate paid on all
interest-bearing liabilities decreased to 2.43% from 3.05%.



The average balance of deposits decreased to $1,306.5 million during the nine months ended September 30, 2003 from $1,361.0 million during the same period in 2002. As discussed earlier, the most significant decline in deposits is related to
the December 2002 sale of two Elmira, New York branches with $44.2 million of deposits at the sale date. Other fluctuations discussed earlier for the comparative three-month periods are similarly applicable based upon the continued lower interest
rate environment of the past year.



Borrowed funds, used to
supplement retail and commercial deposits, had an increase in the average balances to $428.6 million for the nine months ended September 30, 2003 compared to $325.7 million for the same period in 2002. The cost of such increased borrowings was
partially offset by the decrease in the rate paid on borrowings to 3.43% from 3.90% during the respective periods. Fluctuations in interest expense associated with trust preferred securities are consistent for the respective nine-month periods to
the quarterly comparisons.



Net Interest
Income



Net interest income decreased to $54.0 million
from $59.0 million for the nine months ended September 30, 2003 and 2002, respectively. As discussed in the quarterly comparison, the decline is consistent with the general interest rate environment and the Companys current strategy for the
mix of its loan portfolio to emphasize higher



24



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|Item 2  continued |  | 
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quality, lower risk loans. The Companys net interest margin decreased 41 basis points to 3.54% for the first nine months of 2003 compared to the margin
of 3.95% for the same period in 2002. For the respective periods, the decline reflects the inability to lower the cost of funds as rapidly as asset yields declined.



Provision for Loan Losses



The provision for loan losses was $9.8 million for the nine months of 2003 compared to $36.4 million for the comparable
period in 2002. Net charge-offs for the nine-month period were $11.7 million compared to $35.5 million for the same period in 2002. The lower provision for loan losses in the first nine months of 2003 as compared to the same period in 2002 is
primarily due to the significant reduction in net loan charge-offs, as well as both the reduction in non-performing loans and the changing mix of the overall loan portfolio. As discussed in the quarterly results comparison, the provision for loan
losses reflects managements assessment of the estimated losses inherent in the loan portfolio. Loans charged-off can fluctuate from quarter to quarter and the current level of charge-offs should not be considered an indicator of future levels.
See Asset Quality for general discussion of the allowance for loan losses and related analysis.



Non-Interest Income



Non-interest income declined to $10.4 million from $11.1 million for the nine months ended September 30, 2003 and 2002, respectively. The most significant variance involves a $1.8 million net gain on the sale of the Companys credit
card portfolio during the first quarter of 2002. Bank owned life insurance, acquired in December 2002, provided $753,000 of income with no comparable source in 2002. Net gains on sale of securities increased to $1.0 million in 2003 compared to
$270,000 for the same nine-month period of 2002. Other fluctuations were consistent with discussions for respective quarters of each year.



Operating Expense



Operating expense declined to $36.4 million from $36.6 million for the nine months ended September 30, 2003 and 2002, respectively. The most significant
decrease in operating expense for the respective nine-month periods related to costs incurred in the 2002 conversion to the Proof of Deposit processing system of $387,000. Professional fees for 2003 decreased 6.7% to $1.9 million with
the reductions primarily associated with the changes in problematic loans and related credit recoveries. Similarly, year-to-date operating costs associated with repossession and maintenance of other real estate owned and repossessed assets decreased
$211,000 to $435,000.



Salaries, pensions and other employee
benefits for the respective nine-month periods reflected an increase of $700,000. Pension expense for 2003 was $872,000 compared to $413,000 for the same period of 2002, and increased for the reasons discussed in the comparison of quarterly results.
Similarly, health insurance costs increased $136,000 to $1.1 million for the nine months of 2003.



Other significant fluctuations on a year-to-year comparison were associated with opening a new in-house item processing center in May 2003. Previously,
costs for such processing were included primarily under data processing costs. Year-to-date operating expenses for the item processing center totaled $687,000, including $164,000 for salaries and related benefits.



The Companys efficiency ratio for the nine months of 2003 was 56.60%,
compared to 53.03% for the same period in 2002. The increase in the efficiency ratio was due to the decrease in net interest income and non-interest income, and offset slightly by the reduction of operating expenses.



Income Tax Expense (Benefit)



Income tax expense increased to $6.0 million based on income before income
taxes totaling $18.1 million for the nine months ended September 30, 2003. In comparison, an income tax benefit of $733,000 was recognized relative to the pre-tax loss of $2.9 million for the nine months ended September 30, 2002. For the respective
periods, the effective tax rate was impacted by the same factors discussed in the quarterly comparison of results.



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



25



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|Item 2  continued |  | 
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and deposit withdrawals, pay operating expenses, service outstanding debt, pay shareholder dividends, as well as purchase treasury shares under stock
repurchase programs. Liquidity is reviewed on an ongoing basis by management, and monthly by the Asset/Liability Committee (ALCO) and the Board of Directors. Target ratios for liquidity have been established based on historical trends,
and appropriate contingency plans are in place for unanticipated, adverse liquidity situations.



The Companys primary sources of liquidity, on a consolidated basis, are deposits, payments of principal and interest from its loan and securities
portfolios and the ability to use its loan and securities portfolios as collateral for secured borrowings. The Bank is a member of the FHLB of New York. At September 30, 2003, outstanding FHLB advances totaled $425.8 million. In addition, the
Company, through various facilities, has unused capacity to access up to $400.0 million of brokered deposits per Board approved policy limits, of which $105.0 million was outstanding at September 30, 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, time deposit maturity structure and retention, investment portfolio cash flows, and characteristics and diversification of wholesale
funding sources. The Companys liquidity position is influenced by changes in interest rate levels, economic conditions and by competition.



Operating activities provided net cash of $23.6 million for the nine months ended September 30, 2003 compared to $25.9 million for the same period in
2002. Operating activity cash flows were most directly impacted by the results of operations with net income of $12.1 million in the first nine months of 2003 compared to a loss of $2.2 million in the first nine months of 2002. Changes in the
provision for loan losses was generally the most significant adjustment to net income as the source of operating funds providing $9.8 million in the nine months ended September 30, 2003 compared to $36.4 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 modify its decisions to sell or accumulate loans originated by its banking operations within its market area.



Investing activities used net cash of $153.2 million for the nine months ended September 30, 2003 compared to the use of $29.8 million for the same period
in 2002. Investing activities in 2003 used $120.6 million to fund net loan portfolio growth, principally for residential mortgages. Also, the Company increased its securities portfolio approximately $25.7 million for the year-to-date period in
response to continued rapid principal amortization and calls of securities related to the low interest rate environment. In fact, during the past six months of 2003, nearly half of the securities portfolio had to be replaced due to the levels of
such paydowns and sales. For the comparable 2002 period, the reduction of the loan portfolio, especially for consumer loans, provided $118.3 million, in addition to proceeds of $12.7 million from the sale of the credit card portfolio.



Financing activities provided net cash of $128.8 million compared to $775,000
during the first nine months of 2003 and 2002, respectively. Short-term borrowings increased by $12.8 million during 2003. Long-term borrowings were utilized to provide cash for financing activities with proceeds exceeding repayments by $89.1
million in 2003 and $49.9 million in 2002. During 2002, the Company also used financing activities for repayment of repurchase agreements and FHLB line of credit advances.



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



The Company issued a total of $25.0
million of trust preferred securities during 2002, including $10.0 million issued during the second quarter of 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



26



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|Item 2  continued |  | 
|------------------ |  | 



of which was announced during the fourth quarter of 2002 and has been completed. Currently, no additional stock repurchase program has been authorized.



At September 30, 2003, BSB Bancorp, Inc., on an unconsolidated
basis, had immediately available funds totaling $19.8 million. Management believes current levels of cash are adequate to meet the Companys anticipated ordinary obligations in 2003, and to pay customary cash dividends on the Companys
common stock for the next twelve months, if so declared. Management anticipates that the Bank will be able to resume the payment of cash dividends to the Company, without regulatory approval, in 2004. However, circumstances, including stock
repurchases or other unanticipated cash obligations, may require the Company to seek additional sources of funding or require the Bank to seek regulatory approval for another special cash dividend to the Company, should the Bank be otherwise unable
to make such cash dividend payments.



At September 30, 2003,
the Banks Tier I leverage ratio, as defined by regulatory guidelines, was 7.71%, 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 12.84%, up from 11.90% at December 31, 2002, and still in excess of the regulatory requirements. The change in these ratios is primarily attributed to the Companys shift to
higher levels of residential mortgages with lower risk ratings, as well as generating net income in the first nine months of 2003. See Note 7 within Notes to Unaudited Interim Consolidated Financial Statements for a discussion of FIN No.
46 related to trust preferred securities and the potential impact on the Companys Tier I ratios.



The Companys book value per share was $15.69 at September 30, 2003 compared to $15.78 at December 31, 2002 as well as September 30, 2002.



IMPACT OF INFLATION AND CHANGING
PRICES



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



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



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|Item 2  continued |  | 
|------------------ |  | 



MARKET PRICES AND RELATED SHAREHOLDER MATTERS



The stock of the Company is listed on The NASDAQ Stock Markets
National Market System under the symbol BSBN. As of September 30, 2003, the Company had 2,171 shareholders of record and 9,174,759 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 |               
|Second Quarter |  | $           | 28.20 |               
|Third Quarter  |  | $           | 27.72 |               



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Item 3



QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK



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



Based on the Companys latest analysis of asset/liability mix at September 30, 2003, managements simulation analysis of the effects of changing
interest rates on a static balance sheet projected that an immediate 100 basis point parallel increase in interest rates would increase net interest income by 1.32% 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 2.20% over a 12-month horizon. The estimated change in net interest income from a 100 basis point parallel decrease in the level of interest rates
(presentation is limited to a 100 basis point decline in rates due to the current historically low interest rate environment) would be a decrease of 0.30%. 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.



29



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Item 4



CONTROLS AND PROCEDURES



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



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



30



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Item 1 - Legal Proceedings



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



Item 2 - Changes in Securities 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) | Exhibits
| | --- | --------



| |  | Exhibit  31.1  Section 302 Certification of Chief Executive Officer
| |  | --------------------------------------------------------------------

| |  | Exhibit  31.2  Section 302 Certification of Chief Financial Officer
| |  | --------------------------------------------------------------------

| |  | Exhibit  32.1  Section 906 Certification of Chief Executive Officer
| |  | --------------------------------------------------------------------

| |  | Exhibit  32.2  Section 906 Certification of Chief Financial Officer
| |  | --------------------------------------------------------------------



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



| |  | None
| |  | ----



31



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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: November 12, 2003 |  |  |  | By: |  | /s/    HOWARD W. SHARP
|                        |  |  |  |     | 
|                        |  |  |  |     |  |                        |  | HOWARD W. SHARP President and Chief Executive Officer



|                        |  |  | 
|----------------------- |  |  | 
|Date: November 12, 2003 |  |  | 
|                        |  |  | 
|                        |  |  | 



32