<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                                 WASHINGTON, D.C. 20549
 
                                   ----------
                                        
                                   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, 1998
                                                ---------------------------
                                        
                                      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:  O-17177
                                                 -------
                                        

                               BSB Bancorp, Inc.
                             --------------------
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                        
           Delaware                                        16-1327860
  -----------------------------                     ------------------------
 (State or other jurisdiction of                    (I.R.S. Employer Number)
 incorporation or organization)

               58-68 Exchange Street, Binghamton, New York 13902
              -----------------------------------------------------
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
                                        
       Registrant's telephone number, including area code: (607) 779-2492
                                                           --------------
                                        
                                      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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.  As of October 26, 1998:
8,627,036 shares of common stock, $0.01 par value.
<PAGE>
 
                                 INDEX
                                 -----



PART I.  FINANCIAL INFORMATION                                           PAGE
------------------------------                                           ----
 
 
Item 1: Financial Statements
-------
 
       Consolidated Statements of Condition                               
       September 30, 1998 and December 31, 1997.........................    1
                                                                          
       Consolidated Statements of Income Three Months and Nine Months     
       Ended September 30, 1998 and September 30, 1997..................    2
                                                                          
       Consolidated Statements of Comprehensive Income Three              
       Months and Nine Months Ended September 30, 1998 and                
       September 30, 1997...............................................    3
                                                                          
       Consolidated Statements of Cash Flows Nine Months Ended            
       September  30, 1998 and September 30, 1997.......................    4
                                                                          
       Consolidated Statements of Changes in Shareholders' Equity Nine    
       Months Ended September 30, 1997 and September 30, 1998...........    5
                                                                          
       Notes to Consolidated Financial Statements.......................  6-7


 Item 2:   Management's Discussion and Analysis of
 ------                                           

       Financial Condition and Results of Operations.................... 8-20
       
       
       
 Item 3:  Quantitative and Qualitative Disclosures About Market Risk....   21
 ------                                                                   


PART II.  OTHER INFORMATION
---------------------------


       Items 1-6........................................................   22

       Signature Page...................................................   23
<PAGE>
 
-----------------------------------------------------------------------------
BSB BANCORP, INC.                                      (DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENTS OF CONDITION
-----------------------------------------------------------------------------
 
                                                 SEPTEMBER 30,   DECEMBER 31, 
                                                          1998           1997  
-----------------------------------------------------------------------------
ASSETS                                                                        
Cash and due from banks                             $   42,577     $   36,066 
Investment securities available for sale               403,174        271,120 
Investment securities held to maturity 
 (market value $10,864 and $14,141)                     10,681         13,868 
Mortgages held for sale                                 12,965          7,459 
Loans:                                                                        
 Commercial                                            752,939        654,243 
 Consumer                                              346,065        299,307 
 Real estate                                           227,594        252,247 
-----------------------------------------------------------------------------
    Total loans                                      1,326,598      1,205,797 
Less:   Unearned discounts                                 194            595 
    Allowance for possible credit losses                21,895         19,207 
-----------------------------------------------------------------------------
        Net loans                                    1,304,509      1,185,995 
Bank premises and equipment                              9,678          9,500 
Accrued interest receivable                             13,648         11,118 
Other real estate                                        1,984          2,784 
Intangible assets                                        1,672          1,893 
Other assets                                            15,855         20,768 
-----------------------------------------------------------------------------
                                                    $1,816,743     $1,560,571 
=============================================================================

LIABILITIES & SHAREHOLDERS' EQUITY

Due to depositors                                   $1,469,587     $1,239,508 
Borrowings                                             157,682        178,644 
Company obligated mandatorily redeemable  
 preferred securities of subsidiary, Capital Trust 
 I, holding solely junior subordinated debentures 
 of the Company                                         30,000                
Other liabilities                                       25,103         21,553 
Shareholders' Equity:                                                         
 Preferred Stock, par value $0.01 per share;      
    authorized 2,500,000 shares; none issued      
 Common Stock, par value $0.01 per share;           
    authorized 30,000,000 shares; 11,230,228        
    shares and 11,159,924 shares issued                    112            112 
 Additional paid-in capital                             29,964         29,215 
 Undivided profits                                     131,027        122,029 
 Accumulated other comprehensive income                  3,041           (733)
 Treasury stock, at cost: 2,603,192 and 
  2,602,692 shares                                     (29,773)       (29,757)
--------------------------------------------------------------------------------
    Total Shareholders' Equity                         134,371        120,866 
--------------------------------------------------------------------------------
                                                    $1,816,743     $1,560,571 
================================================================================

The accompanying notes are an integral part of the financial statements.

                                       1
<PAGE>
 
--------------------------------------------------------------------------------
BSB BANCORP, INC.                       (DOLLARS IN THOUSANDS-EXCEPT SHARE DATA)
CONSOLIDATED STATEMENTS OF INCOME            
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                 Three Months Ended            Nine Months Ended
                                      September 30,                September 30,
                                    1998       1997          1998           1997
--------------------------------------------------------------------------------
<S>                              <C>        <C>           <C>           <C> 
Interest income:                                                     
  Interest and fees on                                               
   loans                         $30,746    $26,429       $89,518       $75,134
  Interest on investment                                             
   securities                      6,957      4,530        17,569        14,433
  Interest on mortgages                                              
   held for sale                     335        123           873           208
-------------------------------------------------------------------------------
     Total interest income        38,038     31,082       107,960        89,775
                                                                     
Interest expense:                                                    
  Interest on savings                                                
   deposits                          997      1,000         2,913         2,926
  Interest on time accounts       12,580      8,909        34,704        25,938
  Interest on money market                                           
   deposit accounts                3,150      2,951         9,268         8,621
  Interest on NOW accounts           238        198           683           595
  Interest on borrowed funds       2,238      2,801         7,718         7,397
  Interest on mandatorily                                            
   redeemable                                                        
     securities of subsidiary        461                      461    
-------------------------------------------------------------------------------
     Total interest expense       19,664     15,859        55,747        45,477
-------------------------------------------------------------------------------
Net interest income               18,374     15,223        52,213        44,298
Provision for credit losses        3,333      2,538         9,037         7,351
-------------------------------------------------------------------------------
Net interest income after                                            
 provision for credit losses      15,041     12,685        43,176        36,947
Gains (losses) on sale of                                            
 securities                           (6)       126          (509)          107
Gains (losses) on sale of loans      (75)       (94)         (455)         (183)
Non-interest income:                                                 
  Service charges on                                                 
   deposit accounts                  636        579         1,913         1,646
  Credit card fees                   342        225           897           582
  Mortgage servicing fees            310        254           883           811
  Fees and commissions-brokerage                                     
   services                          148        105           398           313
  Trust fees                         231        183           703           504
  Other charges,                                                     
   commissions, and fees             311        182           892           675
-------------------------------------------------------------------------------
     Total non-interest                                              
      income                       1,978      1,528         5,686         4,531
-------------------------------------------------------------------------------
Non-interest expense:                                                
  Salaries, pensions and                                             
   other employee benefits         3,964      3,340        11,368        10,061
  Building occupancy                 670        596         2,040         1,981
  Dealer commission expense          162        487           776         1,252
  Computer service fees              398        253           947           691
  Services                           782        600         2,296         1,623
  FDIC insurance                      45         39           126            99
  Goodwill                            74         74           221           221
  Interchange fees                   259        155           658           396
  Other real estate                  225        192           306           639
  Other expenses                   1,771      1,426         5,036         4,038
-------------------------------------------------------------------------------
     Total non-interest                                              
      expense                      8,350      7,162        23,774        21,001
-------------------------------------------------------------------------------
Income before income taxes         8,588      7,083        24,124        20,401
Provision for income taxes         3,428      2,705         9,450         7,895
-------------------------------------------------------------------------------
NET INCOME                        $5,160     $4,378       $14,674       $12,506
===============================================================================
Earnings per share:                                                  
  Basic                            $0.60      $0.51         $1.71         $1.47
  Diluted                          $0.58      $0.50         $1.65         $1.43
===============================================================================
</TABLE>                                                             
 
The accompanying notes are an integral part of the financial statements.

                                       2
<PAGE>
 
--------------------------------------------------------------------------------
BSB BANCORP, INC.                                         (DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
                                    Three Months Ended         Nine Months Ended
                                         September 30,             September 30,
                                     1998         1997         1998         1997
--------------------------------------------------------------------------------
                                                           
Net income                         $5,160       $4,378      $14,674      $12,506
                                                        
Other comprehensive                                     
 income, net of tax:                                    
   Unrealized gains                                     
    (losses) on securities,                             
    net of reclassification     
    adjustment (Note 3)             2,580        1,290        3,774          599
--------------------------------------------------------------------------------
Other comprehensive income          2,580        1,290        3,774          599
--------------------------------------------------------------------------------
Comprehensive income               $7,740       $5,668      $18,448      $13,105
================================================================================
                                              
The accompanying notes are an integral part of the financial statements.

                                       3
<PAGE>
 
--------------------------------------------------------------------------------
BSB BANCORP, INC.                                         (DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                    Nine Months Ended September 30,
                                                                1998           1997
-----------------------------------------------------------------------------------
<S>                                                       <C>            <C> 
Operating activities:
  Net income                                              $   14,674     $   12,506
      Adjustments to reconcile net income to net 
        cash provided by operating activities:
      Provision for credit losses                              9,037          7,351
      Realized losses (gains) on available for 
        sale investment securities                               509           (107)
      Other losses, net                                          438            108
      Depreciation and amortization                            1,305          1,301
      Net amortization of premiums and discounts
        on investment securities                              (1,026)          (152)
      Net (accretion) of premiums and discounts on loans        (400)          (488)
      Sales of loans originated for sale                      49,981         26,554
      Net increase in loans originated for sale              (64,462)       (29,689)
      Writedowns of other real estate                            712            603
      Net change in other assets and liabilities               3,229            358
-----------------------------------------------------------------------------------
          Net cash provided by operating activities           13,997         18,345
-----------------------------------------------------------------------------------
Investing activities:
  Proceeds from calls of held to maturity investment 
    securities                                                 5,794         11,375
  Purchases of held to maturity investment securities         (3,259)        (3,463)
  Principal collected on held to
    maturity investment securities                               640          1,466
  Proceeds from sales of available for
    sale investment securities                               143,342        132,021
  Purchases of available for sale investment securities     (249,924)      (147,024)
  Principal collected on available for sale 
    investment securities                                     19,240         16,757
  Net increase in longer-term loans                         (195,156)      (164,279)
  Proceeds from sales of loans                                38,361         22,992
  Proceeds from sales of other real estate                       551          1,119
  Other                                                       (1,248)        (1,566)
-----------------------------------------------------------------------------------
          Net cash used by investing activities             (241,659)      (130,602)
-----------------------------------------------------------------------------------
Financing activities:
  Net increase in demand deposits, NOW accounts,
    savings accounts, and money market deposit accounts        4,073          6,678
  Net increase in time deposits                              226,005         (6,593)
  Net increase in short-term borrowings                      (70,962)       105,474
  Net change in long-term borrowings                          50,000             (4)
  Net proceeds from issuance of subordinated debentures       30,000
  Proceeds from exercise of stock options                        749          1,178
  Purchases of treasury stock                                    (16)
  Dividends paid                                              (5,676)        (4,541)
-----------------------------------------------------------------------------------
          Net cash provided by financing activities          234,173        102,192
-----------------------------------------------------------------------------------
            Decrease in cash and cash equivalents              6,511        (10,065)
Cash and cash equivalents at beginning of year                36,066         46,427
-----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                $   42,577     $   36,362
-----------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
  Cash paid during the year for:
      Interest credited on deposits and paid on 
        other borrowings                                  $   54,127     $   44,325
-----------------------------------------------------------------------------------
      Income taxes                                        $   11,708     $    7,396
-----------------------------------------------------------------------------------
  Non-cash investing activity:
      Securitization of mortgage loans                    
       and transfers to other real estate                 $   38,166     $    3,391
-----------------------------------------------------------------------------------
      Unrealized appreciation in securities               $    6,477     $    1,027
-----------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                       4
<PAGE>
 
--------------------------------------------------------------------------------
BSB BANCORP, INC.                   (Dollars In Thousands-Except Per Share Data)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                          Accumulated
Nine Months Ended                                 Additional                                    Other
September 30,                            Common      Paid-in    Undivided    Treasury   Comprehensive
1997                                      Stock      Capital      Profits       Stock          Income      Total
----------------------------------------------------------------------------------------------------------------
<S>                                    <C>       <C>           <C>          <C>         <C>             <C>
Balance at December 31, 1996               $ 73      $27,824     $111,466    $(29,757)         $ (877)  $108,729
 
Comprehensive income:
  Net income                                                       12,506                                 12,506
  Other comprehensive income:
  Unrealized appreciation in
    available for sale securities,
    net of reclassification
    amount (Note 3)                                                                               599        599
----------------------------------------------------------------------------------------------------------------
Comprehensive income                                               12,506                         599     13,105
 
Effect of three-for-two stock split          37          (37)
Stock options exercised                       1        1,177                                               1,178
Cash dividend paid on common
  stock ($0.54 per share)                                          (4,541)                                (4,541)
----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997              $111      $28,964     $119,431    $(29,757)         $ (278)  $118,471
================================================================================================================
 
1998
----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997               $112      $29,215     $122,029    $(29,757)         $ (733)  $120,866
 
Comprehensive income:
  Net income                                                       14,674                                 14,674
  Other comprehensive income:
  Unrealized appreciation in
    available for sale securities,
    net of reclassification
    amount (Note 3)                                                                             3,774      3,774
----------------------------------------------------------------------------------------------------------------
Comprehensive income                                               14,674                       3,774     18,448
Stock options exercised                                  749                                                 749
Treasury stock purchased                                                          (16)                       (16)
Cash dividend paid on common
  stock ($0.66 per share)                                          (5,676)                                (5,676)
----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998              $112      $29,964     $131,027    $(29,773)         $3,041   $134,371
================================================================================================================
</TABLE> 

The accompanying notes are an integral part of the financial statements.

                                       5
<PAGE>
 
BSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998

(1)  In the opinion of management, the interim financial statements reflect all
     adjustments which are of a normal recurring nature necessary to a fair
     statement of the results for the interim periods presented.  The December
     31, 1997 data in the Consolidated Statements of Condition is derived from
     the audited consolidated financial statements included in the Company's
     1997 Annual Report to Shareholders.  The accompanying unaudited interim
     consolidated financial statements and related notes should be read in
     conjunction with the audited consolidated financial statements and related
     notes included in the Company's 1997 Annual Report to Shareholders.
(2)  Basic earnings per share are computed based on the weighted average shares
     outstanding.  Diluted earnings per share are computed based on the weighted
     average shares outstanding adjusted for the dilutive effect of the assumed
     exercise of stock options during the period.

         The following is a reconciliation of basic earnings per share to
     diluted earnings per share for the quarters and nine months ended September
     30, 1998 and 1997.

<TABLE>
<CAPTION>
Quarters Ended September 30,        Net Income  Weighted Average Shares  Earnings Per Share
-------------------------------------------------------------------------------------------
<S>                                <C>          <C>                      <C>
1998
Basic earnings per share           $ 5,160,494                8,613,441               $0.60
Effect of stock options                                         271,733
-------------------------------------------------------------------------------------------
Diluted earnings per share         $ 5,160,494                8,885,174               $0.58
===========================================================================================
 
1997
Basic earnings per share           $ 4,377,918                8,534,591               $0.51
Effect of stock options                                         292,124
-------------------------------------------------------------------------------------------
Diluted earnings per share         $ 4,377,918                8,826,715               $0.50
===========================================================================================
 
Nine Months Ended September 30,     Net Income  Weighted Average Shares  Earnings Per Share
-------------------------------------------------------------------------------------------
1998
Basic earnings per share           $14,674,093                8,597,918               $1.71
Effect of stock options                                         296,946
-------------------------------------------------------------------------------------------
Diluted earnings per share         $14,674,093                8,894,864               $1.65
===========================================================================================
 
1997
Basic earnings per share           $12,505,680                8,495,449               $1.47
Effect of stock options                                         267,244
-------------------------------------------------------------------------------------------
Diluted earnings per share         $12,505,680                8,762,693               $1.43
===========================================================================================
</TABLE>

                                       6
<PAGE>
 
(3)  Effective January 1, 1998, the Company adopted Statement of Financial
     Accounting Standards No. 130, " Reporting Comprehensive Income."  This
     pronouncement requires the Company to report the effects of unrealized
     investment holding gains or losses on comprehensive income.  The following
     reflects the components of "Other Comprehensive Income" on a before and net
     of tax basis:

<TABLE>
<CAPTION>
Quarters Ended September 30,                                                              (Dollars in Thousands)
                                                                         Before Tax   Tax (Expense)  Net of Tax
                                                                             Amount     or Benefit       Amount
---------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>          <C>            <C>
1998
Unrealized gains on securities:
  Unrealized holding gains arising during period                             $4,433        $(1,850)      $2,583
  Less: Reclassification adjustment for losses realized in net income            (6)             3           (3)
---------------------------------------------------------------------------------------------------------------
  Net realized gains                                                          4,427         (1,847)       2,580
---------------------------------------------------------------------------------------------------------------
Other comprehensive income                                                   $4,427        $(1,847)      $2,580
===============================================================================================================
 
1997
Unrealized gains on securities:
  Unrealized holding gains arising during period                             $2,087        $  (870)      $1,217
  Less: Reclassification adjustment for losses realized in net income           126            (53)          73
---------------------------------------------------------------------------------------------------------------
  Net realized gains                                                          2,213           (923)       1,290
---------------------------------------------------------------------------------------------------------------
Other comprehensive income                                                   $2,213        $  (923)      $1,290
===============================================================================================================
 
Nine months Ended September 30,
1998
Unrealized gains on securities:
  Unrealized holding gains arising during period                             $6,986        $(2,915)      $4,071
  Less: Reclassification adjustment for losses realized in net income          (509)           212         (297)
---------------------------------------------------------------------------------------------------------------
  Net realized gains                                                          6,477         (2,703)       3,774
---------------------------------------------------------------------------------------------------------------
Other comprehensive income                                                   $6,477        $(2,703)      $3,774
===============================================================================================================
 
1997
Unrealized losses on securities:
  Unrealized holding losses arising during period                            $  920        $  (383)      $  537
  Less: Reclassification adjustment for losses realized in net income           107            (45)          62
---------------------------------------------------------------------------------------------------------------
  Net realized losses                                                         1,027           (428)         599
---------------------------------------------------------------------------------------------------------------
Other comprehensive income                                                   $1,027        $  (428)      $  599
===============================================================================================================
</TABLE>

(4) On July 24, 1998, the Company placed $30 million of 30-year 8.125% capital
    securities through BSB Capital Trust I, a Delaware business trust that was
    formed by the Company. The Trust was formed solely to invest the proceeds
    from the sale of the capital securities in 8.125% junior subordinated
    debentures issued by the Company. The net proceeds from the sale of the
    capital securities qualify as Tier I Capital for the Company.

                                       7
<PAGE>
 
Item 2

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

General
-------

  BSB Bancorp, Inc. (the "Company"), the bank holding company for BSB Bank &
Trust Company (the "Bank"), earned net income of $5.2 million, or diluted
earnings per share of $0.58 for the quarter ended September 30, 1998, as
compared to net income of $4.4 million, or diluted earnings per share of $0.50
for the quarter ended September 30, 1997.  Net income for the first nine months
of 1998 totalled $14.7 million, or $1.65 diluted earnings per share, compared to
$12.5 million, or $1.43 diluted earnings per share for the first nine months of
1997.

  On October 26, 1998, the Board of Directors announced a quarterly cash
dividend of $0.25 per share payable on December 10, 1998 to shareholders of
record at the close of business on November 24, 1998.

Financial Condition
-------------------

  Total assets of the Company increased from $1,560.6 million at December 31,
1997 to $1,816.7 million at September 30, 1998. During the first nine months of
1998, the Company originated $229.6 million of commercial loans, which
contributed to a net increase in the commercial loan portfolio of $98.7 million
from $654.2 million at December 31, 1997 to $752.9 million at September 30,
1998.  The interest rates on these loans are generally tied to the Bank's Prime
Rate.  Consumer loans increased from $299.3 million at December 31, 1997 to
$346.1 million at September 30, 1998, and during this period, the Company
originated $165.0 million in consumer loans.  Real estate loans decreased from
$252.2 million at December 31, 1997 to $227.6 million at September 30, 1998.
During the above mentioned period, the Company originated $141.5 million of real
estate loans, of which $84.2 million were sold and $37.7 million were
securitized.   Investment securities increased from $285.0 million at December
31, 1997 to $413.9 million at  September 30, 1998.  The increase in investments
was based on two factors: a continued emphasis on maintaining liquidity in the
portfolio commensurate with the strong growth in earning assets and a decision
to build the portfolio in expectation of calls on certain securities over the
next few months.

  Total deposits increased from $1,239.5 million at December 31, 1997 to
$1,469.6 million at September 30, 1998.  This growth came mainly from
certificates of deposits originated through the money desk which was established
in the second half of 1997.  These funds grew to $200.8 million at September 30,
1998 from $49.1 million at December 31, 1997, and successfully provided the Bank
with the funds needed to cover the growth in assets.  Interest credited during
that nine-month period totalled $55.7 million.  The Company's borrowings
decreased from $178.6 million at December 31, 1997 to $157.7 million at
September 30, 1998.  Borrowings at September 30, 1998 consisted of $80.0 million
of Federal Home Loan Bank advances and $44.5 million of a Federal Home Loan Bank
line of credit.  Of the remaining $33.2 million, $31.3 million are securities
sold under agreement to repurchase.  These borrowings are used to fund the
Company's lending activities.

  Shareholders' equity increased from $120.9 million to $134.4 million during
the first nine months of 1998.  This increase is a result of earnings of $14.7
million, $749,000 of stock options exercised during the period, and a $3.8
million increase in unrealized appreciation in securities available for sale.
This increase in shareholders' equity was partially offset by cash dividends
paid to shareholders of $5.7 million.

Results of Operations
---------------------


  The operating results of the Company depend primarily on its 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 affected by credit loss requirements, operating expenses, the
level of other income, including gains or losses on sale of loans and
securities, and other fees.

                                       8
<PAGE>
 
Item 2

  The following tables set forth, for the periods indicated, information
regarding (i) the Company's average balance sheet, (ii) the total dollar amount
of interest income from interest-earning assets and the resulting average
yields, (iii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average cost, (iv) net interest income, (v)
interest rate margin and interest rate spread, (vi) net interest-earning assets,
(vii) net yield on interest-earning assets, and (viii) ratio of interest-earning
assets to interest-bearing liabilities.  Average balances are based on daily or
month-end balances.  No tax equivalent adjustments were made.

                                       9
<PAGE>
 
Item 2 - continued

<TABLE> 
<CAPTION> 
                                                          THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------------------------
                                                   1998                                           1997
----------------------------------------------------------------------------------------------------------------
                                      AVERAGE                      YIELD/        AVERAGE                 YIELD/
                                      BALANCE    INTEREST            RATE        BALANCE     INTEREST      RATE
---------------------------------------------------------------------------------------------------------------- 
                                                            (Dollars In Thousands)
<S>                               <C>            <C>              <C>         <C>             <C>        <C> 
Interest-earning assets:                                                                                  
 Commercial loans                  $  719,858     $17,455            9.70%    $  580,441      $14,368      9.90%
 Consumer loans:                                                                                          
  Passbook                                172           5           11.63            262            7     10.69
  Overdraft checking                      706          36           20.40            854           43     20.14
  Business line of credit               1,066          30           11.26                                 
  Credit cards                          9,660         389           16.11          9,273          366     15.79
  Personal-direct                      53,319       1,383           10.38         40,974        1,056     10.31
  Personal-indirect-new auto           48,324       1,063            8.80         47,915        1,071      8.94
  Personal-indirect-used auto         143,949       3,481            9.67        100,110        2,319      9.27
  Personal-indirect-mobile homes       51,707       1,253            9.69         38,169          911      9.55
  Personal-indirect-other               3,707          82            8.85          4,026          100      9.94
  Home equity line of credit           25,043         579            9.25         24,804          590      9.51
  Checkcard reserve                     1,536         128           33.33          1,022           75     29.35
  Student                               1,451         114           31.43          2,632           37      5.62
---------------------------------------------------------------------------------------------------------------- 
   Total consumer loans               340,640       8,543           10.03        270,041        6,575      9.74
---------------------------------------------------------------------------------------------------------------- 
 Real estate loans                                                                                        
  Residential-fixed                    49,523         915            7.39         38,703          807      8.34
  Commercial-fixed                      4,505         104            9.23          4,696          108      9.20
  Residential-adjustable               51,500         987            7.67         70,145        1,349      7.69
  Commercial-adjustable               121,316       2,742            9.04        136,198        3,222      9.46
---------------------------------------------------------------------------------------------------------------- 
   Total real estate loans            226,844       4,748            8.37        249,742        5,486      8.79
---------------------------------------------------------------------------------------------------------------- 
 Investment securities                387,818       6,957            7.18        282,857        4,530      6.41
 Mortgages held for sale               14,730         335            9.10          5,271          123      9.33
---------------------------------------------------------------------------------------------------------------- 
   Total  interest-earning assets   1,689,890      38,038            9.00      1,388,352       31,082      8.96
---------------------------------------------------------------------------------------------------------------- 
Non-interest-earning assets            93,291                                     80,027
---------------------------------------------------------------------------------------------------------------- 
   Total assets                    $1,783,181                                 $1,468,379
================================================================================================================
                                                                                                          
Interest-bearing liabilities:                                                                                             
 Deposits                                                                                                 
  Savings                          $  140,877     $   997            2.83%    $  139,321      $ 1,000      2.87%
  Money market                        282,333       3,150            4.46        257,366        2,951      4.59
  Certificates of deposit             881,462      12,580            5.71        618,966        8,909      5.76
  NOW                                  65,560         238            1.45         59,262          198      1.34
  Commercial                           74,159                                     61,448
---------------------------------------------------------------------------------------------------------------- 
   Total deposits                   1,444,391      16,965            4.70      1,136,363       13,058      4.60
 Borrowings                           165,669       2,238            5.40        194,517        2,801      5.76
 Subordinated debt                     22,581         461            8.17   
---------------------------------------------------------------------------------------------------------------- 
   Total interest-bearing 
     liabilities                    1,632,641      19,664            4.82      1,330,880       15,859      4.77
---------------------------------------------------------------------------------------------------------------- 
Non-interest-bearing liabilities       21,142                                     20,350   
----------------------------------------------------------------------------------------------------------------  
   Total liabilities                1,653,783                                  1,351,230
----------------------------------------------------------------------------------------------------------------   
Shareholders' equity                  129,398                                    117,149
----------------------------------------------------------------------------------------------------------------   
   Total liabilities and
   shareholders' equity            $1,783,181                                 $1,468,379
================================================================================================================
Net interest income/net                                                                      
 interest rate spread                             $18,374            4.18%                    $15,223      4.19% 
================================================================================================================
Net earnings assets/net               
 interest rate margin                             $57,249            4.35%                    $57,472      4.39% 
================================================================================================================
Ratio of interest-earning assets to
  interest-bearing liabilities                                       1.04X                                 1.04X 
=================================================================================================================
</TABLE>

                                       10
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                           NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------------------------
                                                   1998                                           1997
----------------------------------------------------------------------------------------------------------------
                                      AVERAGE                      YIELD/        AVERAGE                 YIELD/
                                      BALANCE    INTEREST            RATE        BALANCE     INTEREST      RATE
---------------------------------------------------------------------------------------------------------------- 
                                                            (Dollars In Thousands)
<S>                               <C>            <C>              <C>         <C>             <C>        <C> 
Interest-earning assets:                                                                                  
 Commercial loans                  $  695,926    $ 50,840            9.74%    $  565,512      $41,380      9.76%
 Consumer loans:                                                                                          
  Passbook                                191          16           11.17            281           27     12.81
  Overdraft checking                      747         111           19.81            880          131     19.85
  Business line of credit                 975          77           10.53                                 
  Credit cards                          9,539       1,144           15.99          8,978        1,038     15.42
  Personal-direct                      50,457       3,880           10.25         38,273        2,908     10.13
  Personal-indirect-new auto           48,182       3,134            8.67         45,746        2,909      8.48
  Personal-indirect-used auto         130,136       9,249            9.48         85,742        5,894      9.17
  Personal-indirect-mobile homes       48,432       3,487            9.60         32,838        2,350      9.54
  Personal-indirect-other               3,738         260            9.27          4,226          309      9.75
  Home equity line of credit           25,121       1,731            9.19         24,698        1,742      9.40
  Checkcard reserve                     1,391         333           31.92            850          175     27.45
  Student                               3,161         208            8.77          2,563           45      2.34
---------------------------------------------------------------------------------------------------------------- 
   Total consumer loans               322,070      23,630            9.78        245,075       17,528      9.54
---------------------------------------------------------------------------------------------------------------- 
 Real estate loans                                                                                        
  Residential-fixed                    54,055       2,950            7.28         37,841        2,345      8.26
  Commercial-fixed                      4,554         315            9.22          4,852          338      9.29
  Residential-adjustable               56,073       3,211            7.64         71,333        4,148      7.75
  Commercial-adjustable               124,023       8,571            9.21        138,487        9,395      9.05
---------------------------------------------------------------------------------------------------------------- 
   Total real estate loans            238,705      15,047            8.40        252,513       16,226      8.57
---------------------------------------------------------------------------------------------------------------- 
 Investment securities                341,456      17,569            6.86        289,079       14,433      6.66
 Mortgages held for sale               14,686         874            7.93          3,663          208      7.57
---------------------------------------------------------------------------------------------------------------- 
   Total  interest-earning assets   1,612,843     107,960            8.93      1,355,842       89,775      8.83
---------------------------------------------------------------------------------------------------------------- 
Non-interest-earning assets            88,905                                     74,932
---------------------------------------------------------------------------------------------------------------- 
   Total assets                    $1,701,748                                 $1,430,774
================================================================================================================
                                                                                                          
Interest-bearing liabilities:                                                                                             
 Deposits                                                                                                 
  Savings                          $  137,190     $ 2,913            2.83%    $  136,177      $ 2,926      2.86%
  Money market                        274,703       9,268            4.50        252,983        8,620      4.54
  Certificates of deposit             814,532      34,704            5.68        617,935       25,938      5.60
  NOW                                  64,540         683            1.41         60,278          595      1.32
  Commercial                           68,138                                     54,677
---------------------------------------------------------------------------------------------------------------- 
   Total deposits                   1,359,103      47,568            4.67      1,122,050       38,079      4.52
 Borrowings                           187,293       7,718            5.49        175,255        7,398      5.63
 Subordinated debt                      7,527         461            8.17   
---------------------------------------------------------------------------------------------------------------- 
   Total interest-bearing 
     liabilities                    1,553,923      55,747            4.78      1,297,305       45,477      4.67
---------------------------------------------------------------------------------------------------------------- 
Non-interest-bearing liabilities       21,323                                     19,028   
----------------------------------------------------------------------------------------------------------------  
   Total liabilities                1,575,246                                  1,316,333
----------------------------------------------------------------------------------------------------------------   
Shareholders' equity                  126,502                                    114,441
----------------------------------------------------------------------------------------------------------------   
   Total liabilities and
   shareholders' equity            $1,701,748                                 $1,430,774
================================================================================================================
Net interest income/net                                                                      
 interest rate spread                             $52,213            4.15%                    $44,298      4.16% 
================================================================================================================
Net earnings assets/net               
 interest rate margin                             $58,920            4.32%                    $58,537      4.36% 
================================================================================================================
Ratio of interest-earning assets to
  interest-bearing liabilities                                       1.04X                                 1.04X 
=================================================================================================================
</TABLE>

                                       11
<PAGE>
 
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.
                                         
<TABLE>
<CAPTION>
                          Three Months Ended September 30,   Nine Months Ended September 30, 
                                     1998 Compared to 1997             1998 Compared to 1997 
                                       Increase (Decrease)               Increase (Decrease) 
                                 Volume    Rate        Net        Volume      Rate       Net 
--------------------------------------------------------------------------------------------  
                                                   (Dollars In Thousands) 
<S>                              <C>      <C>       <C>          <C>        <C>      <C> 
Interest income on interest-                                                                 
 earning assets:                                                                             
   Commercial loans              $3,589   $(502)    $3,087       $ 9,601    $ (141)  $ 9,460 
   Consumer loans                 1,767     201      1,968         5,650       452     6,102 
   Real estate loans               (485)   (253)      (738)         (865)     (314)   (1,179)
   Investment securities          1,833     594      2,427         2,690       446     3,136 
   Mortgages held for sale          233     (21)       212           656        10       666 
--------------------------------------------------------------------------------------------  
                                 $6,937   $  19     $6,956       $17,732    $  453   $18,185 
--------------------------------------------------------------------------------------------   
 
Interest expense on interest-
 bearing liabilities:
  Deposits                       $3,617   $ 290     $3,907       $ 8,201    $1,288   $ 9,489                 
  Borrowings                        (88)    (14)      (102)          846       (65)      781                 
--------------------------------------------------------------------------------------------                 
                                  3,529     276      3,805         9,047     1,223    10,270                 
--------------------------------------------------------------------------------------------                 
  Net Interest Income            $3,408     257)    $3,151       $ 8,685    $ (770)  $ 7,915                 
============================================================================================                 
</TABLE> 

Interest Income 
---------------

  The Company's interest income on earning assets increased from $31.1 million
for the three months ended September 30, 1997 to $38.0 million for the three
months ended September 30, 1998, and from $89.8 million to $108.0 million for
the nine months ended September 30, 1997 and 1998, respectively.  These
increases in interest income were the result of an increase in the average
balance of interest-earning assets from $1,388.4 million to $1,689.9 million for
the three months ended September 30, 1997 and September 30, 1998, respectively,
and from $1,355.8 million to $1,612.8 million for the nine months ended
September 30, 1997 and September 30, 1998, respectively.  The increase in the
average yield on earning assets from 8.96% to 9.00% for the three months ended
September 30, 1997 and 1998, respectively, and the increase in the average yield
on earning assets from 8.83% to 8.93% for the nine months ended September 30,
1997 and 1998, respectively, also contributed to these increases in interest
income.

  The increase in the average balance of the commercial loan portfolio was the
largest contributor to the increase in interest income.  The average balance of
commercial loans increased $139.4 million from the third quarter of 1997 to
$719.9 million for the third quarter of 1998, and increased $130.4 million to
$695.9 million for the first nine months of 1998 compared to the first nine
months of 1997.  The average yield on commercial loans decreased from 9.90% for
the third quarter of 1997 to 9.70% for the third quarter of 1998.  Despite high
levels of competition in the Company's lending markets, the average balance of
consumer loans increased 26.1% to $340.6 million for the three-month period
ended September 30, 1998 compared to $270.0 million for the three-month period
ended  September 30, 1997, and increased 31.4% to $322.1 million for the nine-
month period ended September 30, 1998 compared to $245.1 million for the nine-
month period ended September 30, 1997.  The average balance of real estate loans
decreased $22.9 million to $226.8 million for the quarter ended September 30,
1998 compared to the quarter ended September 30, 1997. This 

                                       12
<PAGE>
 
Item 2 - continued

period reflected a decrease in yield from 8.79% to 8.37%, and the reduced
average balance resulted in a net decline of $738,000 in interest income from
real estate loans to $4.7 million. The Company continues to emphasize
origination of indirect and direct auto loans, which adds to the Company's
market base for potential business and provides some of the highest yielding
assets for the Company. The average balance of real estate loans decreased $13.8
million to $238.7 million for the nine months ended September 30, 1998 compared
to the nine months ended September 30, 1997. This period reflected a decrease in
yield from 8.57% to 8.40%, and the reduced average balance resulted in a net
decline of $1.2 million in interest income from real estate loans to $15.0
million. Although residential mortgage loans reflect a steadily declining
percentage of the Bank's total loan portfolio, the Bank continues to originate a
significant amount of fixed-rate residential mortgage loans for sale in the
secondary market, while retaining servicing rights for most of the sales in
order to generate fee income. The average balance of investment securities
increased from $282.9 million for the third quarter of 1997 to $387.8 million
for the third quarter of 1998. Yields on investment securities increased for
this same period from 6.41% to 7.18% and contributed to an increase in interest
income on investment securities of $2.4 million for the comparative quarters.
The average balance of investment securities increased from $289.1 million for
the first nine months of 1997 to $341.5 million for the first nine months of
1998. Yields on investment securities increased for this same period from 6.66%
to 6.86%, and increased average balances contributed to an increase in interest
income on investment securities of $3.1 million for the comparative quarters.

Interest Expense
----------------

  Total interest expense increased by $3.8 million for the quarter ended
September 30, 1998 as compared to the same period in 1997. The average balance
of all interest-bearing liabilities increased from $1,330.9 million for the
quarter ended September 30, 1997 to $1,632.6 million for the quarter ended
September 30, 1998.  This increase accompanies an increase in the average rate
paid on all interest-bearing liabilities from 4.77% to 4.82% during the
respective period. The average balance of deposits increased from $1,136.4
million during the three months ended September 30, 1997 to $1,444.4 million
during the same period in 1998, and from $1,122.1 million for the nine-month
period ended September 30, 1997 to $1,359.1 million for the nine-month period
ended September 30, 1998.  The increase in the average balance of deposits was
the major factor contributing to an increase in interest paid on deposits from
$13.1 million for the third quarter of 1997 to $17.0 million for the third
quarter of 1998.  Another component of the change in interest-bearing
liabilities is the average balance of borrowings decreasing from $194.5 million
for the three months ended September 30, 1997 to $165.7 million for the three
months ended September 30, 1998. This decrease in average balance was coupled
with a decrease in the rate paid on borrowings from 5.76% to 5.40% during the
three-month period to reflect lower borrowing costs from $2.8 million for the
three months ended September 30, 1997 to $2.2 million for the same period in
1998.  The average balance of borrowings reflected an increase from $175.3
million for the nine-month period ended September 30, 1997 to $187.3 million for
the nine-month period ended September 30, 1998.  The borrowing balance augments
deposits to fund the loan growth principally in the commercial and consumer loan
areas when needed.  A decline in rate from 5.63% for the nine months ended
September 30, 1997 to 5.49% for the nine months ended September 30, 1998 had a
small impact in the growth of borrowing expense. The utilization of borrowings
to fulfill the demand in loan growth has contributed to higher interest expense.
With generally higher costs than retail deposits, borrowing costs have
contributed to a narrowing of the spread between the Company's interest-earning
assets and interest-bearing liabilities.  Though the interest rate spread is
narrowed by these higher costs, this relationship provides continued growth in
net interest income.

Provision for Credit Losses
---------------------------

  The provision for credit losses increased from $2.5 million to $3.3 million
for the quarters ended September 30, 1997 and September 30, 1998, respectively,
and increased from $7.4 million to $9.0 million for the nine months ended
September 30, 1997 and September 30, 1998, respectively.  The allowance for
possible credit losses increased to $21.9 million as of September 30, 1998,
compared to $19.2 million as of December 31, 1997.  The increase in provisions
reflects in part the Bank maintaining an allowance to period ending loans at a
consistent level coupled with growth seen in the loan portfolio.  See "Non-
performing Loans and ORE".  Management considers this level of reserves adequate
to cover potential credit losses.

                                       13
<PAGE>
 
Item 2 - continued

Non-interest Income
-------------------

  Non-interest income increased 29.5% from $1.5 million to $2.0 million for the
three months ended September 30, 1997 to September 30, 1998, respectively, and
increased from $4.5 million to $5.7 million for the nine months ended September
30, 1997 to September 30, 1998, respectively. The major factors attributing to
these increases comparing third quarter of 1997 to the same quarter of 1998 were
an increase of $129,000 in other charges, commissions, and fees, a $117,000
increase in credit card fees which is the result of increased volumes and
efforts to add new credit card merchant relationships, a $57,000 increase in
service charges on deposit accounts, and a $48,000 increase in trust fees.  The
increase in the same fees account for the majority of the increase for the nine-
month period.

Gains (Losses) On Sale of Securities
------------------------------------

  Losses on sale of securities were $6,000 for the third quarter of 1998 and
$509,000 for the nine months ended September 30, 1998.  This compares to gains
of  $126,000 for the same quarter of 1997 and $107,000 for the nine months ended
September 30 1997.  The Company's investment portfolio is used to maintain its
liquidity position; from time to time, securities are sold when deemed prudent
by management, to adjust the interest rate sensitivity of the Company's balance
sheet.

Gains (Losses) On Sale of Loans
-------------------------------

  The practice of the Company has been to sell or securitize long-term, fixed-
rate residential mortgage loans.  This provides liquidity to fund shorter-term,
or more rate-sensitive assets, and collateral to provide borrowing for lending
activities.  As a result of this practice, the Company securitized or sold $36.6
million and $22.1 million for the third quarter of 1998 and 1997, respectively.
This resulted in losses of $75,000 and $94,000 for the same two periods,
respectively.  Of the net loss taken in the third quarter of 1998, $347,000
resulted from the recognition of deferred expenses at the time of sale, which
more than offset the $213,000 gain taken on the sale of these loans.  For the
nine-month period ended September 30, 1998 and 1997, the Bank securitized or
sold $121.9 million and $48.3 million, respectively, of residential mortgage
loans.  These sales generated net losses of $455,000 and $183,000 for the same
nine-month periods, with recognition of deferred expenses again causing losses
despite gains recognized on the sales themselves.

Non-interest Expense
--------------------

  Non-interest expense increased from $7.2 million for the quarter ended
September 30, 1997 to $8.4 million for the quarter ended September 30, 1998.
Several factors contributed to this increase.  As the volume of transactions
rises due to growth in assets, such as credit card loans and with greater levels
of deposits, such as brokered deposits, service expenses associated with these
assets and liabilities also rise.  This resulted in approximately a $182,000
increase in expense in the third quarter of 1998 compared to the same quarter in
1997.  New customer services and products needed to manage these services
contributed approximately $177,000 to the increase in services expense, with
corresponding increases in the number of employees to handle the new services
and expanded growth of the Bank.  One-time expenses associated with the Bank's
conversion to another core processing vendor amounted to approximately $250,000
of the increase in all other non-interest expenses for the quarter.  Increased
volumes and conversion expense caused service expenses to increase by $673,000
for the nine-month period ended September 30, 1997 to September 30, 1998.
Offsetting this increase in non-interest expense was a decrease of $333,000
other real estate owned (ORE) expense for the nine months ended for the same
periods.  An increase of $33,000 was noted for the three-month period ended
September 30, 1998 compared to the third quarter of 1997.

                                       14
<PAGE>
 
Item 2 - continued

Income Taxes
------------

  The income tax expense was $2.7 million and $3.4 million for the quarters
ended September 30, 1997 and September 30, 1998, respectively, and $7.9 million
and $9.5 million for the nine-month periods ended September 30, 1997 and
September 30, 1998, respectively.  These increases were mainly due to increased
levels of taxable income and changes in tax-exempt investment and loan
portfolios.


Non-Performing Loans and ORE
----------------------------

  When a borrower fails to make a scheduled payment on a loan, the Company
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made within five business days after the expiration of
the payment grace period, set forth in the loan contract.  In most cases,
deficiencies are cured promptly.  If a delinquency extends beyond 60 days, the
loan and payment histories are reviewed and legal proceedings may be instituted
to remedy the default. While the Company generally prefers to work with
borrowers to resolve such problems, the Company does initiate foreclosure
proceedings or pursues other legal collection procedures, as necessary, to
minimize any potential loss.  Once the Company takes legal title to the
property, it is classified as ORE on the Statement of Condition.

  Loans are placed on a non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual.  Such loans include potential problem loans where known
information about possible credit problems of borrowers has caused management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms.  When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income.  Other than with
respect to consumer loans, the Company does not accrue interest on loans greater
than 90 days or more past due for the payment of interest unless the value of
the collateral and active collection efforts ensure full recovery.  Consumer
loans are charged-off before they become non-accrual.

  The following table sets forth information regarding non-performing loans
which are 90 days or more overdue and ORE held by the Company at the dates
indicated.

<TABLE>
<CAPTION>
                                                                     September 30,   December 31,
                                                                              1998           1997
--------------------------------------------------------------------------------------------------
                                                                        (DOLLARS IN THOUSANDS)
<S>                                                                  <C>             <C>
Commercial loans:
  Non-accrual loans                                                        $ 9,085        $10,542
Consumer loans:
  Accruing loans 90 days overdue                                               126            304
Residential real estate loans:
  Non-accrual loans                                                          1,506          1,309
Commercial real estate loans:
  Non-accrual loans                                                            492            821
--------------------------------------------------------------------------------------------------
   Total non-performing loans and accruing loans 90 days overdue           $11,209        $12,976
=================================================================================================
 
Total non-performing loans to total gross loans                               0.84%          1.08%
Total real estate acquired in settlement of
  loans at net realizable value                                            $ 1,984        $ 2,784
Total non-performing loans and real estate acquired in settlement
 of loans at net realizable value to total assets                             0.73%          1.01%
 
</TABLE>

  Total non-performing loans and ORE, which is defined to include property
acquired by foreclosure or by deed in lieu of foreclosure, decreased to $13.2
million, or 0.73% of total assets at September 30, 1998, compared to $15.8
million, or 1.01% of total assets at December 31, 1997.

  At December 31, 1997, 28 non-performing residential real estate loans totalled
$1.3 million.  At September 30, 1998, non-

                                       15
<PAGE>
 
Item 2 - continued

performing residential real estate loans totalled $1.5 million and included 31
loans.

  At December 31, 1997, non-performing commercial real estate loans totalled
$0.8 million, and included 3 loans ranging in size from $78,000 to $594,000.  At
September 30, 1998, non-performing commercial real estate loans decreased to
$0.5 million and consisted of  1 loan.

  Non-performing commercial loans at December 31, 1997 totalled $10.5 million
and included 35 individual loans ranging in size from $5,000 to $1.3 million.
At September 30, 1998, non-performing commercial loans decreased to $9.1 million
and consisted of  36 individual loans ranging in size from $402 to $1.0 million.

  The Company's policy is to charge-off all consumer loans before they become
non-accrual.  At December 31, 1997, the Company had $304,000 of loans 90 days or
more past due on which it was accruing interest, as compared to $126,000 at
September 30, 1998.  As of each date, the only such loans were consumer loans.

  At September 30, 1998, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS No. 114 totalled $7.0 million with a
corresponding valuation allowance of $4.2 million.

  At December 31, 1997, ORE totalled $2.8 million, which consisted of  10
single-family residential properties with a book value totalling $474,000 and 9
local commercial real estate properties with a book value totalling $2.3
million.  At September 30, 1998, ORE totalled $2.0 million, which consisted of
4 single-family residential properties totalling $153,000 and 9 commercial real
estate properties with a book value of $1.8 million.  All residential properties
in ORE at December 31, 1997 have been disposed of at September 30, 1998.

  Management reviews the adequacy of the allowance for possible credit losses at
least quarterly, applying projected loss ratios to the risk-ratings of loans
both individually and by category.  The projected loss ratios incorporate such
factors as recent loss experience, current economic conditions and trends,
trends in past due and non-accrual amounts, the risk characteristics of various
categories and concentrations of loans, transfer risks and other pertinent
factors.

                                       16
<PAGE>
 
Item 2 - continued

  The following table summarizes activity in the Company's allowance for
possible credit losses during the periods indicated:

<TABLE> 
<CAPTION> 
                                            THREE MONTHS ENDED            NINE MONTHS ENDED
                                                 SEPTEMBER 30,                SEPTEMBER 30,
                                          1998            1997         1998            1997
-------------------------------------------------------------------------------------------
                                                        (Dollars In Thousands)
<S>                                 <C>             <C>          <C>             <C> 
Average gross loans outstanding     $1,308,816      $1,119,037   $1,277,629      $1,081,472
===========================================================================================
 
Allowance at beginning of period    $   20,746      $   17,915   $   19,207      $   17,054
-------------------------------------------------------------------------------------------
 
Charge-offs:
 Commercial loans                        1,218           1,045        3,995           3,613
 Consumer loans                            704             562        2,310           1,410
 Residential real estate loans               3              20          121              65
 Commercial real estate loans              581             744          942           1,982
-------------------------------------------------------------------------------------------
  Total loan charge-offs                 2,506           2,371        7,368           7,070
Recoveries:
 Commercial loans                           94             348          375             529
 Consumer loans                            197             134          598             442
 Residential real estate loans               9               0            9               0
 Commercial real estate loans               22               0           37             258
-------------------------------------------------------------------------------------------
  Total recoveries                         322             482        1,019           1,229
-------------------------------------------------------------------------------------------
Net charge-offs                          2,184           1,889        6,349           5,841
-------------------------------------------------------------------------------------------
 
Provision for credit losses
 charged to operating expenses           3,333           2,538        9,037           7,351
-------------------------------------------------------------------------------------------
Allowance at end of period          $   21,895      $   18,564   $   21,895      $   18,564
===========================================================================================
 
Ratio of net charge-offs to:
 Average gross loans
   outstanding (annualized)               0.67%           0.68%        0.66%           0.72%
Ratio of allowance to:
 Non-performing loans                   195.33%         184.57%      195.33%         184.57%
 Period-end loans outstanding             1.65%           1.63%        1.65%           1.63%
 
</TABLE>

  Net charge-offs increased from $1.9 million for the third quarter of 1997 to
$2.2 million for the same quarter in 1998.  For the nine-month period ending
September 30, 1998, net charge-offs were $6.3 million, up from the $5.8 million
for the same period in 1997.  Management continues to take an aggressive
approach to the charge-off of problem loans and continues to add to the level of
reserves to maintain a level of loan loss reserves that is considered adequate
to cover potential credit losses.

Sources of Funds
----------------

  Funding for the Company's assets is derived primarily from demand and time
deposits and long and short-term borrowings.  The competition for deposits
continues to be very strong in the market area and remains a focus of the Bank's
effort.  The average balance of all interest-bearing liabilities increased from
$1,330.9 million for the three-month period ended September 30, 1997 to $1,632.6
million for the same period ended September 30, 1998, an increase of $301.7
million.  The most significant  increase in interest-bearing liabilities for the
quarter ended September 30, 1997 compared to September 30, 1998, was an increase
in the average balance of certificates of deposit of $262.5 million from the
third quarter of 1997 to the third quarter of 1998 from $619.0 million to $881.5
million, respectively.  To fund loan growth, the Bank looked to other areas to
augment retail deposits as a source of funds.  Certificates of deposits from a
money desk have grown to an average balance of $200.6 million in the third
quarter of 1998 from a $600,000 average balance in the same quarter in 1997.
Municipal deposits have grown from an average balance of 

                                       17
<PAGE>
 
Item 2 - continued

$77.6 million for the third quarter of 1997 to $118.1 million for the third
quarter of 1998. With the use of funds that normally carry somewhat higher
rates, the overall cost of funds for all certificates of deposits declined from
5.76% to 5.71% from the third quarter of 1997 to the same period in 1998. Total
borrowings decreased from an average balance of $194.5 million to $188.3 million
for the quarter ended September 30, 1997 to the same quarter ended September 30,
1998. With a decrease in the average rate paid on borrowings from 5.76% for the
quarter ended September 30, 1997 to 5.40% for the same quarter in 1998, interest
expense on these borrowings decreased from $2.8 million for the third quarter of
1997 to $2.2 million for the third quarter of 1998 because of the average
balance decline. The average balance of total interest-bearing liabilities
increased from $1,297.3 million for the nine months ended September 30, 1997 to
$1,553.9 million for the nine months ended September 30, 1998. The increase in
the average balance of municipal deposits was $23.6 million in the nine-month
period from September 30, 1997 to September 30, 1998, and the nine-month average
balance ended September 30, 1998 was $117.0 million. For the nine-month period
ended September 30, 1997, the average balance of all borrowings was $175.3
million compared to $194.8 million for the nine months ended September 30, 1998,
an increase of $19.5 million. The average balance of certificates of deposit
accounts during the nine-month comparative periods increased $196.6 million to
$814.5 million at September 30, 1998. The average balance of money market
accounts during the nine-month comparative periods increased $21.7 million to
$274.7 million at September 30, 1998.

Liquidity and Capital Resources
-------------------------------

  A fundamental objective of the Company is to manage its liquidity effectively.
Prudent liquidity management insures that the Company can meet all of its
contractual obligations, meet its customers' loan demands, fund all of its
operations and minimize the effects of interest rate fluctuation on earnings.
There were no material changes in the Company's liquidity or interest rate
sensitivity since December 31, 1997.

  On July 24, 1998, the Company placed $30 million of 30-year 8.125% capital 
securities through BSB Capital Trust 1, a Delaware business trust that was 
formed by the Company. The Trust was formed solely to invest the proceeds from 
the sale of the capital securities in 8.125% junior subordinated debentures 
issued by the Company. The net proceeds from the sale of the capital securities
qualify as Tier 1 Capital for the Company.

  The Company's primary sources of funds have consisted of deposits,
amortization and prepayments of outstanding loans and mortgage-backed
securities, bond maturities, and such other sources as long- and short-term
borrowings, and sales of investment securities, loans, and mortgage-backed
securities.  At September 30, 1998, the total of approved loan commitments
amounted to $223.0 million.  Long-term borrowings of $50.0 million are scheduled
to mature in 2008.  Savings certificates, which are scheduled to mature during
the next twelve months, totalled $749.8 million.  Management expects that a
substantial portion of these maturing certificates will remain on deposit with
the Company.

  At September 30, 1998, the Company's Tier I leverage ratio, as defined in
regulatory guidelines, was 7.49%, which exceeds the current requirements for the
Company.  At September 30, 1998, the Company's total capital-to-risk-weighted
assets ratio, calculated under the Federal Reserve Board's risk-based capital
requirements, was 10.58%.

  The Company's book value per common share increased from $14.12 at December
31, 1997 to $15.58 at September 30, 1998.

Impact of Inflation and Changing Prices
---------------------------------------

  The financial statements and related data presented herein have been prepared
in accordance with generally accepted accounting principles 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 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.

                                       18
<PAGE>
 
Item 2 - continued

Year 2000 Compliance
--------------------

  The Year 2000 brings with it potential issues to all organizations who use
computers in the conduct of their business or depend on business associates who
use computers. To the extent computer use is date-sensitive, hardware or
software that recognizes the year by the last two digits may erroneously
recognize "00" as 1900 rather than 2000, which could result in errors or system
failures.

  The Company utilizes a number of computers and computer software (systems) in
the conduct of its business. Many systems are for specific business segments and
others have broader corporate-wide use. The Company initiated the review of the
Year 2000 and the impact it would have in 1995. With this review, a strategic
plan to address the issues and maintain the technological standards of the
hardware and software within the Company was incorporated. This plan was
initiated and approved by senior officers within the Company and is revisited at
least quarterly to ensure portions of the plan are completed as scheduled and
progress is continuing with any problems being addressed. This plan included the
following steps:


 .  Awareness: Since 1995, the Company has been aware of the Year 2000 problem
   and increased the awareness of all staff, vendors, and customers to the
   problem.

 .  Assessment: Inventories of all systems, hardware, media, interfaces, internal
   programs and databases, vendor packages, and networks have been made and are
   updated as needed. Communication with vendors to ascertain their status, plan
   and upgrades for Year 2000 compliance was implemented.

 .  Renovation: Since 1995, the Company has formulated and completed two
   initiatives to maintain high quality data processing on an on-going basis.
   Year 2000 issues were addressed within the larger issue of maintaining the
   highest quality data processing available. In 1995, a Branch Automation
   Project was started and continued into 1996. In 1996, a Back Office
   Automation Project was completed. This provided the Company with Year 2000
   compliant back office hardware and most software to address the concerns of
   both technology modernization and Year 2000 issues. In October of 1998, BSB
   converted to M&I Data Services, which provides data service to all of our
   core processing and delivery systems. The M&I system is certified compliant
   by the Information Technology Association of America.

 .  Validation: Testing of all hardware and software is being conducted on an
   independent Local Area Network that has been established at the Company
   solely for that purpose. All hardware, networks, and mission critical systems
   will be tested by the end of 1998. All M&I systems will be tested during the
   preconversion testing process. All interfaces, media, and systems will be
   validated for compliance in early 1999.

 .  Implementation: Saturday, January 1, 2000 will be treated as a data
   processing conversion. Contingency plans are being developed and will be
   completed in 1999.

  Contact with significant vendors and commercial loan customers was made.
Commercial loan customers were asked to fill out a survey so assessment of their
status with regard to the complications of the upcoming Year 2000 issues and
their readiness for that time could be determined. Significant vendors were
queried as to their ability to continue to supply their product without delay
with the passing of Year 2000.  Of course, the response of certain third parties
is beyond control of the Company.

  Year 2000 compliance costs pertaining to internal staff incurred cumulatively
through 1998 has been approximately $75,000. An additional $50,000 is expected
in 1999 for these same costs. Direct capital expenditures have neared $30,000
for 1998 with an additional $70,000 expected in 1999. These costs do not include
normal ongoing costs for computer hardware (including ATM's) and software that
have been incurred or would be replaced in the next year even without the
presence of the Year 2000 Issue as these pertain to the ongoing programs for
updating the Company's delivery infrastructure.

                                       19
<PAGE>
 
Item 2 - continued

  Despite the Company's efforts in regards to the Year 2000 Issue, there can be
no assurance that partial or total systems interruptions or the costs necessary
to update hardware and software would not have a material adverse effect upon
the Company's business, financial condition, results of operations, and business
prospects.

Forward-Looking Statements
--------------------------

  Statements in Management's Discussion and Analysis are forward-looking
statements within the meaning of the Securities Act of 1933 as amended and the
Securities Exchange Act of 1934 as amended.  Actual results, performance, or
developments may differ materially from those expressed or implied by such
forward-looking statements as a result of market uncertainties and other factors
related to Internet-based businesses.  The financial services market generally,
and the market for the Company's products and services specifically, is
characterized by a high degree of competition and rapidly changing local,
national, and global market, financial and economic conditions.   Such
developments, as well as unforeseen developments in the financial services
industry, could have an adverse impact on the Company's financial position and
results of operations.

Market Prices and Related Shareholder Matters
---------------------------------------------

  The stock of the Company is listed on The Nasdaq Stock Market under the symbol
BSBN.  As of September 30, 1998, the Company had 1,726 shareholders of record
and 8,627,036 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.

                                                                     Cash
                                                   Price Range  Dividends
-------------------------------------------------------------------------
                                                                         
1997                                                                     
----                                                                     
First Quarter                                   $21.33  $17.17      $0.17
Second Quarter                                   26.00   19.50       0.17
Third Quarter                                    29.00   23.83       0.20
Fourth Quarter                                   37.25   25.75       0.22
                                                                         
1998                                                                     
----                                                                     
First Quarter                                   $36.00  $28.00      $0.22
Second Quarter                                  $35.25  $27.50      $0.22
Third Quarter                                   $32.75  $25.63      $0.22 
 

                                       20
<PAGE>
 
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-bearing 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 (August 31,
1998), management's simulation analysis of the effects of changing interest
rates projected that a gradual 200 basis point increase in interest rates over
the 12 months ending August 31, 1999 would decrease net interest income for that
period by 4.27% or less and that a similar decrease in interest rates would
increase net interest income by 4.31% or less.  The test is based on a number of
assumptions and there can be no assurance that if interest rates did move by two
percent that the Company's results of operations would be impacted as estimated.
Although the Company uses various monitors of 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 rate decrease, borrowers are more
likely to prepay loans.  Funds generated by prepayment 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.

                                       21
<PAGE>

Part II - continued
 
PART II - OTHER INFORMATION
---------------------------

Item 1 -       Legal Proceedings
               -----------------
                        Not applicable

Item 2 -       Changes in Securities
               ---------------------
                        Not applicable


Item 3 -       Defaults upon Senior Securities
               -------------------------------
                        Not applicable


Item 4 -       Submission of Matters to a Vote of Security Holders
               ---------------------------------------------------
                        Not applicable


Item 5 -       Other Information
               -----------------
                        Not applicable


Item 6 -       Exhibits and Reports on Form 8-K
               -------------------------------- 
                        (a) Exhibits
                                  27   Financial Data Schedule

                                       22
<PAGE>
 
                                 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 14, 1998              By:   Alex S. DePersis
       --------------------------------     -------------------------
                                            ALEX S. DEPERSIS
                                            President
                                              and Chief Executive Officer

Date:    November 14, 1998              By:    Rexford C. Decker
       --------------------------------     -------------------------------
                                            REXFORD C. DECKER
                                            Administrative Vice President
                                              and Controller

                                       23